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Delek US Holdings Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the Delek US First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today’s conference is being recorded. [Operator Instructions]
And now I would like to hand the conference over to your speaker today, Mr. Blake Fernandez. Thank you. Please go ahead, sir.
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' first quarter 2020 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President, and CEO; Assi Ginzburg, EVP and CFO; Reuven Spiegel, incoming EVP and CFO; and Louis LaBella, EVP and President of Refining; as well as other members of our management team. 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, which is posted on the Investor Relations section of our 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 first quarter press release.
On today's call, Assi will review financial performance, I will cover capitalization 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 Assi.
Thanks, Blake. On an adjusted basis, for the first quarter 2020, Delek US reported a net loss of $128 million or $1.74 per share compared to a net income of $129.4 million or $1.64 per share in the prior year period.
Our adjusted EBITDA loss was $29.7 million in the first quarter 2020 compared to $244.1 million gain in the prior year period. Adjusted results include $106.1 million of headwind or $1.44 per share. This is comprised of a pre-tax other inventory loss of $90.8 million.
I would like to point out that this is separate from the LCM inventory charge that is already excluded from adjusted results. Additionally, there is a $36.1 million tax headwind resulting from applying the annual estimated effective tax rate to the quarterly results.
On Page 4, we provided a cash flow waterfall. In the first quarter of 2020, we generated cash flow of approximately negative $154 million from continuing operations, which includes a working capital benefit of $102 million. Finally, cash capital expenditures in the quarter were $190 million, including the Big Spring turnaround.
With that, I will turn it over to Blake.
Thanks, Assi. Slide 5 highlights our capitalization. We ended the first quarter with $785 million of cash on a consolidated basis and $1.4 billion of net long-term debt. Excluding net debt at Delek Logistics of $936 million, we had a net long-term debt of approximately $496 million at March 31, 2020.
Moving to Slide 6, we provide second quarter guidance for modeling. Based on actions taken to optimize operating cost and limiting overhead through a hiring freeze, we expect a 10% reduction or $100 million improvement in cost structure on a full-year basis in 2020 versus 2019 levels. This is comprised of $75 million reduction in operating costs and $25 million decrease in overhead.
With that, I will now turn the call over to Louis to discuss operations and CapEx.
Thanks, Blake. During the first quarter, our total refining system crude oil throughput was approximately 240,000 barrels per day, which reflects the major turnaround of Big Spring and downtime at Tyler for reformer work. In the second quarter 2020, we expect crude oil throughput to average between 230,000 to 250,000 barrels per day, approximately 80% utilization at the midpoint.
On Slide 7, I want to highlight our capital spending. Capital expenditures during the first quarter were $109 million, reflecting the major turnaround in Big Spring. As a result of a market volatility, we are lowering our full-year 2020 capital program to approximately $250 million. This represents a $75 million reduction or 23% from prior guidance. Recall, CapEx excludes JV investments like Red River as well as the Wink to Webster connector where financing will be provided by joint venture.
The bulk of the spending reductions are coming from retail Permian gathering and differing or canceling discretionary projects. The 2020 capital program is broken down by segment as outlined in the slide. I would point out that roughly 75% of the full-year capital program was completed in the first quarter, leaving minimum outlay for the balance of the year.
Next, I will turn the call over to Uzi for closing comments.
Thank you, Louis. Good morning, everybody. Please move to Slide 8. The energy industry is facing dual headwinds between demand impact from COVID-19 and excess global oil supply. We are taking aggressive steps to improve our ability to compete through a lower cost structure and spending profile leading to a $175 million reduction collectively.
While macro conditions have been volatile, our niche product markets have remained somewhat insulated and the economy is opening up in our regional footprint, mainly Texas. Feedstocks advantages have moved in our favor, especially with the steep contango curve where we benefit on every barrel run through our system. These factors are allowing us to run our system above the industry average utilization rates near-term.
In the midstream, Delek recently sold the Big Spring Gathering business to DKL. This transaction demonstrates our support for DKL and increases our ownership to 71%, including the GP interest. We are committed to maintaining a strong balance sheet with ample liquidity and we are well positioned to withstand macro volatility. We are maintaining our quarterly dividend payment of $0.31 per share.
At this point, I'd love to thank Assi Ginzburg for his long term with us as a company. His 15 years with us as a company were full of dedication, smartness and love, and I'd like to thank him again for everything he did for the company and emphasize our personal friendship. With that, I'd like to welcome again, Reuven Spiegel, our incoming CFO, who I am sure will do great for our company.
Before we open the call for questions, I would like to acknowledge that CVR Energy is taking a position in our stock and we welcome them as a shareholder. We have no further comments in this regard, so we would appreciate you keeping your questions to the first quarter results and outlook.
With that Lee, would you please open the call for questions.
[Operator Instructions] And your first question comes from the line of Ryan Todd. Your line is now open.
Thanks. Good morning, everybody. Maybe if I could start with something – we've seen a lot of volatility in both Midland differentials and crude contango structure over the past month or so. Can you talk a little bit about, one, I mean, I think whether you feel – I think the market probably focuses too much on Midland destined, but maybe not enough on contango, but can you talk about how you view the dynamics of those playing out in the coming months? How it relates to the export market? And then I have a follow-up question.
Well, good morning, Ryan. As discussed before, we believe that we need to look at the value chain all along for Midland to the export market. As we see in the marketplace, export today is anywhere between $7 to $9. So everybody can focus on one part, but in order to see the full picture, you probably want to look at Midland, contango as well as Brent-TI, which depends on the size of the – which part of that value chain is in favor at any given moment.
At this moment, Brent-TI is as we all know around $6 to $6.50 and contango is around $2 – little more than $2. That brings immediately strength not only to Midland, but if you look at what happened in any grades in the United States, including, the medium sour, including Maya, that is blended in the United States. All these grades are very, very strong.
So Mars, I think yesterday was a $3.5 to $4, I didn't check this morning. And so the value chain, if you capture every part of the value chain, it doesn't matter actually where you get it. Now in our case, we just need to remember that when we have Midland as premium now is $2.50. This is on a portion of the barrels.
We get the contango, which – the CMA, which has little less than $3, maybe around $3 on every barrel. So overall the current environment is actually very positive for Delek US. I don't know how long it will last, but between Brent-TI of $6 and contango $3 that more than offset the strengths in the grade including Midland.
I appreciate the color there. And then maybe as a second question, I appreciate the guidance for the second quarter. I mean, it looks like you're going to be – you're targeting a utilization rate that's probably roughly around 80%, which as you highlighted is above the industry norm.
Can you talk about what you're seeing – the strength that you're seeing in your niche markets, maybe what you're seeing locally in terms of gasoline and distillate demand. And how – in what ways you've viewed those markets as being resilient, whether from a pricing and or from a logistical access point of view relative to other parts of the country?
Absolutely. Good morning, Ryan. So finally they are basically serving a niche market, obviously across the U.S. We've seen less impact on all area, which our refineries are working at.
At the beginning, we saw most of the impact on the gasoline side, but starting two or three weeks ago, we have seen the decline starting to come back up. In the beginning, obviously we saw some decline in diesel, which was less significant than gasoline, but gasoline is obviously leading the charge and this kind of calculated with what we see with the EPA numbers. And at this point we are serving the niche market, and the demand over there mostly on the gasoline side is working for our favor.
Okay. Thank you.
And your next question comes from the line of Brad Heffern. Your line is now open.
Hey. Good morning, everyone. A question on inventories. So it looked like in the first quarter, there were a lot of sales out of inventory, can you talk, I guess first of all about how those contributed to profitability in the quarter and then sort of related, you guys did have a working capital benefit during the quarter which is sort of odds with what other people are reporting. So can you explain the dynamics of that and if that's something that we should expect to reverse? Thanks.
Hey Brad. In the quarter we had the Big Spring turnaround, so that was obviously a big component and tends to throw things off in terms of the inventory. We also had some reformer work at Tyler and so utilization, there was a bid off. So I'm not sure specifically if you had something in mind, but those are two things I would point out that maybe skewed things a bit in terms of sales versus typical utilization rates. And then I think your second question was on working capital.
Yes. Hi, Brad. Working capital was impacted by two tax credits. One was not credit, one was a reversal of $52 million on fourth quarter, excess fourth quarter provision and the other one was $85 million biodiesel tax credit. So the number that you see on Slide 4 is $102 million is reflecting of these tax credits.
Okay. That makes sense. Thanks for that. And then just a question on detail. So obviously it's recovered a lot, but it's still trading into 20% yield, how do you see the value of that entity at this point? Is there a chance that if this continues on that you could buyback in or do you think that ultimately with more scale and maybe linked to Webster that will solve the problem I assume? Thanks.
Well, strategically we look at the midstream as something that we need to look at very carefully. That’s the reason we continue to look into that. However, 20% cost of capital is very hefty. It's extremely expensive. So as we look at the capital structure of the company, we do need to think about if it doesn't recover over a longer period of time, it just happened then we probably want to think if this thing makes sense.
However, I want to make sure that we all understand. We have the DKL situation unfolding, if you will. Our target is around $400 million of EBITDA with the latest dropdown and the results. We're talking about now on an annual basis to $30 million to $40 million. We still have ideas how to dropdown things to DKL and we will continue to look at that as a tool to create value.
Okay. Thank you.
And your next question comes from the line of Manav Gupta. Your line is now open.
Hey, guys. First of all, Assi, you will be missed. I think you were a second pillar of the company and whenever we can be choosy you always helped us out, went out of the way to help us. So you will be clearly missed. We will really miss you. So with that, the first question, we understand the contango benefit. I think in the past you have tried to provide some sensitivity, and I don't remember the exact number, but if it stretches for like a $1 for the entire year, it's like $80 million to $100 million. Can you help us quantify that benefit?
Absolutely. It's a little more than $100 million for every dollar, call it $100 million.
Okay, perfect. Second question, $75 million of CapEx reduction, can you provide where that came from and should be assumed that as a run rate going forward. So should we assume Delek would be running at the lower $250 million kind of CapEx going ahead?
Hey, Manav. It's Fred Green. So the 75 cuts mostly came out of some of our growth initiatives for the year, including the Delek Permian Gathering, and also retail where we're just not going to build new stores. I think we still look at our ongoing sustaining capital at roughly $20 million to $25 million per refinery per year. And then your later turnaround on that where we have typically one a year, but we're not changing our base capital levels going forward.
Okay. And the last one for me, Uzi, Big Spring is a very good asset, some of the best assets out there. That margin capture in this quarter did not reflect the quality of this asset. So I'm just trying to understand, was it just a turnaround or something against you because I certainly don't expect that kind of capture rate going ahead. That's a much better asset, and what was shown in 1Q results?
Well, when you have a refinery that is down for 60 days for a major, major turnaround, including capital projects. With no intent to touch it over the next five and maybe even six years, then it's a reflection of the situation. Even if you look at the capital or the CapEx of the company in the first quarter, most of the capital of this year was spent already in the first quarter just because of the fact that we wanted to put one of our best assets in good shape for the upcoming challenges in the marketplace. I want to be clear, it is still our best refinery and it is performing very well since we came up from turnaround, actually it's running pretty much a full.
Perfect. Basically it was all the turnaround which caused the capture to go haywire. And as the refinery runs much better in 2Q, it should go back to the historical good capture rate. Thank you.
Absolutely.
Thank you.
Absolutely.
And your next question comes from the line of Paul Sankey. Your line is now open.
Hi. Good morning, everyone. I'm sure this is a good joke about missing and whether I can miss as badly as Manav will, but Assi, all the best. I think it's about the 50th time we've typically feel a little bit anyway, thanks a lot mate. A specific question about the SPR, can you just talk a little bit about that just as a very detailed question?
Well, it was in the press and I don't mind telling you that we bought some barrels and put it in the SPR. This is about Manav question from earlier. When you do that, you can actually play with the contango. And that's the reason when he asked if it’s $100 million. I said a little more than $100 million while we have other places that we can put inventory. That's one of the reasons why we are so comfortable with DKL. And the fact that we changed the – we increase the dividend and also maintain the dividend here.
We enjoyed the contango in several aspects. One of them is SPR and we tapped our toe into that business. That business also support, if you will, the payline, as well as the Red River pipelines that we own and some of it operates, some of it not operate. So for us it's a great business and the way to make money another tool in our toolbox.
Great. Thanks. And then a further follow-up to Manav's questions, which is a big and difficult and long question, which is especially with Manav asking about Big Spring. But can you try and – obviously we drove-off a cliff to two months into Q1, difficult to make sense of Q1 results going forward. Can you try and do that? Can you talk to us about the – firstly, the extent which the world has changed and how we normalize?
And secondly, something, if anything you can say about where you feel that post-COVID where your normalized earnings will end up. And I know there's a 100 moving parts, but that would be very interesting to get your perspective. Thank you.
Hey Paul, it's Blake. I'll take a stab at it. Since the COVID impact began, we actually saw the market move in our favor, in terms of packing order relative to the group, I would just say. Obviously, we've seen an expansion in contango. We've seen periods of Midland moving in and out. And then of course the crack spreads moved all around.
Without going too far on guidance, I would just say looking forward, when I see 2Q estimates at a loss of $0.56 a share, I would just say we are very confident that that's a very achievable number. And I would probably leave it at that. The only thing I would just tell you and remind you is that, historically we look at a Gulf Coast 5-3-2 as a kind of a benchmark crack and we normally realize about 70% to 75% of that.
Got it.
The difference is when you have contango or Midland, that feedstock component, you actually capture a 100% of that. So we would actually – much rather a lower crack spread in an expanded contango market that's going to help our capture rates going forward. So I hope that gives you some color.
Yes. Thanks Blake. And obviously thanks for the efforts you made last night to try and clear up the results. Please do get rid of this combination of LIFO and FIFO. Uzi, can you talk a bit about where you think things will settle in without going specific to earnings? Blake obviously handled a bit. Do you think we're in a world of more gasoline demand and wider spreads, whatever? Thank you.
Well, without being too optimistic here, we just need to make sure that we do have some data already coming from the state of Texas. And while in Texas, which is one of the first to open, while it was the 40% decline, today we're in an environment of less than 20% decline in gasoline demand in Texas or at least in the area that we serve. I think we don't serve all the areas in Texas.
So as the states start to open up, we will have more data. One thing that I don't want to be too optimistic, but I saw your note Paul, the other day saying that gasoline will be winning. And we saw already – at least API yesterday showed another draw of gasoline. That will be driven by several factors as you mentioned yourself. The fact that people don't want to use that mass transportation, the fact that people don't want to fly, the fact that people will probably want you to pull costs will be offset some by people not going back to offices as much as they used to. But in general, I think gasoline can be winning here pretty quickly.
And as I said, Texas use to be minus 40% as of two days ago. It is on a weekly basis minus 20%. So we already cut, and Texas only opened or started to open a few days ago. So we maybe too optimistic here, but we do have that data coming from Texas.
Thanks, Uzi. Thanks, guys.
And your next question comes from the line of Theresa Chen. Your line is now open.
Hi. Thank you for taking my questions. I guess just a follow-up on the discussion around the deceleration and the pace of decline. Uzi, you mentioned the 20% in your market specifically relative to the 40% at the trough and decline. Can you talk about just in terms of your markets, are there any qualifiers or factors that we should consider, and why that maybe better than industry or national average? Does it have to do with population density or consumer behaviors there? Any color you can share?
Well, absolutely. And again, I'm not sure that we have the data for New York City or for LA, we don't. So we're just talking about our areas. We mainly serve rural areas. And in these rural areas, as you well know, people in order to do something they need to get into their cars.
And we see it all in Texas as we mentioned. And also in Arkansas, which Arkansas was never minus 40%. It's actually in the area that we're in minus 27%, 28%, and now it's improving. And that's the reason we are saying that the 80% – we are comfortable with 80 utilization rate for the quarter.
I want to remind everybody, many of us were here during 2008, 2009 and that was the case at the time as well, that rural areas didn't get heard as much or lift. I shouldn't say, it's still very strong, but lift. We had some data on big cities. We see that in big cities the decline is little more severe. But that's again one of our strategies.
Also I want to emphasize one more thing. The impact of the virus, and I know most people are not interested in our convenience stores, but the same-store sells inside the store jumped significantly over the last four to six weeks. People don't want to go and stand in lines in big boxes and people really don't want to be exposed to a lot of people. So they come in and out to these stores.
Now this is data only for four weeks or six weeks. We shouldn't take it to the bank. We need to be very cautious. But we do see a change in behavior in people inside the store.
Got it. That leads to my follow-up. In terms of your retail strategy, so you're seeing better same-store sales related to changing consumer behavior in this pentatonic. I think on the DKL call, there were some comments about West Texas demanding down 15% or so.
And then your earlier comments about this post-COVID world, yes, people are going to stop kicking flights and using mass transit, perhaps driving more, but also balanced with the consideration of social distancing being a social norm going forward. And maybe people are going to stop driving to work as much. How do you think about your retail strategy going forward in light of all of that?
Well, it's a combination of factors and I'm going to take it very shortly here. We just need to remember this in some area. The big box retailers stop accepting customers 24 hours. And we see it in West Texas. We see it in Arkansas. I don't know. We didn’t check every area in the country. But in these areas, other retailers because of social distancing is because of different – their decision.
Now all of a sudden we see after hours, 9:00 PM, 10:00 PM, 11:00 PM much more traffic than it used to be in the past. I don't know if big box retailers will change their mind in the next two weeks, or two years or two months or whatever it is. I really don't have a clue. But as long as their behavior is their behavior, we are the beneficiary.
So I'm going to be bold here because I'm little surprised. In terms of enjoying the traffic, we're not afraid to put our neck, if you will, outside there and say we are going to see a better demand. And that's the reason we say, we're going to run the refineries little better than the industry average. We are going to – we think that retail will be a big beneficiary.
And also as I mentioned earlier, the contango, which I don't know any company, maybe there are companies that enjoy 100% of the contango in their crude slate. So I'm little surprised how it's not being looked at a little better, but maybe this is me just being naive.
Well, I'm not surprised at your boldness at all, Uzi. Thank you very much.
Thank you.
And your next question comes from the line of Roger Read. Your line is now open.
Yes. Good morning. Thank you. And Assi, like some of the other guys, I'm happy to say, thanks for all the help along the way and good luck in your next endeavors. With that, I'll kick down to the question. Uzi, dividend, we've seen a few companies in the space make some cuts. Results like Q1 obviously you're not indicative of the future, but if they were to continue at that level, we'd all wonder about the dividends. So I was just wondering how you think about dividends sustainability going forward and how that fits within the overall capital allocation?
Well, Roger, first quarter was horrendous for everybody including us. We took it a little harder just because of accounting issues with FIFO and LIFO. And I know that it's hard to explain that to all of you and maybe one day we need to clean this thing. But ignoring the inventory, which is pretty much in line with everybody else. First quarter was a loss of, call it $0.30. And I know that this made a lot of noise around it and it's hard to get to that number, but it is minus $0.30.
Now with the capital – like Fred mentioned, the capital project behind us. And from now on to the end of the year, we are talking about probably $60 million of capital with the combination of contango, which is very strong in the second quarter. And I know Midland is out of favor. All the grades are out of favor right now. But until a week ago, Midland was very weak and we took advantage of that for the quarter and also the fact that we see DKL doing much better in terms of coverage as well as leverage and the convenience stores, performing – I'm not afraid to say, the system will be above everybody expectation for this quarter, for the second quarter.
I'm not afraid of – or we're not afraid to continue the dividend. There's no reason not to continue the dividend. Obviously, if this continues, first quarter would continue and some negativity we would need to look at it. But second quarter doesn't show any indication of cash burning. So we don't think that dividends should be touched at this time.
All right. Thank you. Very clear defense. The only other question I had was a kind of a follow-up modeling thing to understand the contango crude storage play that you were referencing. I believe it was with Paul's question. But is that going to be something classified inside of DKL, inside of DK or is it split between the two? Or are there opportunities that both entities will do and some of them involve the SPR storage and some of them other options?
Well, SPR is not the only inventory play that we can play. As we all know we have a lot of tankage and especially when you don’t run 100%, you have capability to enjoy the contango. So it's a combination between DK and DKL. Obviously, we own 71% of the DKL and 100% of the GP. So we look at DKL as very – is something that we need to protect as well. So the inventory play will be between the two entities and that should be looked very carefully over the next few months if contango continue to play itself the way it is.
Great. Thank you.
We have a question coming from Neil Mehta. Your line is open.
Hi, good morning. This is Carly for Neil. Thanks for taking the question. My first one was just around the midstream growth strategy. How if at all have your views evolved on increasing exposure to the midstream business given how expectations around the U.S. production growth trajectory have changed in the last month?
That's a great question, Carly. And we need to look at it on over longer period of time. We still believe that the United States will need that oil. Our assumption is that export won't be as cheap anymore because the outside countries like Russia or OPEC won't allow United States to export as many barrels that it used to be, but at the same time all will be needed inside the United States. So we are going to look at that bit more in light of not only exports, but oil that is needed in other places of the country and how other people will modify their behavior.
Got it. That's helpful. Thank you. And then the follow-up is just around the split between gasoline and diesel. We've seen some pretty dramatic swings between the strengths and the margins for those two products. Can you just remind us what flexibility exists in the DK system to shift between gasoline and diesel production and then any thoughts on your views on relative demand for those two going forward?
Yes. Thanks Carly. This is Louis. Currently, we've been in max disciplined mode for a while now and our – typically range between 38% to 40% and we can probably swing toward gasoline about 10% if the economics dictate.
Great. Thank you.
Your next question comes from the line of Doug Leggate. Please ask your question.
Hey. Good morning, guys. This is Clay on for Doug. I've got a follow-up question on the strong utilization rates. Wondering if you can talk about how you see the cadence trending from April to June, provide any reasonable color and also let us know a bit any of this product that you're producing is being put into tanks rather than being sold?
Well, I don't know that we are breaking that down by month. The question if we are building inventory, absolutely not. We're not building inventory.
Okay. Thanks.
Yes. We're not given regional details by refinery or throughout. But I think a fair assumption would be just somewhat similar utilization across the board for the system.
Okay. That's very fair.
And Clay I'd like to say one more thing. I mentioned that obviously one our best asset is Big Spring. And with the fact that demand over there is coming back, it's fair to assume that Big Spring will be running very close to capacity.
Got it. Okay. Also just wondering maybe you can provide any details around the OPEC cuts that you had announced yesterday and confirm whether or not these will be sustainable post recovery?
Yes. Clay, it's Blake. I'll kind of cover that. So I think the best way to look at it as a reference point for 2019. OPEC was about $682 million, and we're looking at roughly $75 million coming off of that. If you look at the first quarter actual and then the guidance we're providing for 2Q and kind of extrapolate that for the second half of the year, that gets you right in the zip code of kind of where we think we're going to land for the full-year.
And I would just say this, the only thing embedded in that is a little bit of downtime. Obviously at 80% utilization, you're running the system a bit below normal. That's probably about a $5 million impact from a variable cost standpoint. So I would just say that maybe 2Q is about $5 million lower and that might come back up a little bit in the second half of the year.
On the overhead side, again similar reference point last year was 275, if you take the 1Q actual and then 2Q guidance and again, extrapolating that second half of the year, I think that gets you in a good landing point there and that should definitely be sustainable both of those going forward.
Got it. So when do you expect to hit run rate on those savings?
Well, like I say, if you take the 2Q guidance, all we really need to do is maintain that level for the rest of the year it will be at the full-year guidance.
Got it. Thanks, Blake.
Yes.
Your next question comes from Jason Gabelman. Please ask your question.
Yes. Hey, good morning. I wanted to circle back on the refining utilization guidance which is a bit stronger than peers. First, if you could give any insight into what you're running at right now. And then in terms of strength in your individual product markets, are you insulated from other competitors from selling barrels into those markets?
I understand that demand in your more rural markets are strong, but I guess the question is, do competitors have an opportunity to ship products by pipeline into those markets and have you seen that happening potentially eroding some of the margin benefits you're seeing from stronger demand? And I have a follow-up. Thanks.
Hey, Jason. Good morning. This is Avigal. So obviously we have a cost advantage of supplying ourselves to our refinery. Some of them isolated, some of them has some supply that coming into the area. But having a refinery in a rural area always, does that present an advantage.
As we mentioned earlier in the call on those areas, the options that people have to move is very much dependent on the gasoline demand. And we have seen in the beginning some decline in demand, but we obviously see some very strong trend that shows us that the demand is coming back.
We see that in Arkansas, East Texas and West Texas, all of them. So we are very optimistic about the demand coming back in our areas and we are seeing – we've seen – we have a very strong customer that rely on us and we are happy to serve them as much as we can.
Got it. Is there optimism baked into that 80% utilization rate, you got it to?
Jason, I would say that's actually fairly conservative. Obviously at this point we have some data in hand and we are trying to be fairly conservative in terms of the way we're guiding you.
Got it. And thanks for that color. My follow-up is on the results specifically on the cash flow. There was a lot of noise because of the inventory movements and it seems like those inventory movements flow through the income statement, whereas for some competitors because of the way their accounting is done, it flows through working capital, and maybe gets kind of taken out of underlying earnings.
So can you just discuss how those different accounting policies kind of impacted your underlying earnings and cash flow? And specifically, I noticed the lower cost or market adjustment wasn't classified as non-cash and I think it typically is. So just if you could elaborate on what happened there and if that was in fact a non-cash item? Thanks.
Well, when price of inventory or when you have inventory at one price and it comes down, then you have different ways to treat it from an accounting standpoint in different ways, some do FIFO, some do LIFO, some do moving average, whatever they do. It doesn't change the fact that all refineries, including us are long working capital.
We have many more payables versus receivables. It's not unique to delicate everybody, we pay for crude on the 20 of the following month. That's on average 35 days of payables while receivables are usually between four to five to seven days. So when prices come down, the working capital or the entire working capital, because we are long working capital everybody is, then the working capital is coming down.
That obviously changes and we already see it when prices recover. When prices are coming down, working capital is shrinking; when prices are coming up, working capital is expending. It's not unique to Delek. It's 100% of the refineries regardless of the accounting methods that we use.
Regarding our accounting methods, we are using some FIFO and some LIFO and that's the reason we tried to call out both the LIFO and the FIFO within the other inventory as well as LCM. If you combine these two numbers and I'm sure you can do it much better than we do, you will see that compared to our peers, we're pretty much in line and everybody has the same LCM. In our case, some of it is inventory. But the accounting method doesn't change the fact that we are all long working capital.
Got it. Okay. Thanks for the color on that.
Your next question comes from the line of Matthew Blair. Your line is now open.
Hey everybody. Glad to hear you all safe and sound here. I had a question on the valuation of the Big Spring Gathering drop. Could you just talk about this from DKs perspective? It looks like the multiple came in maybe a little bit less than 5x. And then on the DKL call, you mentioned to expect another drop in the near future. What kind of evaluation or multiple do you think would be appropriate there? Thanks.
Hey, Matthew. It's Blake. So on the drop for the gathering business, I would remind you we took about 5 million shares or so. And the implication there was we thought DKL was a very good value. And if you look at DKL is basically doubled since that time.
So in essence that went from, call it $150 million transaction to $250 million and would have brought the multiple in line with kind of industry averages. So I guess I would just answer it in terms of a big component of that was taking equity in DKL, which we felt was a very depressed price.
And I don't think we're going to get into any kind of alluding to multiples on future drops, but obviously I think we've demonstrated that DK is very supportive of DKL and I think we'd probably just leave it there.
Sounds good. Thanks. And then Assi, could you explain that $36 million tax hit a little bit more and if your earnings improve, does that get reversed out in future periods?
Well, Assi is here. But we are trying to give him some vacation time as he is transitioning out. So Reuven will take that question if that's okay with you, Matthew?
Sure.
Well, the $30 million in change was based on our outlook for the remaining of the year and the prorated tax rate that derived from that. So I think that shows are anticipating for improved results over the next quarters. And that will reverse the amount.
Okay. Thank you.
And next question comes from the line of Paul Sankey. Your line is now open.
Hi, good morning. It's Davis on for Paul. Thanks for taking the question. Can you tell us what was the realized hedging gain for the quarter?
Hey, it's Blake. Yes, it was $68 million.
Okay. Thank you. And my follow-up is just regarding the cost reductions that you highlighted. Has any of this been realized in 1Q or how will we kind of see it come through over the next three quarters of the year?
It's really more of a progressively kind of 2Q and beyond. I think you'll notice the guidance for 2Q is starting to indicate a downward trend. Although I would point out 1Q I believe came in pretty much lower than 4Q had. So the trend had started, but I think you're looking at additional steps in 2Q. And like I say, in order to achieve guidance for the year, we really just need to maintain that 2Q level. And I think we're trying to bake in some conservatives there, so.
Okay. Thank you. That's all I had.
[Operator Instructions] And there are no further questions at this time. Presenters, you may continue.
Well, first I'd like to apologize for the small interruption during the call. I'd like to thank my colleagues around the table, Board of Directors, you investors for your confidence in us. But mainly I'd like to thank each one of our employees who make this company, the great company it is. These are challenging times, and I'm very happy that we had very minimum interruption within our business during these tough times that this is because of the dedication of our employees. Have a great day and we'll talk soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.