Earnings Call Transcript - DK Q2 2020

Operator, Operator

Good morning, and welcome to the Delek US Holdings Second Quarter 2020 Financial Results. All participants will be in listen-only mode. 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, sir.

Blake Fernandez, Senior Vice President of Investor Relations

Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek U.S. Holdings' second quarter 2020 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President, and CEO; Assi Ginzburg, 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 the 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 segment of the website. Our prepared remarks are being made assuming that the earnings press release has been reviewed, and we are covering less segment and market information that is incorporated into the second quarter release. On today's call, Reuven will review financial performance, I will cover capitalization, liquidity and guidance, Louis will cover operations and CapEx, then Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Reuven.

Reuven Spiegel, EVP and CFO

Thanks, Blake. On an adjusted basis, for the second quarter 2020, Delek US reported a net loss of $111 million or $1.50 per share compared to a net income of $98 million or $1.27 per diluted share in the prior year period. Our adjusted EBITDA loss was $85 million in the second quarter of 2020 compared to $211 million income in the prior year period. Adjusted results include $75 million of after-tax headwind or $1.02 per share. This is comprised of an after-tax other inventory and purchase product loss of $92 million, realized hedging losses of $104 million after-tax, partially offset by a fixed price crude benefit at our Tyler Refinery of $85 million after-tax. Lastly, adjusted results reflect a reversal of the $36 million tax headwind disclosed in the first quarter of 2020. I would point out that the other inventory and purchase products mentioned are separate from the LCM inventory index that is already excluded from adjusted results. On Slide 4, we provided a cash flow waterfall. In the second quarter of 2020, we had negative cash flow of approximately $169 million from continuing operations, which includes a working capital decrement of $363 million. Within working capital is $130 million of income tax credit where we expect to receive the cash in the first part of 2021. Finally, cash capital expenditures in the quarter were $15 million. With that, I will turn it over to Blake.

Blake Fernandez, Senior Vice President of Investor Relations

Thanks, Reuven. Before discussing the balance sheet, I would like to highlight some additional disclosure in the press release this quarter. Details of other inventory and purchase product impacts are highlighted within the verbiage of each business segment and broken down by refinery within the refinery segment. Page 10 outlines the details of both realized and unrealized hedging by segment. Finally, I would like to point out the Gulf Coast 5-3-2 benchmark illustrated on Page 13 has been changed from our high sulfur diesel to ultra-low sulfur diesel for the distillate component of the equation. This benchmark better aligns with our product yields and sales. Hopefully, this increased transparency will provide better visibility into the underlying performance of the business. With that, we'll move to Slide 5, which highlights our capitalization. We ended the second quarter with $849 million of cash on a consolidated basis and $1.6 billion of net long-term debt, excluding debt Delek logistics of $979 million, we had net long-term debt of approximately $627 million at June 30. Moving to Slide 6, we provide third quarter guidance for modeling. We remain confident that we will meet or exceed the full year guidance provided on last quarter’s conference call for $100 million in operating and overhead cost reductions. With that, I will now turn the call over to Louis to discuss our operations and CapEx.

Louis LaBella, EVP and President of Refining

Thanks, Blake. During the second quarter, our total refining system crude oil throughput was approximately 266,000 barrels per day. Our niche market locations continue to support running at higher utilization rates versus the industry. In the third quarter of 2020, we expect crude oil throughput to average between 230,000 to 250,000 barrels per day or approximately 80% utilization at the midpoint. On Slide 7, I want to highlight our capital spending. Capital expenditures during the second quarter were $15 million. We remain confident we will hit our full year 2020 capital guidance of approximately $250 million to recall CapEx excludes the JV investments like Red River, as well as the Wink to Webster connector where financing will be provided by the joint venture. The 2020 capital program is broken down by segment as outlined in the slide. I would point out that roughly 81% of the full year capital program was completed in the first half, leaving minimum outlay for the balance of the year. Next, I will turn the call over to Uzi for closing comments.

Uzi Yemin, Chairman, President, and CEO

Thank you, Louis, and good morning, everybody. Our strategic transition towards a business model with more stability and predictability is well underway. Our midstream investments are coming to fruition and should lead to progressively improving performance over the coming quarters. Our diversified portfolio continues to provide resilience during this period of weak refining margins, with the logistics and retail segments generating a contribution margin above $80 million collectively. The outlook for these businesses remains robust, despite macro volatility, and the strong logistics performance supports our 71% ownership in DK. Delek has a long history of being nimble and we remain agile in managing our costs and capital spending to handle the prevailing macro environment. We are committed to maintaining a strong balance sheet with ample liquidity and are well-positioned to withstand macro volatility while maintaining our quarterly dividend payment of $0.31 per share. With that, operator, can you please open the call for questions?

Operator, Operator

Our first question today comes from Neil Mehta with Goldman Sachs.

Neil Mehta, Analyst

Good morning team. And thank you so much for taking the question. But I guess the first question would be your perspective on M&A, recognizing there's a lot that you can't say here. EVI made some comments on their call yesterday, but your thoughts on consolidation in the industry, whether there's a need for it in whether you see Delek playing a role in it.

Uzi Yemin, Chairman, President, and CEO

Good morning, Neil. To answer your question about whether the industry is ready for consolidation, I believe we are nearing that stage. While we may not be there just yet, the circumstances—especially with some asset closures—indicate that there should be changes in the marketplace. Therefore, I think we are getting closer to that point. As for Delek's involvement in such a process, we must remain vigilant for the opportunities available in the marketplace. This is why we maintain a strong balance sheet, and we are also confident in our two other segments, retail and midstream, that are performing well. This gives us a solid foundation going forward.

Neil Mehta, Analyst

I appreciate that. I guess a follow up is just on working capital in the quarter. It was a big number. There is a deferred tax item, I think embedded in that, can you just talk a little bit about working capital, how it reverses and then talk about the tax as well and how we should be modeling that?

Reuven Spiegel, EVP and CFO

Good morning, this is Reuven. The negative $363 million in working capital consists of three main components: first, a $200 million non-cash LCM reversal; second, a $130 million increase in tax receivable that we expect to collect in the first half of 2021. In the first quarter, we had $60 million in tax receivable; the $130 million reflects the change in the second quarter, totaling $190 million. Of this amount, $160 million is from federal taxes and $30 million is from various state taxes that we expect to receive in the first half of 2021. Additionally, there is a $36 million increase in inventory for SVR.

Neil Mehta, Analyst

Great guys, thank you.

Operator, Operator

Our next question comes from Benny Wong with Morgan Stanley. Can you hear me?

Benny Wong, Analyst

Hello, can you hear me?

Operator, Operator

We will go – we can hear you now go ahead.

Benny Wong, Analyst

Hey, sorry about that, I was having issues here. I just want to get your update on the midstream business and your outlook there. I know your team has been really focused on growing that business. But just curious in terms of getting your updated views on what the business environment might look like coming out of this downturn. And is there anything new we need to think about as you guys move towards your targeted EBITDA growth there?

Uzi Yemin, Chairman, President, and CEO

Well – first, good morning, Benny. We said all along over the last 24 months that we want to create more stability in Delek US earnings power. And I think we demonstrated that this quarter with midstream being around $65 million of EBITDA. We did say that the outlook continues to be positive. And we expect to improve that number over the next few quarters. And then obviously, we have the Wink to Webster idea that fits right now on Delek US. We have several avenues now with several agreements that we can take. There are some different points. We will have the ability to do to take those from Midland or Cushion all the way to the Gulf. So we continue to look at that strategically and we think that we need to provide more stability to our earnings power. So for us, and we said all along, $400 million EBITDA over the next two to three years is our target. We said with this 70 to 390, I think would quite surprise we think about 400. We don't see any reason why we won't be on track to achieve that.

Benny Wong, Analyst

Okay, appreciate those thoughts, Uzi. Second question is around your retail business. You had a pretty strong quarter in terms of margins and merchandise sales. Just wanted to get a sense of the factors you're seeing driving that. How does that compare to July? And do you expect those trends to continue into the third quarter?

Uzi Yemin, Chairman, President, and CEO

We did see double-digit in the quarter, July is going by memory, I think it's like 9%, same store sales. We mentioned that in the past several components first, the fact that people sit at home and they go out. So they go in and out to convenience stores. I'm sure you heard it from our peers. Second in our areas, the big boxes don't operate 24 hours anymore. So after-hours business has picked up. And the third component is people really don't want to stand in line outside the big boxes. So they prefer to do their shopping at least in our areas in and out. So these are the three reasons.

Benny Wong, Analyst

Great and do you see these trends still persisting or do you think it's just more of an isolated event that will change as we kind of get past this COVID, whatever that timeframe may be?

Uzi Yemin, Chairman, President, and CEO

We're in unusual times, it's hard to predict. Do I think that we can sustain 12% or 13% over same store sales? Probably not. But I think people are changing their behaviors a little bit. So I expect over the next two to three years to have strong merchandise sales in the stores. Again, it's hard to predict, but if I need to guess.

Benny Wong, Analyst

I appreciate it. Thank you so much.

Operator, Operator

Our next question comes from Manav Gupta with Credit Suisse.

Manav Gupta, Analyst

Hey, Uzi. So back in ‘16 you had a good retail business making $60 million to $65 million EBITDA incomes, offers you nine times you take it and you sell it. The multiples today are much higher. I'm just trying to understand can history repeat itself you don't need the cash last time you needed to close that on, but the multiples are higher than they were even last time and you build this business out. So is there a possibility history repeats itself?

Uzi Yemin, Chairman, President, and CEO

We're looking at that business always or every business. We're focusing now on continuing to build the business. But we're always open to a discussion around multiples. And we were very proud, Manav, I think I mentioned that to you with the fact that between retail and midstream, we are approaching $82 million to $83 million EBITDA for the quarter. So these are higher multiple businesses. You see it in the DKL performance and if an opportunity to get high multiple accounts, then we will look at it very carefully.

Manav Gupta, Analyst

Great and Uzi a quick follow-up, a lot of progress was being made on Krotz, in fact I think last quarter Krotz was your best performing asset. This quarter, it's gone a little other way. I am just trying to understand was it all one-time events like Krotz was doing really well until this quarter? So if you could tell us what happened with Krotz this particular quarter?

Avigal Soreq, Analyst

Hey, good morning Manav, this is Avigal. So there are two elements; those numbers fell off between physical loss and contribution gain that we called out in the reconciliation. I think you've got the answer from Blake on that. And the second Krotz sales are based upon bulk and we have seen higher value in Q1 in some small gap in Q2, so that’s expanded the.

Manav Gupta, Analyst

Well. Thanks, guys.

Operator, Operator

Our next question comes from Ryan Todd with Simmons Energy.

Ryan Todd, Analyst

Thanks, good morning. I’ll start by discussing strategy as your business model shifts towards more stable cash flow. Can you talk about the priorities for using the cash, especially regarding sustaining the dividend in the short term and considering long-term growth?

Uzi Yemin, Chairman, President, and CEO

That's a great question. First, it is correct that we want to create more stability around our earnings. In the past, we were known for differentials. What we're trying to do is continue to increase that stability. We received a lot of questions about the dividend during the quarter. The reason we chose to maintain the dividend is that the outlook for both midstream and retail is very positive. We didn't want to penalize our shareholders because of weakness in refining. However, if the weakness in refining persists, we will reassess the situation, particularly considering other opportunities in the marketplace.

Ryan Todd, Analyst

Okay, thanks. If the weak operating environment continues, there could potentially be a change in dividend policy.

Uzi Yemin, Chairman, President, and CEO

That's something that we look at every quarter. So I don’t know that we necessarily need to make a decision now or make an announcement. We don’t have a decision. We do need to look at it every quarter. We look at dividend is something that is versus buyback as something that is much more long-term. And as Reuven said, we have $850 million on the balance sheet plus the tax credit of around $130 million. So that's something that we will look at every quarter.

Ryan Todd, Analyst

Okay, thanks. Maybe if I could follow up with one on the current environment utilization. I mean with cracks still relatively soft and capture trends. As we think about capture trends in the third quarter, we still have relatively narrow differentials and the contangos what it was during the second quarter. Can you help us frame the relative competitiveness of operating and third quarters versus Q2 and what that could mean for your utilization rates in the second half giving you a pretty strong in the second quarter?

Louis LaBella, EVP and President of Refining

Good morning, Ryan, this is Louis. So yes, Ryan you said it's over differential, it does not exist. So, we are anticipating 80% utilization in Q3 mainly to keep up pace with demand in our local markets. And also we want to make sure we focus on not building any inventory. Right, so we want to stay competitive with that.

Blake Fernandez, Senior Vice President of Investor Relations

And Ryan, this is Blake, I'll chime in on the capture side of things. There's not a lot of things that are going to change quarter to quarter necessarily, as you know, in the prevailing environment, it's a low margin environment, which makes it a little difficult on capture because you have some fixed cost components. So as a percentage that hurts you, but the one uplift we should get going into next quarter is, Avigal already mentioned, the impact of bulk versus ratable sales. But we are restarting the FCC unit there. So you should see an improvement in gasoline yield. And so in theory, you should see a little bit of uplift and capture at Krotz, which potentially could serve as a little bit of a buffer for any compression and contango in Midland. So hopefully that helps.

Ryan Todd, Analyst

That's great. Thanks for the color.

Operator, Operator

Our next question comes from Phil Gresh with JP Morgan.

Phil Gresh, Analyst

Hey, good morning, I just want to follow up on Ryan's question just around the third quarter. And the lower utilization comment that you made, is it just spread out across the refineries or any area in particular, where the lower and then just with the OpEx guide that looks sequentially higher? I'm just trying to understand what drove it down so much in the second quarter. And just as you think about this as the sustainability of the cost savings that you've outlined, where do we stand with that?

Uzi Yemin, Chairman, President, and CEO

So two different questions and good morning Phil. The first one around utilization, for the most part, we are running Big Spring full and the rest of that on the economic situation and the LP, but you can assume for modeling standpoint that Big Spring is running full. In regard to OpEx I'm sure Blake would love to pick that question.

Blake Fernandez, Senior Vice President of Investor Relations

Good morning, Phil. We're committed to maintaining our $100 million reduction in operating expenses and general and administrative expenses year-over-year. With two quarters already accounted for and guidance in place for the third quarter, if you take the midpoint of that guidance and project it into the fourth quarter, we are on track. Theoretically, we could reach almost $125 million, but we are not adjusting our guidance and prefer to be conservative. Overall, we are meeting our targets and are confident in achieving our goals for the year. Regarding your specific questions about the second quarter as we prepare for the third quarter, there are several factors at play. One involves deferring some maintenance activities from the second quarter, which will resume in the third quarter. Additionally, the restart of the FCC unit I mentioned will incur some costs, along with a few renewable plants that are becoming operational again. While we anticipate some increased expenses, even when considering the third quarter projections for the fourth quarter, we are confident we will surpass the cost guidance for the entire year.

Phil Gresh, Analyst

Okay, got it. And second question is just another cap allocation one as we look at 2021 and I think it’s a little bit early, but just any initial thoughts on potential capital spending levels next year and Uzi you had mentioned at our conference not too long ago, you're talking about renewable diesel as a potential investment opportunity. So I just thought I'd see any latest thoughts you have on that. Thanks.

Uzi Yemin, Chairman, President, and CEO

Okay, so these are two different questions. It depends on the macro environment. If the macro environment stays where it is, we'll trim it down for next year. I mean, if things will improve and honestly, we don't believe that this year they will improve dramatically from where they are now. But next year, there is a chance that they'll improve and we'll open it up. In regard to renewable diesel, we mentioned that in the past, we cannot talk about it, unfortunately, because of some disclosure issues we have with our partners. But we do have an option to buy one-third of renewable diesel that another company builds now as part of our bigger deal, that is an option for a nominal amount. And I’ll leave it at that; as we work our disclosure issues with our partners, we'll be happy to provide you with more details. But we do have an option to buy into a renewable diesel plant in California at a nominal amount.

Phil Gresh, Analyst

Okay, just on the ‘21 CapEx, can you give us an order of magnitude of the flexibility you would have year-over-year if the environment continued to be challenged?

Uzi Yemin, Chairman, President, and CEO

Look, we can swing no problem between $75 million to $125 million.

Phil Gresh, Analyst

Okay. All right, thank you.

Operator, Operator

Our next question comes from Brad Heffern with RBC Capital Markets.

Brad Heffern, Analyst

Hey, good morning, everyone. Thanks for taking the questions. I'll start-off with some detail. So obviously the units have come back almost all the way from the trough. So I am wondering if that sort of reiterates your commitment to that as the separate vehicle or whether you still think that the performance there needs to improve sort of for it to add value for DK?

Uzi Yemin, Chairman, President, and CEO

That's a great question. The units have performed very well, but still, the yield is pretty high. Our cost of capital is below 12%. So while MLPs in general, were out of favor like any other vehicle with the energy sector, we performed pretty good, it's funny, though, that we increased our EBITDA almost five times in the units around where they were five years ago. So that's something that we need to look at carefully in the future. I do believe that eventually, something needs to give. And so MLPs need to be traded at 12 times or 14 times or 16 times yield. And when the time comes, then we need to look at it strategically. It is something that we're very proud that DKL has performed as well as it did.

Brad Heffern, Analyst

Okay, great. And I was just wondering if you had any thoughts on the Gallup closure? I know it's obviously pretty far to the West. But does it have any impact on the product or crude sourcing sides of the business for Big Spring?

Uzi Yemin, Chairman, President, and CEO

Well, first of all, the closure itself, you probably need to ask Marathon if it has an impact on us in the Big Spring area, where we sell products to New Mexico out of Big Spring, so that helps. We are in an environment as you know of utilization around between 75% and 80%, that's not something that is a surprise to anybody. So closure of a small refinery like this in today's market doesn't mean much. But in the future, and certainly, I think that there should be other closures. They add up and when the market comes back, we will see the impact.

Brad Heffern, Analyst

Appreciate the answers. Thanks.

Operator, Operator

Our next question comes from Theresa Chen with Barclays.

Theresa Chen, Analyst

Good morning. I guess, my first question as a follow up to Brad's question on the Gallup closure, Uzi would like to pick your brain about the macro environment as we are firmly in the second half. How do you see refining economics evolving from here in terms of getting back into the right inventory range? Is it a question of additional closures or tweaking utilization further across the industry? What are your thoughts here?

Uzi Yemin, Chairman, President, and CEO

Well, first, those are really good questions, but I'm not sure we have all the answers. I'm relying on historical context. If we consider what happened in 2008, it was the result of several factors. The impact of 2008 was not nearly as severe as what we are currently experiencing. We believe there should be more refinery closures. Everyone entered this downturn with significant cash reserves, so it may take some time for people to recognize that additional closures are necessary. Right now, we're discussing five refineries that have been shut down either permanently or are currently non-operational. I anticipate that a few more will close, and at the same time, demand should rebound. However, do I expect this to occur within the next two or three months? Probably not. It seems likely that we will experience this environment for a while, perhaps two or three quarters. It's essential for us as an industry to remain disciplined during this period.

Theresa Chen, Analyst

Got it. And then in terms of your long-term strategy to high-grade your earnings and provide more cash flow stability by transitioning incrementally to midstream, so currently your projects are primarily from a supply push perspective. Many midstream operators as well as refining competitors have given commentary shying away from that just given the volatility upstream. As you go forward and develop further projects down the line, are you still looking at a primarily supply push strategy or are you focused more on demand pull side of things?

Uzi Yemin, Chairman, President, and CEO

Well, obviously, many things changed over the last six months. So, while we continue to be committed and should be committed to more stability in our earnings, and not to be the proxy for the Midland differential. At the same time, we need to be mindful of the changing market. So I don't know that I can articulate now a long-term strategy. That's what we're doing right now. We are committed to long-term stability. At the same time, we want to make sure that when the market comes back, and the market will come back. I've been here long enough to see it every time when it's so doom and gloom. All of a sudden something happens. So when the market comes up, we're here to capture that. I don't know that I can articulate in this call, a long-term strategy especially in light of the change in the market vis-à-vis the questions you asked.

Theresa Chen, Analyst

Okay, and then maybe just one quick housekeeping one for me. So, on the Krotz asset, the quarter-over-quarter uptick in the other products to almost 19,000 barrels per day was that just related to building intermediate as you turned down some of the downstream units? And just any color on what was going on there and how should that trend going forward?

Uzi Yemin, Chairman, President, and CEO

Why don't we do this; I'll try to answer it on the slide, Blake will take it offline with you. And obviously, it's important to everybody, we will publish it.

Avigal Soreq, Analyst

I’ll follow up with you.

Theresa Chen, Analyst

Okay, great.

Uzi Yemin, Chairman, President, and CEO

Thank you.

Operator, Operator

Our next question comes from Doug Leggate with Bank of America.

Unidentified Analyst, Analyst

Good morning. This is filling in for Doug. My first question is about your cash balance. It's still very strong, and I'm curious if there are plans to use it strategically or if we should see it as a safeguard during this pandemic.

Uzi Yemin, Chairman, President, and CEO

That’s a good morning. That’s a good question. We always say that between $800 million and $1 billion is where we are comfortable. We don't know how long this trend will last. We've been in it for the last five months. So I don't know that we will necessarily feel that we have too much cash, but at the same time, if opportunities arise, there's no reason to believe that we won't act.

Unidentified Analyst, Analyst

Okay, thank you. For my follow up question, I just want to get your updated thoughts on the core differential structure given that U.S. producers seem to be acting a little bit more disciplined and obviously there is a supply shock because of the pandemic. What's the view on Midland push going forward?

Uzi Yemin, Chairman, President, and CEO

I think that for the next year or two we will likely stay around $3. Currently, it's $3, and I think we may widen a little bit to $3.5 to $4, but not significantly.

Unidentified Analyst, Analyst

Thank you. And – so my last question I just want to ask about the retail business. So Delek has a strong record of managing this business, why not stepping into it a little bit more aggressively. It seems like the store count is down from when you guys took it on from Alon.

Uzi Yemin, Chairman, President, and CEO

It is, but remember that we're building mega stores. So when we divest 10 stores, we build a store that makes 10 times that volume, so we are trying to modernize our stores and it shows in the earnings and probably will continue to show in the earnings that these new stores are performing very well for us.

Unidentified Analyst, Analyst

And why not accelerate its growth?

Uzi Yemin, Chairman, President, and CEO

That's something that we're looking at very carefully. We need to balance between retail, midstream, and returning cash to our shareholders. These are all the things that we try to do.

Unidentified Analyst, Analyst

Great. Thanks for taking the questions.

Operator, Operator

Our next question comes from Matthew Blair with Tudor, Pickering, Holt.

Matthew Blair, Analyst

Hey, good morning Uzi. Could you talk about the contribution from Asphalt in Q2? Was that a bright spot with lower crude prices?

Uzi Yemin, Chairman, President, and CEO

Hey, Matthew yes, I don't have any hard numbers to give you, but what I would just tell you is the stickiness in those margins, and a lot of that is sold on a contracted basis. So when you see a collapse in crude prices, you do tend to see a nice uptick in the margin for Asphalt. At the end of the bulk of our exposure, there is El Dorado and I think to a certain extent Big Spring as well. So it was definitely additive to the overall picture.

Matthew Blair, Analyst

Sounds good. And then Uzi, you mentioned a few times you expect more refinery closures. How are you thinking about the competitiveness of Krotz and El Dorado just given this low demand environment? Are you pretty confident those refineries will stay up or is that something that you're looking at right now?

Uzi Yemin, Chairman, President, and CEO

That's a wonderful question. First of all, I'm sure that Big Spring and Tyler are doing good. Now you asked a great question about what is the rate on cost, so let me take them one by one here. El Dorado we invested a lot of money in that refinery, it's now very reliable. We just need to remember that El Dorado gets around 20% of its production from local production, which we buy at a deep discount. If we can get these producers to produce a little more which we're trying to do, then crawl, Krotz, sorry El Dorado will be as competitive as Big Spring. We just need to work on it a little more. And I think we have a plan. And don't be surprised if we execute on that plan over the next few quarters, especially in light of crude coming up more for that’s one thing. Second in Krotz. In Krotz, we have a project that we're not ready to disclose just yet. It's not a lot of money. We're looking at something over there that can increase the competitiveness of the refinery. We just need to remember that all these four refineries are lightweight refineries, and they all got hurt in this time when producers stopped producing. But now as they come back, if we assume that what comes out of the market is light weighted barrels, then these refineries would be competitive. But I don't think that any of them is a candidate for closure at this point.

Matthew Blair, Analyst

Thank you.

Operator, Operator

Our next question comes from Jason Gabelman with Cowen.

Jason Gabelman, Analyst

Good morning. I had two questions first, on the Red River expansion project, I believe that started off now and I know there's some logistics EBITDA that you get from that expansion. But I think in the past year, I've discussed the potential for also some commercial earnings from that expansion with a wider Cushing and Midland differential given that the Cushing and Midland differential has come in. Is there still earnings potential from that expansion above whatever the fixed fees are on that pipeline? And I have a follow up. Thanks.

Avigal Soreq, Analyst

Jason, good morning. It's Avigal. So as you all know, the business model of refineries relies on optionality and flexibility, and they will over time Red River optionality and flexibility to get to source small Cushions which will pull itself into the capture it in the refining. We do not need to measure that over the Midland Cushing differential as we see now. But over time, it will present a very nice capture within refinery.

Jason Gabelman, Analyst

Okay, got it. And then the second question, you've mentioned M&A opportunities a few times. So just wondering within the three business segments that you operate, where do you see opportunities or where are you most eager to expand between refining midstream and retail, if at all, and specific to refining, are there specific regions that you think are most opportunistic for you guys? Thanks.

Uzi Yemin, Chairman, President, and CEO

Jason, that's a good question. But it depends on if you are a buyer or seller. M&A opportunities exist in all these three segments. We just need to make sure that we create enough value for our shareholders and I'll leave it at that.

Jason Gabelman, Analyst

All right, thank you.

Operator, Operator

This concludes our question and answer session. And I would like to turn the call back over to management for any closing remarks.

Uzi Yemin, Chairman, President, and CEO

Well, I appreciate everybody's good questions this morning. I appreciate our management and executives around the table with me here. Everybody is doing a great job in these times. I’d like to thank you investors and all for your interest in our company. I'd like to thank the Board of Directors for their trust in us. And mostly, I'd like to thank each one of the employees who during this time stayed safe and healthy and made this company what it is. Have a great day. Stay safe. Thank you.

Operator, Operator

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