Earnings Call Transcript - PBF Q2 2023

Operator, Operator

Good day, everyone, and welcome to the PBF Energy Second Quarter 2023 Earnings Conference Call and Webcast. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. You may begin.

Colin Murray, Investor Relations

Thank you, Debbie. Good morning, and welcome to today's call. With me today are Matt Lucey, our President and CEO; Tom Nimbley, our Executive Chairman; Karen Davis, our CFO; and several other members of our management team. Copies of today's earnings release and our 10-Q filing, including supplemental information, are available on our website. Before getting started, I'd like to direct your attention to the safe harbor statement contained in today's press release. Statements in our press release and those made on this call that express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we described in our filings with the SEC. Consistent with our prior periods, we'll discuss our results today, excluding special items. In today's press release, we described the special items included in our quarterly results. The cumulative impact of these special items increased second-quarter net income by an after-tax amount of approximately $729 million or $5.59 per share. This relates primarily to the gain realized on the formation of the St. Bernard Renewables equity method investment. Also included in today's press release is further guidance related to our 2023 operations. For any questions on these items or follow-up questions, please contact Investor Relations after today's call. For reconciliations of any non-GAAP measures mentioned on today's call, please refer to the supplemental tables provided in today's press release. I'll now turn the call over to Tom Nimbley.

Thomas Nimbley, Executive Chairman

Thanks, Colin. Good morning, everyone, and thank you for joining our call. Refiners follow the markets and respond to consumer demand. We continue to hear calls for higher refining utilization and see a market supported by low inventories and sustained customer demand. Crude differentials narrowed over the quarter. It is common to have narrow crude differentials during peak summer runs. The narrowing is amplified by the production policies of OPEC Plus and, to a lesser degree, recent SBR restocking activity. We believe crude markets are near the peak of the narrowness and would expect crude differentials to relax post-summer, as the industry heads into full turnarounds that are forecasted to be higher than seasonal norms. PBF's refining system is well-positioned to manage these market dynamics. We have a complex conversion, ample reforming capacity, and our long-life octane. We like our yield profile, which puts the company in an advantageous position. Refinery margins remained well above historical mid-cycle levels, and we have seen a recent rebound from the relative lows experienced during the second quarter. A key theme for 2023 is the recovery in the demand for jet fuel and gasoline, partially offset by a decline in distillate demand as industrial production has slowed. Diesel inventories are up yet still remain below five-year averages. However, at this time of the year, we expect to see distillate inventories building into the coming agricultural season and winter. The fact that we are not seeing this normal seasonal activity provides some support for potentially stronger distillate markets ahead. The markets will continue to be volatile. Predicting the timing of and the future moves in the commodity markets is challenging. At the same time, we are seeing stable to growing demand for our products at our refinery gates, thereby continuing the call for high utilization from our assets. With that, I will turn the call over to Matt.

Matthew Lucey, President and CEO

Thanks, Tom. Before commenting on the quarter, I thought I'd take a moment to give you my perspective on the company as I take on the role of CEO. First, I can say with absolute confidence that today, PBF is in its strongest position ever as an operating company. As I reflect on PBF's time as an operating company, which began in 2010, I break our history into three distinct periods. The first five years from 2010 to 2014, we set the foundation of the company and established our refining platform. The next five years from 2015 to 2019, we focused on growth. We doubled our refining capacity, increased our logistics footprint, and geographic diversification. The three years from 2020 to 2022, we navigated the most volatile marketplace oil markets ever experienced, maintaining consistent, safe, and reliable operations through the lows allowed us to fully capitalize on the robust market recovery to generate record financial performance, which brings us to today. We have repaid over $3 billion in debt, repurchased PBF Logistics and PBF Inventory Intermediation Agreements, reduced our environmental credit payables by about 40% since the beginning of the year, and formed the renewable fuels business with a world-class partner in Eni. We restarted paying a dividend and commenced executing a share buyback program where we bought about 8% of the shares. Moving forward, our focus is on capital allocation. Our repositioned balance sheet will buttress the company against future market disruptions, which are inevitable in this cyclical industry or any cyclical industry for that matter. Our goal is to further strengthen our business, cash flows, and balance sheet and to work with the rating agencies to highlight these improvements with the intention of eventually becoming an investment-grade company. On that front, we have recently been upgraded by S&P, Moody's, and Fitch. We will continue to invest and innovate in each of our refineries to maintain and improve our reliability and competitive positioning. We will evaluate growth opportunities that leverage our expertise and large industrial footprint into high-quality business opportunities that diversify our cash flows beyond refining. Similar to the renewable diesel business we developed at Chalmette. Most importantly, we will weigh potential investments in growth against returning capital to shareholders, with the goal of maximizing long-term value. By definition, any returns associated with any future potential growth opportunities must be and will be superior to buybacks and dividends. Our process will continue to be rigorous and disciplined and will ensure competition for capital, so that funds will flow to the highest and best use. PBF is committed to driving long-term value for shareholders. This obviously begins with working safely and operating reliably and responsibly. On that note, in the second quarter, our refineries operated reasonably well with system-wide throughput in line with our expectations. We completed a turnaround of the Delaware City coker and minor work on the hydrocracker in Torrance. There will be a larger FCC and outpacing units turnaround in the fourth quarter at Torrance. As mentioned in our press release this morning, the St. Bernard renewable joint venture transaction closed in June. We are more than pleased to have reached this point and look forward to operating this venture alongside Eni sustainable mobility. The operations of SBR are progressing as planned. We successfully started up both the RD unit and the PTU. The facility is running well. We continue to line out operations and we sold our first commercial cargoes in July. We are more than halfway through the year, and market conditions have provided PBF with the opportunity to generate exceptional results. While the work to maintain the strength of our balance sheet is ongoing, the major efforts to improve it have largely been completed. We will continue to focus on our robust balance sheet with a simplified and transparent capital structure. We intend to demonstrate the durability of our transformation and our through-the-cycle financial strength. Our goal is to generate long-term value for our investors through solid operational performance, and disciplined capital allocation. With that, I'll turn the call to Karen.

Karen Davis, CFO

Thank you, Matt. For the second quarter, we reported adjusted net income of $2.29 per share and adjusted EBITDA of more than $560 million. As mentioned at the opening of the call, adjusted net income excludes the gain on the investment in St. Bernard Renewables. We closed on the joint venture partnership at the end of June and going forward, we will account for our 50% interest using the equity method. The fair value of the SBR business was approximately $1.72 billion at closing, excluding working capital. In the second quarter, we recorded a gain of approximately $969 million relating to the formation of the joint venture. The gain represents the difference between the value of the consideration we received, which includes the fair value of our 50% noncontrolling interest in the partnership, plus the cash contributed by our partner, and the carrying value of the related assets we contributed. On June 28, upon closing of the transaction, we received $431 million, and on August 2, just yesterday, we received an additional $415 million subsequent to the successful commercial start-up of the PTU in July. In total, PBF has received $846 million relating to its investment in SBR. PBF is entitled to potentially receive up to an additional $30 million of contingent consideration if certain performance conditions are met. While we exclude this one-time gain from the discussion of our second-quarter results, this transaction generated real equity value for PBF and holds potential future value through additional opportunities. We look forward to exploring those with our new partner, Eni. With our results from operations and the cash provided by the successful closing of the SBR equity investment, we continued our work to improve the financial position of the company, strengthen our balance sheet, and reward shareholders. We further reduced our outstanding environmental payables by approximately $250 million for a total of approximately $570 million year-to-date. Our environmental credits payables have now been reduced from over $1.3 billion at the end of last year, to just under $800 million at the end of June. Continuing with our efforts to streamline our balance sheet, in July, we exited our Inventory Intermediation Agreement at a total cost of approximately $270 million, including the cost of repurchasing the inventory and transaction fees. This arrangement had been our highest cost of capital. For the first time in our history, the company now owns and controls all of its inventory, a milestone event in the development of PBF. We continue to purchase PBF shares, and through today, we have repurchased almost $440 million worth of PBF shares, including $100 million in the second quarter. For the life of the program to date, we have repurchased over 11 million shares and reduced our total share count to just under 124 million shares. Our G&A expenses for the second quarter came in at $104 million, which includes our base G&A expense and amounts related to the company's incentive and equity-based compensation plans. For the sake of clarity, PBF's annual base and G&A expenses should continue to be in the $200 million to $250 million range. Depending on financial and operational performance on top of this, there could be approximately $100 million in incremental G&A expense related to our compensation programs. This incentive component of G&A is variable and dependent on a number of factors, the most important of which is our financial performance. If the company does well, so do our investors and our employees. Consolidated CapEx for the second quarter was approximately $367 million, which includes $260 million for refining, corporate, and logistics, and approximately $107 million related to SBR. Our refineries should continue to demonstrate durable earnings power, and we are adding diversified earnings streams as SBR comes online. For the second quarter, SBR was not a contributor to the earnings of our system, as we did not fully start up until July. As of today, we have reached planned throughput rates and expect to continue operating in the 20,000 barrel per day range. We have previously mentioned our EBITDA per gallon expectations on a steady-state basis, but we do not expect to reach that run rate until we receive all of the required regulatory approvals for our pathways and products, which could be into the first half of 2024. We ended the quarter with over $1.5 billion in cash and approximately $1.44 billion of gross debt. We continue to focus on the strength of our balance sheet and ensuring that the needs of the business are satisfied. We believe our sector-leading balance sheet needs or exceeds many investment-grade credit metrics, and we will continue to exercise balance sheet discipline and sound financial policy. Operator, we have completed our opening remarks, and we'd be pleased to take questions.

Operator, Operator

Our first question comes from Roger Read with Wells Fargo.

Roger Read, Analyst

First off, Matt, congratulations on becoming CEO. Can we take a closer look at the diesel markets and your comments? Diesel demand has been quite weak, and diesel inventories have not shown any significant growth. As we approach the fall and winter, considering a normalized economy next year on the industrial side, what is your perspective on the ability to supply enough diesel to the market, and how might this impact margins moving forward?

Matthew Lucey, President and CEO

I'll start and then pass it over to Tom, who made some relevant comments. Diesel demand has been somewhat weaker. However, if we compare it to last year, we see a similar trend, perhaps with a longer duration. Gasoline performance was significantly better in the early part of the year compared to diesel. Consequently, we produced more gasoline, leading to a decline in diesel yield. There are always unintended consequences. Recently, we've witnessed a significant rebound in the diesel crack, partly because this time of year, diesel inventories remain well below historical averages. As a result, the market must create the incentive to produce diesel as we approach the agricultural season with changing weather. I am confident that the market will find a way to ensure sufficient diesel supply. However, these situations always return to the same conclusion—refined capacity is limited. While supply is increasing, it's crucial. Therefore, we view the situation as favorable and believe the market is well-positioned to achieve margins above historical averages for this stage of the cycle. Tom, do you have anything to add?

Thomas Nimbley, Executive Chairman

I would just like to mention that we still have to navigate through the turnaround season, which is active and lengthy, and we are just at the start of hurricane season. So there is likely some added cost factored in at this point for getting through this period. However, the market and the industry will be adjusting yields over the coming weeks and months as we move into the winter gasoline season, while distillate is expected to hold its market position.

Roger Read, Analyst

Okay. Can you quantify or highlight a few key points regarding what changes for PBF with the new inventory control, and if an investment-grade rating is achieved, how should we assess its potential impact on the bottom line?

Matthew Lucey, President and CEO

Yes. Regarding the Inventory Intermediation Agreement, as Karen mentioned, if we look back at our history, when we started, we had suppliers of crude on the East Coast and product off-takers. We also had suppliers in the Mid-Con for our three refineries. This week marked a significant moment for the company as we fully extinguished the agreement, allowing us to be properly capitalized. Previously, our financing structures were fine, but we lacked the capitalization to own everything outright. Now that we do own the inventory, it significantly simplifies our balance sheet and enhances transparency. Owning the inventory rather than renting it reduces costs, as the Intermediation Agreement carried our highest capital cost. This change not only shows that we are well-capitalized, but owning it debt-free strengthens our position and provides us with more liquidity going forward. It's clear that this was the right move for us. The structures we had in place served us well for the last 12 years, and we appreciate the partners we've worked with, but at this point in our lifecycle, it makes sense to move on. In terms of achieving an investment grade rating, we believe it will increase our company's value in several ways. It will lower our cost of capital, which is crucial in this business where working capital is extremely important. Improved credit opens opportunities with counterparties, especially when dealing with a million barrels a day of crude at the current prices. Enhancing our standing with counterparties adds value, reduces insurance costs, and lowers overall expenses. Additionally, it can attract a stronger shareholder base as our company becomes more robust. We consider this goal to be very important, and it is something we are actively pursuing. Our argument has significant merit, and it is gradually gaining recognition. We received an upgrade recently, yet for our industry, achieving an investment grade rating is critical and will provide substantial value to our shareholders.

Roger Read, Analyst

Great. Good quarter and we'll catch you on the next one.

Matthew Lucey, President and CEO

Thanks, Roger.

Operator, Operator

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

Doug Leggate, Analyst

Tom, it's nice to hear from you on the call. Matt, you've clearly outlined the different life stages of PBF throughout its history. However, I would like to ask about your current view of the portfolio. Is there anything you would consider changing at this time? My question is partly inspired by the joint venture you have that is expected to generate some RINs, which seems to pose a significant challenge for the company. Given Valero's ethanol business and other methods to reduce RIN exposure, I'm interested to know how you plan to manage your obligations moving forward.

Matthew Lucey, President and CEO

So I'll go backwards. And unfortunately, way too much of my time has been focused on RIN mitigation. It's far and away, the best way to mitigate RINs is to manufacture renewable diesel, which we're now doing. And so that is a milestone event for the company. And not only do we have half the entity, half the RINs are ours, but we're set up to not be an obligated party. So we'll procure their share of RINs as well, which is good access simply to acquiring the RINs. But I would quibble with the idea that investing in ethanol is necessarily a good hedge against RIN volatility. The long and short of it is what makes it difficult is the way the program is administered; the beneficiaries are entities that trade at a much higher multiple than refiners. So it's a difficult task to take on that, well, I'm just going to buy my way through the RIN market because much of that benefit will flow to wholesale marketers that retail businesses that trade at different valuations in refining. I don't think there's any glory going that way. But like I said, we are now manufacturing 500 million RINs a year, and that dynamically changes our position. We look forward to operating SBR safely and reliably and delivering those RINs. Regarding our portfolio, I talked a little bit of our history. If you go back to the last cycle, 2010 to 2019, I would oversimplify the cycle by comparing it to residential real estate, which was location, location, location and everything else was secondary or not important. It didn't really matter what your size was, what your complexity was, or your ability to process our grades. It was about whether you were near the crude renaissance and had access to cheap crude for various reasons. I think our portfolio, which we put together very specifically on the back of complexity and access to coastal markets, is much better positioned going forward. Why is that? I think there have been a number of closures in the industry, and you can see that impact everyone. I'm not sure it directly impacts anyone as much as it does PBF. As you look at where the closures have occurred, they happen to be around us on the East Coast, for example, PES. You could see that from Paulsboro to a lesser extent, certainly not our neighbor, but come by chance in Hovensa or direct East Coast participants. And when you go to the Gulf Coast, it was really the eastern edge of the Gulf Coast, where Chalmette and Lynn shutdown, which are neighbors to Chalmette. There, you have not only benefits from less refined products being produced but also on crude procurement because they're buying very similar crude to us. Out on the West Coast, Marathon, Martinez, Scott, San Maria are down, and Phillips 66 announced yesterday that Rodeo will be converting in the first quarter. All these are direct and local competitors to Martinez. I think the closures impact us directly, but stepping back more broadly, you have obviously the disruption in Europe, where natural gas is now a major headwind for the refining sector. Obviously, you fire boilers and heaters with natural gas, but you also desulfurize your products with hydrogen that comes from natural gas. If you're paying 4 or 5 times natural gas than we are in the U.S., that's a big headwind and a big competitive advantage for us. Additionally, there’s disruption from the Russian-Ukraine ground war, creating distortions that can accrue to the benefit of our coastal refining network. Finally, we’ve talked about for years the International Maritime Organization (IMO) regulations. Its impact is embedded in everything else. Looking forward, we've got our refining footprint. We're very, very pleased. We're also beginning stages with Eni and SBR, and we're looking into new businesses like hydrogen. We're working with the federal government. I think the company is very well positioned with our refining and renewable footprint, and we can capitalize on other industrial opportunities.

Doug Leggate, Analyst

Very thorough answer. I guess my follow-up is a quick one on the West Coast. It seems to me last December; I think we saw $100 cracks at one point when refineries went down for maintenance. Obviously, Rodeo is still too close and you're going to have your FCC offline, as you pointed out. I guess my question is, how do you see the dynamics in the West Coast now? It seems to me we're back to sort of 2005 type volatility, incremental imports setting the incremental price. I'm just curious if you can characterize how you see the West Coast dynamic going forward, and I'll leave it there.

Matthew Lucey, President and CEO

Yes, I think it's going to be very tight. And you went through some of the reasons. I'll ask Paul Davis to comment. He works in California every day.

Timothy Davis, Analyst

Actually, Doug, I would say you probably nailed it, right? The market is going to have to price a steady flow of imports as we have experienced refineries shutting down, and we have more pending that are going to shut down. The gasoline markets on the West Coast, including the whole pad are short, it's going to have to price accordingly, and you're going to see a lot of volatility going forward. That's what we see.

Operator, Operator

Our next question comes from the line of John Royall with JPMorgan.

John Royall, Analyst

So my first one is on working capital. Can you talk about any working capital builds you're seeing from the start-up of SBR, and we don't see it in the release, but I assume there was an overall headwind in 2Q. So any of that reverse in the second half? Or just should we be thinking about kind of more ordinary course seasonality for working capital in 2H?

Karen Davis, CFO

Thanks, John. Thanks for the question. Yes, in the second quarter, there was a build of inventory related to SBR. In fact, it was $75 million, which was contributed to the partnership. Going forward, all of that working capital requirement will be within the SBR joint venture. So I think you should see in the future a return to more normalized working capital.

John Royall, Analyst

Great. And then on throughput, I think you cut guidance for the full year. Can you talk a little bit about the drivers there? Was it just turnaround dragging a little bit beyond plan in 1H? Or anything with 2H there?

Matthew Lucey, President and CEO

No, I don't think anything specific. We do have a big turnaround in Q4 at Torrance, the FCC will be down for probably 50 days. So that will certainly impact throughput there.

Operator, Operator

Our next question comes from the line of Manav Gupta with UBS.

Manav Gupta, Analyst

I just have one question, guys. You have two complex refining assets on the West Coast. Both of them can process a lot of heavy sour crude barrels. There's a new pipe, which we can debate if it opens up in 1Q next year or 2Q, but that will deliver close to 500,000 barrels of WCS on the West Coast. I just want to understand how PBF can benefit from it. And if you can help us out a little bit by quantifying it, that would be absolutely great.

Matthew Lucey, President and CEO

Well, I do think it is a tremendously positive story for our West Coast operations, not only bringing new crude into the marketplace. But that crude has to be priced to get to Asia for the U.S. and for our California system. It can be loaded on foreign flagships and we're dramatically cheaper to deliver it, to Torrance and to Martinez. You're absolutely right. Our kit out there can process the most heavy, the most sour grades of crude out there. And so we're incredibly well positioned to be able to take that crude; we believe it will provide an economic advantage. We are working diligently right now to figure out how much we can run and how we can increase that number, and so we're actively working in advance of whenever it is, but if it starts out next year, we’ll be able to capitalize on the best way we can.

Thomas O'Malley, Unidentified Company Representative

We put a little time in the room. But it's an interesting crude because, yes, it's a sour heavy crude, but it has day one in it to ship. And that is not by and large. So we are looking at trying to figure out how to make sure we debottleneck, expand our ability to handle products from that crude at the top of the tower. We actively have the team working on that, and we can see it as a terrific opportunity for the company.

Operator, Operator

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

Matthew Blair, Analyst

I guess starting out on refining. Could you talk a little bit about the capture rates in the East Coast in the second quarter? Seemed a little low. Was that due to the planned turnaround at the Del City coker? And I guess, what would you expect for Q3 here?

Matthew Lucey, President and CEO

Yes, you are correct. The coker turnaround that took place in the second quarter definitely affected the capture rates on the East Coast, and crude differentials have also decreased. We are optimistic that improvements are on the way. Tom and Paul can provide further insights on that. We anticipate that crude differentials in Del City and Paulsboro will run smoothly regarding future turnarounds. Paul, do you have any additional comments?

Timothy Davis, Analyst

No, I think that's right. We have a pleased slide on work, and we think we're peaking on the light-heavy spreads on crude. So when we take a look at September and October, these programs are a little more advantageous than in July and August.

Matthew Blair, Analyst

Sounds good. And then could you help us understand a little bit more on your expectations for RD profitability in the back half of this year? I think you mentioned that some of the pathways for I presume like RINs and LCFS might not come through until the first half of '24. But it sounds like you're still selling cargoes. I guess 1 question is, is there an opportunity to simply put that R&D into storage and wait for the pathways to fully monetize it? And then I guess second question is, what kind of rough EBITDA range might you expect? And does that $1.25 to $1.50 long-term target still hold?

Matthew Lucey, President and CEO

I would classify it into three categories. To answer your question, we anticipate that long-term profitability in RD will stabilize between $1 and $1.50. You mentioned $1.25 and $1.50; it's within that range, whether $1 to $1.50 or $1.25 to $1.50. Currently, the market is somewhat softer for various reasons. However, if you're fully optimized and fully benefiting from the LCFS credits, it’s likely around $0.75 to $1 at this time. At the start of operations, you receive an initially low carbon score, which doesn't reflect our actual situation as we have a complete pretreatment facility that allows us to utilize all available low carbon feeds. This temporary situation typically lasts for 6 to 9 months from when we commence operations. This is a common challenge for any new participant in the market. For the remainder of this year and possibly into early next year, you might consider adjusting the current market figure by about $0.25, bringing it down to around $0.50 to $0.75 per gallon of EBITDA. Naturally, the markets are dynamic and circumstances can change rapidly. This is our current outlook, and I don't foresee any reason to store diesel; we'll be actively selling throughout the year.

Operator, Operator

Our next question comes from the line of Paul Sankey with Sankey Research.

Paul Sankey, Analyst

Matt, I'm sure you're delighted to be free of Tom. Matt, you gave an interesting little historical perspective early in the call. And one thing that's always struck me about PBF is you've consistently surprised by your willingness to buy major assets. Now that you're at 1 million barrels a day capacity, and you're obviously highly pursuing the investment-grade rating. How do you think about cost of capital, future acquisitions, cash return, are you going to pursue a dividend policy of growth? Is there any potential for special dividends? Or do you think it will be a buyback with a lot less on the acquisition front now you've filled dates?

Matthew Lucey, President and CEO

There's a couple of things there. One, I do think there are tremendous benefits to getting to scale. I think we have scale. One small example, when we were refining at 3 refineries, we didn't have much of a refining organization. The three plant managers reported into executive management. Now we have a Head of Refining. We've got a whole organization under that helps support it. So our access to expertise and operational excellence improves as we got scale. But to your point, we have scale. As I said in my remarks, the rigor that we will take at looking at all uses of capital going forward, whether it's for potential expansion in or out of refining, will all be analyzed together and compared, and everything will always be brought back to our alternative, which always exists in buying back our shares or dividends. Up until this point, we've been very, very focused on debt reduction. Obviously, that's sort of extended to the Inventory Intermediation Agreement, which we just took out. We've been paying down environmental credits. We've demonstrated a fairly aggressive buyback program, and we're coming up on the anniversary next quarter of restarting the dividend. Every day, it's my job, and I've got a team with me that works every day to figure out our best uses of capital going forward. There is no need to get bigger. So everything will be evaluated as an opportunity, and we will weigh it against our alternatives.

Paul Sankey, Analyst

Got it. That's what I kind of thought you would say, frankly. And by the way, Tom, that was a joke. I didn't hear you well; the Valero laugh is much harder regardless of top average. But more you guys...

Matthew Lucey, President and CEO

They're much more generous.

Paul Sankey, Analyst

Can you share your insights on global oil markets? Specifically, could you discuss the implications of Saudi Arabia's recent announcement about extending cuts into September? I'd like to hear your thoughts on trade flows, especially in crude and how it's affecting you, significant changes in Canadian differentials, and product flows. Additionally, has the increased mega capacity we are seeing in Asia resulted in less cost impact? I'm very interested in your perspective on this.

Unidentified Company Representative, Unidentified Company Representative

Paul, that's a great question. Let's approach it from the back. The capacity additions are real, but they won't happen immediately. It will take time to get those large refineries operational. There will be some offset potential for the U.S., especially with Rodeo shutting down. Additionally, the situation with LyondellBasell could change if they proceed with their plan to exit that business in the Gulf Coast. This would not only affect product availability but also crude supply, as they process a significant amount of WCS. We will certainly monitor that. In the end, those refineries will become operational, but most of them are in Asia, where global population growth will primarily occur. These refineries are being constructed with the aim of ensuring self-sufficiency. Regarding trade flows, our team's expertise can provide insights on what's happening with Russia and the new refiners entering the market. Tom and Tommy, do you have anything to add?

Thomas O'Malley, Unidentified Company Representative

Yes, I mean, let me pull along with that. I think it's really kind of the developments that really happen related to the OPEC cuts, right, Atlantic Basin, long crude, Pacific Basin, short crude. So the OPEC cuts have had a more dramatic effect upon the refineries in Asia starting to see an increased trade flow of barrels leaving the Atlantic Basin, particularly on lights. The Western African programs in the prior months, which were sort of softer, and which were moving sloshing around the Atlantic Basin, are now starting to get pulled to the east. That's probably the biggest change we've seen, which is not uncommon, but that's the change that's most apparent in front of us today.

Paul Sankey, Analyst

Yes. Anything on Canada? And I'll leave it there.

Thomas O'Malley, Unidentified Company Representative

I don't think anything that hasn't already been mentioned on the call. Obviously, it's tightened up significantly. It looks like it's winding out a little bit, but I agree with Tom. The big move there will happen when the trans pipeline gets on board.

Operator, Operator

Our final question comes from the line of Ryan Todd with Piper Sandler.

Ryan Todd, Analyst

I would like to follow up on Paul's earlier question regarding the use of cash. You have made significant progress this year in reducing your environmental liabilities while also being active in the buyback market. How much more would you like to reduce the environmental liabilities before you feel comfortable that you are in a normalized position? Additionally, concerning the cash available from both your organic free cash flow and the cash from the closing of the Eni deal, you mentioned being aggressive with buybacks. Is there additional room to increase the buyback, or how do you assess the appropriateness of that strategy?

Karen Davis, CFO

Sure. Ryan, with respect to environmental liabilities, we are at $800 million now, down from $1.3 billion. We would like to see ourselves getting to a range of say $200 million to $400 million by the middle of next year and would call that 200 to 400 range, more normalized. With respect to the Eni proceeds, we've long been talking that the balance sheet is our first priority, but the list of cleanup items is decreasing. We talked about taking in the Inventory Intermediation Agreement and continuing to reduce the environmental liabilities. There is a potential that we might refinance our 2025 notes. Beyond that, it's really weighing, as Matt said, the alternatives for excess cash, which includes stock buybacks. Everything else will have to compete against that return.

Ryan Todd, Analyst

Great. And then maybe just one last quick one. OpEx came in really strong performance on operating expenses there on the refining business came in lower than expectations. Can you talk about some of the drivers there, and how sustainable some of those are as we look through the second half of the year?

Matthew Lucey, President and CEO

Yes. The biggest driver, no question, is natural gas prices. I know there was a lot of concentration on OpEx early in the year, and that was primarily on the back of much higher natural gas prices. Natural gas prices come down, then OpEx comes in.

Thomas O'Malley, Unidentified Company Representative

With that, that concludes the call today. We appreciate everyone's participation, and we look forward to speaking to you next time. Thank you.

Operator, Operator

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