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Delek US Holdings Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Earnings Call for Delek U.S Holdings Incorporated. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today Mr. Blake Fernandez, Senior Vice President of Investor Relations & Market Intelligence. Thank you. Please go ahead.
Thank you, Jerome [ph], and good morning. I'd like to thank everyone for joining us on today's conference call and webcast to discuss Delek U.S holdings third quarter 2019 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Assi Ginzburg, Executive Vice President and CFO; Fred Greene, EVP and COO, as well as other members of our management team.
The presentation material, we'll be using during today's call, can be found on Investor Relations section of Delek U.S. website. As a reminder, this conference call may contain forward-looking statements as that term is defined under federal securities laws. Please see Slide 2 for the Safe Harbor statement.
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP result, 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 earnings press release has been reviewed and we are covering less segment and market information that is incorporated into the third quarter press release.
On today's call; Assi, will review the financial performance, and Fred will cover operations for the quarter; then Uzi, will offer a few closing strategic comments.
With that, I'll turn the call over to Assi.
Thank you, Blake. We had strong financial result this quarter despite the lower Midland differential and plant maintenance at our El Dorado refinery. As you can see on Slide 3, on an adjusted basis, for the third quarter 2019, Delek US reported net income of $58.7 million or $0.78 per diluted share, compared to net income of $186.4 million or $2.15 per diluted share in the prior year period.
Our adjusted EBITDA was $163.1 million in the third quarter 2019, compared to $325.5 million in the prior year period. Adjusted result this quarter include a $20.7 million pre-tax benefit from RIN waivers, granted for Krotz Springs, El Dorado and Tyler refineries, however, this was partially offset by a negative refinery inventory impact, excluding LCM of $13.5 million. I would like to highlight that year-to-date adjusted earnings and EBITDA are above year ago level, despite a compressing Midland differential.
On Slide 4, we provide a cash flow waterfall. In the third quarter of 2019, we generated significant cash flow of approximately $213 million from continuing operations, which include a working capital benefit of $81 million. This strong cash generation allows us to fund cash capital expenditure of $106 million along with $75.3 million contribution to Wink to Webster.
We're on track to complete project financing by as early as year-end for Wink to Webster, and the remaining contribution should be funded through that vehicle on a nonrecurring basis. As a reminder, we expect total net investment for Wink to Webster of $340 million to $380 million. Finally, we returned approximately $65 million of cash to our shareholders between buybacks and dividend.
Slide 5 highlights our capitalization. We ended the third quarter with over $1 billion of cash on a consolidated basis, and $994 of net debt. Excluding net debt to Delek Logistics of $830 million, we had net debt of approximately $159 at September 30, 2019.
On Slide 6, we provide fourth quarter guidance. We estimate based on differed curve that our realized Midland differential in our gross margin will be in the range of $0.15 to $0.35 per barrel premium to WTI.
With that, I will now turn the call over to Fred to discuss our operation.
Thanks, Assi. During the third quarter, our total refining system crude oil throughput was approximately 274,000 barrels per day, which reflects downtime at El Dorado. As shown on Slide 6, for the fourth quarter 2019, we expect crude oil throughput to average between 275,000 and 280,000 barrels per day. Separately, I’d like to point out that in the first quarter of 2020, we have a turnaround plan at our Big Spring refinery. Crude oil throughput for Big Spring in the first quarter should be in the range of 30,000 to 35,000 barrels per day.
On Slide 7, I want to highlight our capital spending. Capital expenditures during the third quarter of 2019 were $111 million compared to $86 million in the third quarter of 2018. Our full year 2019 capital expenditures are forecast to be $415 million. This amount includes $247 million in our Refining segment, $10 million and our Logistics, $21 million in Retail, and $137 million at the Corporate level. The Big Spring gathering system is included at the Corporate level and will comprise approximately $132 million this year. As a reminder, CapEx excludes joint venture investments like Red River and Wink to Webster.
While our CapEx for 2018 is expected to come in about 5% above our prior forecast, this is mainly a function of pulling forward spending from 2020 as a timing of the Big Spring turnaround was moved from March to January. We now expect CapEx next year to be meaningfully lower on a year-over-year basis.
Next, I'll turn the call over to Uzi for closing comments.
Thanks, Fred, and good morning everybody. Cash generation was significant in the quarter, and I'm pleased with the progress on our strategic ambition of building out our midstream business and increasing utilization of our own logistics asset versus third-parties.
Moving to Slide 8, Big Spring Gathering Acreage continues expanding, and now we have more over 275,000 dedicated acres on the system, up from 250,000 acres previously. With ongoing progress at Big Spring Gathering, we now expect $20 million to $25 million of EBITDA from that system next year. As gathering continues to grow, it places Delek in a unique position among refiners with availability to equity accrued in excess of our refining capacity. This dynamic underpin our decision to enter Wink to Webster JV as it offered fuller integration potential. Once the project is complete, we will have optionality to place barrels at our own refineries, selling into local markets or accessing the premium Gulf Coast market.
Moving to El Dorado. We're excited about the vacuum tower upgrade that was completed at the end of the third quarter. We're now positioned to run at increased utilization rates with a substantial improvement in product yield, including increased distillate output. These improvements should allow El Dorado to take advantage of potential IMO benefits, including strong distillate cracks and increased capacity to run West Texas Sour feedstock.
As shown on Slide 9 cash returned to shareholders remains a priority. Year-to-date, we have repurchased $147.8 million of our stock. Our share count has been reduced by 16% from the peak in the second quarter of last year. Our capital allocation program balances cash to shareholders with potential opportunities for growth. We intend to repurchase $30 million of Delek stocks in the fourth quarter of 2019. In addition, our Board of Directors approved a 3.5% increase in our regular quarterly dividend from the second quarter 2019 level. This marks our sixth consecutive increase since the first quarter of 2018.
With that, operator, could you please open the call for questions?
[Operator Instructions] So we have a question from the line of Roger Read of Wells Fargo. Your line is open.
Hey. Thank you. Good morning everybody and apologies for any background noise on my way through air port right now. Uzi, I just wanted to -- I guess, first ask or may be this is for you, Assi, cash flow in the quarter was pretty good, especially the recapture of the working capital, and you gave pretty good idea of what the gathering and processing system to that in EBITDA? But as we think about a relatively modest or even maybe slightly negative Midland versus Cushing premium, how should we think about cash flow generation as we look at ‘20 and ‘21, if not an absolute number maybe sort of a rough contribution as we think about the three segments of the company?
I think is first – good morning. I think it's too early to talk about contribution for 2020. We do know that we have a meaningfully decreasing our 2020 CapEx plan below our 2019 plan in order to make sure we have a material available cash flow to continue our dividend growth and buyback program. With that being said, we do think that our gathering business, through other aspects of it, can generate much more money next year than what we have on our base case. And also there is a good chance that some of the Wink to Webster will start producing cash as early as next year. So we're very confident in our performance of our Logistics segment, our Retail segment and even our Refining segment, when you look at the 2019 number, please remember that El Dorado ran almost every quarter in the first three quarters of the year, below 65,000 barrels a day, producing a distillate yield of 37%. When you look at the IMO environment, we're going to be in a much better place because as we mentioned on our call earlier, we're looking at higher distillate yield. So I think there is yet to be filled, but Delek will be a big beneficiary of the increase in distillate cracks, something we haven't seen as much in 2019, especially in El Dorado.
Yeah, fully agreed. This one market looks tight pretty much everywhere. I was just curious about getting too deep into that particular project. Do you see other similar type tweaks into your system whether it's Tyler or Krotz Springs that you can affect sort of changes like this in short order, and get a better product yield. I mean your yield is pretty solid already, but I was just curious if there is any other tweak you have there.
Well, first, we're very excited about El Dorado. Increasing El Dorado distillate by at least 4% is something that we're very excited. We always work on other projects, sometimes they do require downtime like it happened in the third quarter with El Dorado. So that’s something that you need to balance between how big is the benefit versus the downtime, but for sure there are several projects that will enhance our system. I just want to make sure, or we just want to make sure that we balance the downtime in the return. Obviously, with El Dorado, its no-brainer – it was no-brainer to take the vacuum tower down for 45 days because of the enormous benefit from that.
Your next question comes from the line of Manav Gupta of Credit Suisse. Your line is open.
Hey, Uzi, a quick clarification. So when you initially announced Wink to Webster, the CapEx was $340 million to $380 million. Now what you're saying is after this spent of $75 million, which is already done, there is no more spend associated with Wink to Webster as you secure project finance. Am I understanding that right?
Let's start with FX. If you use 20% say need for the project and then use the midpoint of the project of $360 million, you will end up with roughly equity need for the project of $72 million. Already in Q3, we invested $75 million. We haven't secured yet the project financing, but we believe that we are on track to close it as early as at the end of 2019. And therefore, meaningfully, we shouldn't have too much outlay of cash when you look at the continuation of the project. I will say that there is actually a situation that we will even have a cash inflow when we complete the project, because at that point, if we elect, potentially, we can reduce the equity in the business or in the investment of 15%. So right now, we are on track to close the financing. It's not secured yet. We are going to launch it in the next two weeks, but the markets are good, and we have good -- secured, I would say commitment from some banks.
So the midstream – so refining spend you said would be down next year, but if there is no material contribution, we should also assume that the midstream spend at DK next year would be lower because Wink to Webster would be hopefully project finance. Is that the right way to think about it?
Correct. Now, when we talk about CapEx, just to be clear, Wink to Webster is not CapEx, its investment in a JV. But you are right. First, we don't have any burden of Wink to Webster next year. It may be even generate free cash flow back to us. On top of it, we do expect overall DK CapEx to go down meaningfully, including the DPZ [ph] person, which is a gathering system.
Okay. So next question is more on the line of El Dorado, you indicated it besides the higher diesel yield, you are also increasing utilization. Can you help us quantify in your term, if you look at the forward cracks. The change you need at El Dorado, are we looking $15 million, $20 million EBITDA uplift. What kind of EBITDA uplift are we looking at from the change you made, if you can help us quantify the benefit?
Let's start with the fact, when you look at this quarter, just this quarter, the loss profit opportunity was $20 million to $25 million. And then when you look year-to-date, on average every quarter, that was a number anywhere from $15 million to $20 million every quarter year-to-date of basically impact on that. And that's before we are using the new curve. So this can be a significant number, when you just look at this year compared to next year.
And last question, Assi, every quarter we are getting a 3.5% increase in dividend, which is very good. I think your dividend from 2017 end was of like 19% or so. So I'm just trying to understand where does -- like how does the [indiscernible] gone? Is it all about getting to a competitive yield or is it balancing dividend and buybacks here?
Manav, that's a great question. We continue to generate significant cash flow. You see even in this quarter that -- the cash flow that we generated and we told you, not you personally, but we told the market that there will be a reversal of working capital range that's happened in the first – in the second quarter, and now we see that this can in. So even after we spent $75 million that which we believe is what we need to put as equity for the Wink to Webster project. We feel that we are continuing to generate cash flow. We will not stop in hiking the dividend yield in the foreseeable future just because of the fact that we have committed to returning cash to shareholders. And as Assi said the combination of bear performance at El Dorado, which includes illuminating the fuel oil or eliminating almost completely the fuel oil make together with IMO, together with our cash flow from the gathering, we are committed to returning that cash to our shareholders, so from a modeling standpoint just assume that these dividend hikes will continue in the -- for the foreseeable future.
Thank you. Your next question comes from the line of Benny Wong of Morgan Stanley. Your line is now open.
Just had a quick question regarding your balance sheet, obviously, you reported that you have $1 billion in cash. It sounds like you guys have been generating a higher level of cash potentially. Just how are you thinking about that strategically -- is there a targeted level of cash like as the rest more of kept drive powder to be opportunistic? Or is there more cushion to be the sense of how are you thinking about path?
Good morning, Benny. First, we're very proud about our ability to continue and produce cash flow every quarter even when we’re investing in CapEx equity this quarter and Wink to Webster, we still able to generate a net cash of more than $1 billion. There is no secret amount of what is that number that we need to be at. With that being said, we always like to have probably more cash flow as a percentage of other -- of the balance sheet or the equity value of the company compared to the others. With that being said, the reason why we're doing it is positive too and your answer is one opportunity. We always like to look at other things, and we want to be able to extract when the opportunity is showed up. Second cushion, we won't be able to use our balance sheet when needed to continue their buyback, to continue the dividend, to continue investing in the company. And that allow us to operate the company in a way that two or three so that quarter doesn’t impact our ability to continue – basically, continue with our capital location program. Hopefully, I answered the question.
You did, I appreciate the color there. Just the second question is it really around your upgrading of El Dorado, and, I mean, 4% increase in distillate yield sounds pretty good. And I’m just wondering, for you guys due to upgrade, should we read as -- your view on IMO has changed? I remember, previously, you had a view that it was going to be relatively short-lived for you to guys to make a decision to go forward with this. Is that IMO base, you're seeing something different you think it might be a little long-lived, how do I reconcile that?
Hey, Benny, it’s Blake. Good morning. I guess, obviously, address a broader eye on all questions and then tie it in. For one, two components to IMO. And as you know, we have very little [indiscernible] for crude oil production, and so we're not in a situation where we forced to recycle that in the system. Moving to the distillate yield side, which is really where we have significant leverage as you know. We're actually seeing market dynamics drive the distillate crack right now. And it’s hard to say for sure, but we're not really -- there is no real evidence that IMO is necessarily driving this, there are some broader market factors. So one we’ve got heavy global maintenance. You see the Saudi strike took a lot of the distillate rich volumes off the market. We have PES off the market. And now cold weather, we're actually seeing the fairly wide arbitrage to send [indiscernible] from the Gulf Coast over to the East Coast. So in our view the distillate margin is very strong, but it’s not necessarily reflecting all of the IMO benefit. And so some of these decisions that we're taking to improve the distillate yield is partially driven just by fundamentals, but then also tying in potential uplift from IMO going forward.
Your next question comes from the line of Prashant Rao of Citigroup. Your line is open.
Hi. Good morning. Thanks for taking the question.
Hey, good morning.
Good morning. I wanted to ask first on the gathering projects and sort of a broader question. We have been hearing the upstream and rig counts come down where some concerns about production levels sort of maybe bottoming out here and maybe some change in call the next 12 months of what supply will be in the overall U.S. shale base. I just wanted to get a sense of your gathering as it fits in the context of that background. And as we look forward to further gathering enhancements, maybe if you could talk a little bit to remind us about the nature of your gathering projects and how they might be differentiated from maybe some of the production declines that most of us are expecting in the greater shale play in the U.S. in the upstream?
Well, that's a great question. First, let me give you our perspective sense to date. We made years ago a decision that our gathering will focus on the -- if you will the best counties, in the Permian. And only now people starting to understand that there's a difference between different counties. Our counties are Marty County, Midland and Howard Counties. These are – they are that are coming from these counties are 37, 38 APIs. We watch every day. We have a report card from every producer. As you know, we have dozens of producers. And we don't see any slowdown in these three counties. Also, we checked in light of the last talk -- the political talk about fracking and further lend, there is very minimum impact in these three counties on us. It would be price for crude at $55, $56. In these three counties, we see zero slowdown from producers at any given moment. As a method of projections they give us for next year meet what they told us a year ago. These are really good barrels. And once -- and we spoke about that now we are basically come – at the end of the year, we will belong crude oil. So Delek will be in a unique situation that we will have quality barrels, and we are long both crude and products. So for us, for me or for us, the best position to be, especially, in these three counties that are so good to produce.
And obviously, we just said that we include the dedicated acreage this quarter to above -- to more than 275,000 acres. I'm just going to remind you and others that similar gathering systems are being sold for hundreds and hundreds of millions of dollars we just sold the last deal. So, we continue to believe that there will be more production coming from -- if you will, best counties, and we don’t hear anything from any produces. So I hope -- that was a long answer, but I hope, answered every angle of your question.
That was very helpful. Thanks Uzi. And just one quick follow-up on the cash flow statement. The working capital benefit -- that was really funded to confirm that we should be thinking with that more sort of reversal of anything to build – as working capital build in the first half and then further confirmation sort of how to think about it. For 4Q is that sort of -- that it’s not -- it doesn’t turn into a headwind going forward in last year, perhaps, depending upon crude purchases or something that might change. But as it stands, that doesn’t reverse into some sort of a headwind in 4Q or 1Q?
Correct. When you look at the year-to-date number, as you will see there was basically no material change in working capital. And in Q1 and Q2, when prices have all came up, we had a fable inventory gain basically that we reported that balance some with cash flow, and then this quarter when prices came down, we actually collected some of that cash basically to the working capital changes. We don’t see right now any tailwind or headwind for Q4. Like you said, if we're going to run less or more barrels, there may be some change, but we don’t anticipate one.
Your next question comes from the line of Paul Sankey of Mizuho. Your line is open.
Hi, everyone. Apologies for the short-term question, Uzi, but the Keystone pipeline were highlights I know you guys would be a relative winner if we can say that from the acreage. Can you just talk a bit about what’s happening from your prospective, and how to fetch your markets? Thanks.
Yes, I will let Avigal, our Chief Commercial Officer to take that one if he watches it.
So we believe this question is still a long bell. Obviously, when the market is – in present opportunity, everyone wants to use the last logistics aspect that they can. We have still remained very optimistic about the investment we made in the area, and most of our investments in the reason based upon [indiscernible], and firm may supply. So all-in-all, cushion is still long bell, and that’s obviously something that every midstream would like to look to how to utilize the last piece of pie, but around this, we’re very optimistic.
There is a perspective that you are going to suffer from Keystone [indiscernible] is that misguided or how would we get to that, because my understanding, obviously, is that you will not a big user of the pipeline?
No. We obviously are not user of that pipeline, but there is another pipeline that takes volume out of the cushion, and there is something that changes the balance of cushion, but it’s not something that’s material for what we do because we are mostly midcontinent on that.
Right. If I could switch slightly to another big announcement this quarter, which is the word that you’ve gone on improving distillate yield, is that really kind of the surprising the scale to which you can manage that. Can you just talk a bit more about it because it’s obviously going to be very important in terms of profitability given current market conditions?
Well, I will let -- I want to introduce to everybody our President of Refining, the guy that actually constructed all that Louis LaBella. I don’t think the market has seen you, but welcome to the call. So go ahead Louis.
Thank you, Uzi. So, yes, during our IMO scenario planning, we've recognized that potential opportunity to take advantage of the oversized design of the crude back in at the El Dorado refinery. So, in Q3, we planned a slowdown of the refinery to go after design change upgrade to the vacuum tower. Preliminary test results have shown to be very effective. The design change allowed more lift in the vacuum tower to produce own speck asphalt trade off the tower as well as increasing gas hold and distillate make yield, while we minimize our fuel production. These results will provide us the flexibility of what type crude we like to run whether it’s light, medium or heavy crudes depending on the LP model, how it predicts going in IMO. And then, as we look at our current models and also our field cash run all indicate that we have consistently shown a 4%, above 4% distillate yield increase.
Got it. Finally is on the market, there is a view that the Keystone effect will be one to know that the Brent-WTI spread. I know you always got a view on these things. I will be interested and I'll leave with that. Thanks you.
Well, obviously, there are some completing factors here. First, the world needs to absorb all that crude that is coming from United States. We're doing a huge work right now to understand what destination for light crude is exists and rewards. So also the shipping cost is going up, and at the same time, Keystone, obviously, impacting to the other side. We believe that the market found still – around $6 benchmark as we stand. It’s still -- I'm not smart enough, or we are not smart enough to know what the impact of trying to dump on another 2 million, 3 million barrels on awards like pool, but I assume that there will be some impact to that. We – in our mode, we always assume $5 to $6 Midland-Brent, and that's what we see right now
Your next question comes from the line of Brad Heffern of RBC. Your line is open.
Yeah. Hey, everyone. Sorry to harp on the El Dorado questions, but just one further one on the yield. So, when I look at the yield structure of the refinery, it’s like 8% outside yield something like that, and maybe 1% petchem, and 1% other. So -- where is that 4% yield coming from? Is that the overall productions of refinery is going up some or is it taking some out of the asphalt category? Just any color you can give me how that's going to be accounted for going forward?
So, this is Louis again, looking at the design -- the crude backed unit design for 100,000 barrels for a medium tower design. So with the new upgrades to tower, we are actually have the choice not to make fuel. So we drive everything into the gas hold yield as well as making spec product of asphalt. So it’s really splitting the tower up to get – to drive up the tower to get capture the distillate yield straight off the tower.
Okay. Thanks for that. And sorry, if I missed this, but Assi could you give the exact working capital number for the quarter? That's all I have. Thanks.
Yeah. It was a benefit of $80 million. Brad?
That’s it from me. Thanks.
And the next question comes from the line of Neil Mehta of Goldman Sachs. Your line is open.
One of the things that we talked about with you guys lately is the transformation of your business, and how you're shifting away from being heavily levered to refining and switching increasingly into non-refining businesses. Can you just provide sort of that big picture perspective of what you're trying to accomplish over the next three to five years kind of quantify how big you want to get in non-refining and the path is? There is a lot there, but I think it’s probably the most important strategic question for you guys.
As usual, Neil, your questions are spot on. So we are in the middle of creating or extending our integrated business model. And more and more we want to rely on our logistics assets versus third-party. We -- right now, as we look -- we expect in the next three or four year to get to midstream around $400 million, this quarter, obviously, we had declared $52 million, which was a record quarter. We need to see – we probably going to see this trend continue to evolve higher as more and more assets we get out of third-party commitment and enjoy our assets. And together, we will be gathering and our gathering is picking up steam very nicely. We already have positive return on a monthly basis. And as Blake said, next year we give guidance of $20 million to $25 million only from gathering. So the number that we have in our head is around $400 million in three years by the end of 2020. And that doesn’t take into account any other ideas that we have -- only the project that we are involved as we speak. I hope I answered your question, Neil.
Yeah, that’s helpful. And the focus right now is to focus on sort of the core midstream growth platform. Is there another area or avenue diversification that the company would look at? Historically, you guys have played in retail, I think, that's less of a focus now. But I was just trying to understand, again, what Delek is going to look like in a couple years?
Well, we're dipping also into renewable even more. We used to have two plans, two well disciplines, now we have a third one. We just bought another one a month ago. Obviously, none of the numbers include any benefits from DTC, which who knows what's going on in Washington, but the prospects look pretty good. So we look at renewables, and at the same time, we need continue to develop our integrated business model. So we're not shy of making acquisition that you know, but the multiple should be wide. And right now, what we look at around is too expensive. So we will continue the course of developing our organic growth.
Your next question comes from the line of Phil Gresh of JP Morgan. Your line is open.
Your line is open.
I guess sort of a follow-up to that Neil was asking, maybe slightly differently. There are a lot of refining assets in the market, many of which are outside of the region in which you operate, but they are out there nonetheless. So, I guess, as you look at those opportunities in your desire to grow midstream in other areas, are you ruling out the idea of a refining M&A at this point to grow your footprint? Or is it primarily just the other midstream growth?
Well, we are not ruling out anything, if this is the right opportunity and the right multiple. We're not going – I read somewhere that Kenai is for sell. I don't think that as much as I love Alaska, I don't think that we're going to buy Kenai. And we were very loud and clear about other opportunities that came to the market that we thought the prices were too high. When you buy a refining asset and we have done several acquisitions, as you know, Phil, you worked that over the years, anybody can write a big check and buy refinery. In order to buy a good refining asset and that last example is along with the two refineries we bought, you need to have the opportunity to improve the crude slate or the cost of the crude that's what we did in both Big Spring, and in Krotz, when we lowered the cost of crude with the gathering or other means using pipeline. Second, you need to be able to improve operation that's what we did in Krotz, and a little bit in Big Spring or Krotz, we, obviously, will be running the refinery there and building the [indiscernible] that is now giving us $50 million on the yearly basis. And you need to do bear in selling your products. Other than that, if you just like a big check, and the multiples are – or the EBITDA is high, then you are going to do a good favor. So as long as these are criteria are not being met, we don't want to be in the acquisition mode, however, if there are opportunities that we think that there will be assets that are in reasonable price, and we can improve the operation day in and day out, then we will look at it.
Sure. I was not thinking of the last come or just there are there are several opportunities in the path forward, obviously, you don't operate in path forward today. So that was more of the aligned in new questioning that if you have any views on diversification footprint in that regard?
Absolutely. We diversified the company -- that's a great question. By the way, you're more than welcome to come to me here with me to Alaska if you like Alaska. We can just go and look at there, but we don't need to buy a refinery. But on the serious note, we do understand that the market perceived us as Midland Company. And it was very good, and tremendous benefit to our company as we grow it, but there would be a point in the future that we will need to look at diversification of our portfolio. We're doing it to the midstream right now, but maybe in the future, we will look at diversifying our refining portfolio.
Yeah. Sure. Okay. That makes sense. And then, I guess, on the capital spending. I know it doesn't sound like you want to give a number for next year, but perhaps you could just remind us of what is a normalized level of spending looks like in a given year as we try to frame out or the spending this year and where it might go over time?
So let's start -- when you look at the CapEx of this year, we expect to spend roughly at $450 million. Including in that number $260 million in the Refining segment, and these are the big numbers, and then between Retail and Logistics, roughly $30 million, and then on other, which is mostly the discretionary of CapEx where to the gathering, we're talking about $135 million. So when you added all that, you will see that this year with a lot of spend at the refining, a big stand on the gathering, we’re over $400 million. Now please remember that this year CapEx when we look at the refining side, includes the project in other way that we mentioned earlier, includes the completion of the RK, and also we brought back turnaround costs from 2020 associated relative to the big screen. So we don't think refining should be $250 million, more like somewhere around $200 million, when included turnaround and maintenance CapEx. Between Retail and Logistics, I think, our $30 million that we did year summing that make sense, so that puts us at $230 million. And then the question is how much we want to spend on gathering, and we mentioned that next year we're going to spend less on gathering than this year. So that puts you in a much lower number compared to the $450 that we spent this year. And when I say much more is significant for me, it’s not 5%, and I will say for Uzi significant, it is not even a 10% decline. So we are looking at a meaningful decline next year.
Okay. Very helpful. Last one -- was not on the DKL call, but just wondering about your desire to leverage DKL as the growth vehicle here for the midstream growth and possible drop downs, not just in 2020, but maybe over the next couple of years? Thanks.
Well, DKL, as we all know, the MLP market is not functioning the way we want – there must be market to function. We are still looking at what to do with DKL because we want to continue to grow our midstream segment. But maybe we shouldn’t do it at DKL level. We look at it as a combined situation, still -- DKL is still an option, and we don’t want to eliminate that option at this point. But we look at the midstream segment between what is sitting at DK and DKL as a combined segment, and not just DKL.
Would you ever buy it in?
Obviously, that’s a possibility of VLP or [indiscernible] done it. I don’t want to say that we're going to do it, but it is a possibility.
Your next question comes from the line of Paul Cheng of Scotia Bank. Your line is open.
Uzi, On the M&A you are just refining, what will be the two or three most important evaluation metrics that you're going to use?
Evaluation, well, first, I wouldn’t assume that were buying a refinery tomorrow morning, so just let -- we're not engaged in any discussion with anybody to my knowledge by buying a refinery. So that’s the question that belongs to the past, and maybe to the future, but doesn’t belong to the present. So as I mentioned the three criteria is that improving the crude slate or the cost of crude, improving the operation and improving the net backs. These are the three criteria that we look at when we buy a refinery. Also we just need to make sure that we don't pay too high multiple if this is going to be dilutive to our shareholders.
I understand. So I guess my question is that when you’re talking about you don't to overpay or paying too high multiple, what evaluation metric, what multiple that you will be looking at?
Paul, I don't think that I can give you on a theoretical deal what the multiple is without knowing, if we can improve the operation or not. So that's not -- at the time, we paid 10 times for Krotz. Today it looks really cheap.
Okay. I think this is for Assi, for Big Spring Gathering, let's assume next year that you are $20 million, $25 million, and given that is the spending is actually in the [indiscernible] the MLP. So that earning -- is that going to show up in the Big Spring refinery? Where that we should assume earning going to show up?
So right now, that’s not material, and this quarter, it’s actually showed up in the Corporate and Other, and the contribution margin for DPG, which is a Delek Permian Gathering, was around $3 million this quarter, incorporate in others. As you grow and next year it’s going to be meaningful, we will look into what percentage needs to be in Big Spring or in the Logistics. So we haven't made that decision, but I want to show you that this quarter, it was in the Corporate and Other, and it was a benefit of $3 million. When you look at 2018, when we just had a spend, that number was a negative $1 million in Corporate and Other. So we do see an improvement and we were looking to – it’s a – it’s going to be in Big Spring Corporate and Other or maybe even part of the Logistics segment.
But you haven't made up my way that you're going to project.
Correct. Probably, by year end, when we will start having meaningful number, we will have to make that decision. As you know this point $3 million in a quarter, it's not material, and that's why it’s part of Corporate and Other.
And for fracks in El Dorado, you talked about the business yield changes and all that. How does it change in terms of crude slate? And I think you guys, several years ago, that have decided even though the crude unit is 100. But [indiscernible] I think you’ve decided into 80 and to one [indiscernible]. How does that may change under the new design? And weather that unit costs, operating costs, is going to have any changes?
Okay. So that's a tricky question. I'll take the first part and then Uzi will answer the technical part. We've got refining more barrels in El Dorado, absolutely, we can run more than 75,000, actually, we can run more than 80,000, and enjoy the same yield. However, there is a gain here between running 80,000, and the RIN waivers are small refinery exemptions. As you know, if we're running more than 75,000, then there – RINs waiver doesn't exist for us. So that's something that we need to watch both end as you know. I know that you excluded that in others from our earnings, but at the same time this is real cash flow that we get every year, and that’s something that we need to watch. But to answer your question, running more than 75,000, we can do it easily any day, running even more than 80,000 is easy. We just need to understand economics. And we got to be crude slate and the product slate, Louis, I will let you take that one.
So, yes, it really opens up our flexibility of the crude that we can run, and it out drafts minimizing fuel we’ll make. So as we minimize the fuel we will make, we can draw the date of the tower into the gas hold and actually – we actually yield diesel of the vaccum tower sale. So it opens up to wide range of what the market would tell us which crude to run.
Final one for me. [indiscernible] and deal as the company become bigger and your cash flow position, your balance sheet is stronger. Why we still have that deal? I mean, is it better that for you don’t have that deal or you think that is still advantageous?
So great question. First, we can actually terminate all of the [indiscernible] deal as early as in Q2, 2020. With that being said the capital cost that being allocated for inventory just to put another $450 million of debt in the balance sheet, the net leverage is not something that we’re not ignoring, and therefore, it’s all question of costs. We're targeting basically to move the [indiscernible] on deal to the same cost of our deck. And from a cash flow prospective, it means that, overall, we will have the benefits of not having it as part of our deck, on one hand, and on the other hand, reduce materially our cots, and we do hope that in the next level, including alternative that we have in the market to renew such a deal, we will be able to reduce materially those costs.
Okay. Thank you, ladies and gentlemen. And I would now like to turn the call back over to your presenters today. Please go ahead.
Okay. Thank you. I would like to thank my friends around the table here for the hard work that they put together, the Board of Directors for their trust in us. Obviously, everybody that took –that listened to this call this morning, all the investors for your trust and belief in us. And mainly, I would like to think each one of the employees of this great company. I appreciate everything, everybody joined today. Thank you. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.