PBF Energy Inc
NYSE:PBF
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PBF Energy Inc
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Good day, everyone and welcome to the PBF Energy First Quarter 2020 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for questions following management’s prepared remarks. [Operator Instructions]
It is now my pleasure to turn the floor to Mr. Colin Murray of Investor Relations. Sir, you may begin.
Thank you, Brie. Good morning and welcome to today’s call. With me today are Tom Nimbley, our CEO; Matt Lucey, our President; Erik Young, our CFO and several other members of our management team. A copy of today’s earnings release, including supplemental information is on our website.
Before getting started, I’d like to direct your attention to the Safe Harbor statement contained in today’s press release. In summary, it outlines that statements contained in the press release and on this call, which 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 quarters, we will discuss our results excluding special items. For the first quarter, this is a net $933 million adjustment consisting of after tax, non-cash, lower-of-cost-or-market or LCM adjustments, change in tax receivable, agreement liability and debt extinguishment cost related to the redemption of the 7% notes due in 2023 which were partially offset by a change in the fair value of the earn out provision included in connection with the Martinez acquisition, which in total decreased our reported net income and earnings per share.
As noted in our press release, we will be using certain non-GAAP measures while describing PBF’s operating performance and financial results. For reconciliations of non-GAAP measures to the appropriate GAAP figure, please refer to the supplemental tables provided in today’s press release. Also, included in the supplemental information provided with today's press release are the consolidated results of our Martinez refinery now included in our west coast system as of February 1, 2020. If you have any questions about this new information or presentation, please contract Investor Relations after the call.
I’ll now turn the call over to Tom.
Thanks, Collin. Good morning, everyone and thank you for joining our call from wherever you may be working. Results for the first quarter seemed somewhat inconsequential given the challenging start to 2020. We are all experience, our own unique sets of circumstances as we manage our daily lives as individuals, families, communities and companies in the face of the measures necessary to navigate the impacts of the COVID-19 pandemic.
Through our refining logistics and commercial operations, we have seen the effects of COVID-19 demand destruction on our business first hand. As a result of the nationwide stay-at-home orders, we estimate demand for gasoline bottomed at around down 50% from last year's level in early April with demand for other products down as well. In response to the pressures of the pandemic, PBF has taken a number of aggressive steps to protect our business from the virus impacts and resulting demand destruction.
We significantly reduced our capital expenditures for the remainder of 2020. We have increased our initial reduction of $240 million announced in March to an aggregate decrease of $360 million in 2020 planned capital expenditures. This represents a 50% reduction to our original guidance. We intend to satisfy all required safety, environmental and regulatory capital commitments while continuing to explore further opportunities to minimalize on near-term CapEx.
We have identified a number of opportunities to lower our 2020 operating expenses by approximately $140 million. We lowered corporate overhead expenses by over $20 million, primarily through temporary salary reductions for more than 50% of our corporate and non-represented workforce and continue to target other areas for savings. We suspended our quarterly dividend, which will preserve approximately $35 million in cash each quarter to support the balance sheet.
And through the sale of five hydrogen plants located at our Martinez, Torrance and Delaware City refineries we generated $530 million in cash proceeds and we continue to evaluate various other liquidity and cash flow optimization options.
And finally, last week we raised $1 billion through a successful bond offering. Our total projected cost reduction measures amount to more than $600 million in expected savings in 2020. Some of these measures are temporary, but should result in long-term benefits. We are taking these and other steps to counter the impact of the unprecedented headwinds we are facing.
Since late March, we have reduced runs by approximately 30%. To put that into context, coming into 2020 we expected to run approximately 950,000 barrels a day through our refineries and we now expect to be in the 650,000 to 750,000 barrels a day range. We expect to be in that range until demand improves and we will adjust our operations regionally depending upon market conditions.
Across our refining system, due to the complexity and configuration of our facilities, we have the flexibility to idle certain units and scale back operations to balance our production with prevailing demand. We are not the only company facing these market conditions and our competitors appear to be responding to the market in a similar fashion.
We are also seeing some companies take the harder decision to completely shutdown refineries. Two facilities have shutdown domestically and several more facilities have been shutdown in the Atlantic basin as a result of high costs and low margins. The refining sector as a whole has responded to the market conditions and done a good job of aligning product supply with demand.
We are taking all the necessary actions to ensure that we emerge from these trials a stronger company and we remain fully committed to our base assumptions that complexity matters. Our complex and geographically diverse asset base provide us with a stable platform to build a strong future. Many uncertainties remain with respect to the lasting effects of the pandemic and the impact it has had and will have on our economy.
From a hydrocarbons perspective, it certainly appears that we have hit the bottom and we are seeing some signs that demand is returning in some measure as the states manage their individual recovery paths. Even in these trying times, as always the health and safety of our employees and our community partners remains our top priority. We will continue to operate our assets in a safe, reliable and environmentally responsible fashion.
Now, I'll turn the call over to Erik to discuss our current liquidity and financial position.
Thank you, Tom.
Today, PBF reported an adjusted loss of $1.19 per share for the first quarter and adjusted EBITDA of negative $3.8 million. These figures include approximately $11.5 of transaction related expenses. Consolidated CapEx for the quarter was approximately $139 million, which excludes the amounts paid in connection with the acquisition of the Martinez refinery. The consolidated CapEx includes $133 million for refining and corporate CapEx and $6 million for PBF logistics.
As a result of the reductions to our 2020 capital budget, we expect to incur roughly $15 million of CapEx per month from May through the end of the year. In addition to the $600 million of cost reductions, we executed two strategic transactions to boost liquidity. We completed the sale of five hydrogen plants to Air Products for $530 million and issued 1 billion of senior secured notes last week.
As of May 1, 2020, after giving effects to these transactions, our liquidity was approximately $2 billion based on our estimated $805 million of cash and $150 million of additional available borrowing capacity under our asset-backed revolving credit facility. When combined with PBF logistics, our consolidated liquidity is more than $2.2 billion. Assuming current commodity prices remain relatively constant, we expect our liquidity to improve as working capital continues to normalize in May and our revolving credit facility borrowing base increases.
Operator, we've completed our opening remarks and we'll be pleased to take any questions.
Certainly. [Operator Instructions] And we will go first to Roger Reid with Wells Fargo.
Hey, certainly, good morning. Hopefully, can everybody hear me?
Yes Roger. We can hear you.
Okay good. I think all of us with the work-from-home thing never really know, just a quick followup there Erik if we could on your liquidity comments, so if we look at the content or what's written in the press release $858 million after giving effects to the $1 billion secured debt that was issued later in May, did - should we presume that you paid back revolving debt?
I mean, I'm just trying to understand how you add a $1.5 billion less than a $1 billion in cash on hand, kind of what the moving components were? And then as we think about working capital within that, since inventory numbers that we reported were lower, I'm guessing we're looking at an accounts receivable, accounts payable or most of the working capital is trapped at this point?
Roger, the cash balance of $805 million was the balanced pre-transactions as of May 1, so then you take the, call it roughly $1 billion, I think the net proceeds were closer to $987.5 million after all fees and expenses. That's how we're getting to the $2 billion. So the $805 plus call it, the incremental $1 billion of cash from the bond deal, plus the availability under our ABL.
Okay, all right, thanks. That's helpful. And then on the working capital side, the moving parts there?
Yes, the biggest piece is on the working capital. During the course of the quarter, clearly as prices declined, we did see cash move out of the system through working capital. We do carry, we are essentially long payables when we think about like we're paying North American crude payments terms, there is typically a lag of anywhere from 4 to 6 weeks there.
So in a declining flat price environment we will ultimately see what we're paying during for example the month of April, that we paid for barrels, half of the barrels that we basically priced during the month of March. So when you start to see $10, $20 per barrel moves month over month, you will ultimately have a lag there. Then as prices start to rebound, it flips and goes the other way.
So that's where we believe the working capital side of things, because we are in a net payables position. We probably carry 10 days worth of receivables and anywhere from 20 to 30 days worth of hydrocarbon related payables. So when an increasing flat price environment everything flips back the other way. We will start to see cash come back into the system.
And just as a quick clarification on that, should we think of it as an average price in a month or should we think of it as where prices were as of March 31 versus where they might be on June 30 when we're trying to compute the effect?
The easiest way to do it, there's a significant amount of science involved because crude prices depending on whether it's CMA or individual prices, the easiest way to think about it though is on a CMA basis. There will fluctuations though month over month because we will end up, right, we're going to run whatever is the most economic crude, some of that specific crude we may buy for three months and then not buy again for another three months. But I think for what you're doing, ultimately using CMA is probably the easiest way to think about it.
Okay, great, thanks. And then Tom, if I could go back to you just, you mentioned maybe some signs of demand starting to creep back into the market and it looks like some other indicators would show us certainly the improvement over the low parts of April, but you got more exposure to East Coast than West Coast which have been two of the weaker markets. So I was just curious if there is anything kind of incrementally help us with there?
Yes, we track this obviously diligently. If you take a look at, as I said, gasoline at the trough, nationwide is down 48% or close to 50%, pad-5 was down 48%, pad-3 was down 43%, pad-2 is down 47%, and pad-5 was down 45% from last year's levels. Now if you look at the last set of reported numbers that I had, now we're down all pads 24% from last year's level up from 5127.5 million barrels a day in the last reported EIAs.
And the improvements have been actually more pronounced in pad-5 were now down only 25%. There is a lot more traffic apparently on 4, 5, in California. Pad-3 has moved from 43% loss in last year to 27%. Pad-2 47 to 33% and pad-1 is the lag and 45% and has now rebounded to only to 35%, I shouldn’t say only, less than last year. And again, obviously this area of the country is a little bit slower in opening up than most of the other regions.
Okay, great, thank you.
We will go next to Manoj Gupta with Credit Suisse.
Hey guys. My first question is on Toledo, the gross margin capture was a little weaker than expected and I understand there was a big turnaround and I'm just trying to understand if that was the only reason because of which the gross margin capture was a little weaker or were there some other factors Mid-Continent? And the broader question is, we understand that Mid-Continent gasoline demand has recovered the sharpest. In fact some people are indicating it should be as high as 90% to 95% of normalized levels. So do you plan to run Toledo harder into 2Q versus some of the other assets?
Okay, there's three parts to your question. First of all, Toledo - the capture rate in Toledo was impacted not only by the fact that we had a turnaround, but candidly we had to bring the unit down earlier than we planned to because the unit had decided it was tired and it was needing some rest. I'm being a little [indiscernible] there but we basically had a number of mechanical problems on some boilers and so we accelerated the turnaround by three weeks and that actually impacted the efficiency of getting ready to execute the turnaround.
Then when we completed the turnaround, we were sitting there looking at double-digit negative gas cracks and we said well, this is not the time to be bringing up a cat cracker that makes gasoline. So that unit has been down and in fact we – so it was really a prolonged turnaround much more than a couple of weeks longer than what we had expected and planned for.
Second part, we are seeing demand increase and the numbers that I had are not quite as strong as what you are saying. Hopefully, you will get there, but we are going to be very, very diligent. We are just not going to do what everybody expects refiners to do, seeing improvement in gas when it cracks and say the Holy Grail, there it is, let's ramp up, let's run. This thing is not over. I am looking at distillate and what we did across our horses that everybody else did is to unmake gasoline and unmake jet.
We cut runs significantly, but we've also channeled the GD knob [ph] and turned gasoline and jet fuel into distillate and distillate is actually something we are looking at as we go forward being very careful that we're not building distillate inventory in a manner that is not prudent. So we will likely start up the SEC [ph] but candidly we won't be running anymore crude, maybe a couple of thousand barrels a day more crude in Toledo until we see that we've gotten above the waterline.
Yes, thanks for that Tom. A quick followup, now you have had maintenance for about a quarter, is it performing up to your expectations? I am asking this question because when you initially acquired Torrance, you thought kind of it needed a little more work, then you initially [indiscernible]. So is Martinez an asset in a condition in which you expected it to be delivered? Thank you.
Actually so far, we obviously took it over February 1, and absent the impact from the margin side, from the pandemic. I will tell you, they are, it is a first class asset, first class workforce. It is not the Torrance situation. It is not the [indiscernible] situation that we inherited when we bought those troubled assets, we said that we thought we would buy in a first class facility and I am very confident and in fact that is the case these folks are really good oil blows.
Thank you, so much for taking may questions.
We will go next to Prashant Rao with Citi.
Good morning, this is Joe on behalf of Prashant. I just wanted to followup on the debt issuance like with that 1 billion private books offering – like your net debt to capital ratio like would be up quite a bit, right? So I just want to know like what are some of the major covenants should we be aware of besides maintaining a $100 million on the revolver?
From a - you know this was a high yield secured note issuance. So from a covenant perspective, there are simply different types of incurrence tests that we need to do or need to abide by in the event that we're going to do anything in terms of moving assets out from under the security. So, other than that, there's really no incremental covenants.
I think the existing covenants that we have dealing with our ABL has stayed in place. We did receive an amendment under our ABL to increase the total secured debt capacity to 20% of total assets. But from a covenant perspective, there are no real financial covenants with the high yield notes.
Okay. Switching gears a little bit back to the CapEx, your CapEx guidance for 2020 is another $110 million versus your origin expectation. Could you elaborate a little bit on the drivers for that and also like, have your views changed on your turnarounds or cash needed for Martinez like since completing the deal? Thank you.
The reaction - was driver on the additional CapEx reduction is predominantly turnarounds, but the turnarounds that we are pushing out from 2020 into 2021 are a crude unit turnaround that was scheduled for Delaware and a turnaround that pre-spend and some turnaround work that was being done in Torrance. So they have been pushed out, everything else we're going to now move to rebalance, if you will, by looking at 2021 and what we can push out from 2021 into 2022 to try to smooth out the curve. That's the way we handle our turnarounds. And I'm sorry, I couldn't get the second part of your question on Martinez.
Have your views on the turnarounds or cash needed like for the asset for Martinez changed since completing the acquisition?
No, not at all.
Not at all, thank you.
We will go next to Theresa Chen with Barclays.
Good morning. I wanted to follow up on the demand question, just in relation to California and your outlook there. In light of recent comments made by government officials, relating to LA possibly being under perpetual lockdown until there's a cure and if you think San Francisco would follow suit and how do you think about the evolution of things on the West Coast?
Well, I can tell you the facts are that we are seeing – have seen California gasoline demand increase rather nicely. It may be plateauing, we’re not sure. We took it down, as I said, if you look at the stacks, it was down 48% at the trough and now has recovered to 25%. So it’s at 75% of last year's level. As to how quickly it goes from there, we actually expect to see - it's tough to follow California because it depends on which politician you listen to.
The Governor is saying that he's willing to open up some things, but then the local jurisdictions have it in LA, I guess you have what the county health supervisor who has come out and said, I think she was the one who said, LA County is going to be closed for three months and the Mayor came out and said, no that's not okay. So we're always at risk that the politicians are going to do some things and that will be what it will be. But our view is that, frankly, California is going to be continuing to recover just as the rest of the country is, as the states open up.
Got it. And then on the differential side, clearly it's been a pretty wild ride over the past couple of months, both domestically and globally. I mean in part, due to – it’s for storage and key hubs and under water, and now with production shutting and Tom, how do you see all of this playing out in the next couple of quarters and in 2021?
In your mind, is there any sort of logical path forward, I mean what do you think has to happen for us to, I guess, get back to some sort of normalized environment where differentials are again, anchored by transportation, economics and quality?
That's a great question. I will start by saying, I think the volatility in the marketplace has been obvious to everybody. We're reacting to things that we've never had to react to before. All of a sudden you wind up with a negative TI price of minus $32 a box or whatever it was. And a lot of that was storage related, a lot of it might have been the length and the derivatives on this thing.
But our belief is, that as we start to see the pickup in demand, and as the states starts opening up the market is in a process of rebalancing. And if you just – a couple of days doesn’t a trend make, but if you take a look at the spread between ICE and daily Brent that's blown out five to six bucks, Marz – its distorted versus LOS, and it's actually selling all over Brent. A lot of that is storage. A lot of that is where you can put your crude, but we believe that the market is in the process of rebalancing on a crude side and ultimately we'll get back to the differentials.
But why do I say that? It's really the story about the products side, it is demand, and as demand improves, obviously, utilization will go up and then ultimately, you'll wind up bringing some of the crude that is being cut back into the system and that incremental crude will be likely the [indiscernible] mediums that are being backed out of the marketplace by OPEC, OPEC plus. I say this on occasion, I think one of the things we should really learn from what we've seen here is, and I'm not sure we will, crude has no value unless it can find its way inside a refinery.
The only way crude has value is if you get it to a refinery and the refinery takes it and turns it into products that the nation and the world needs. So we remain confident that with our complex kit, that ultimately we'll return to some type of a normal, more normal, I can't say normal, but more normal situation and be rewarded. How long it will take? I suspect certainly we're not going to get there until after the second quarter as demand is going to – no, is in the process of recovering. And it may take a little bit longer than that, but the trends do seem to be moving in the right direction.
Thank you.
We’ll go next to Doug Leggate with Bank of America.
Thanks, excuse me good morning, everybody. Erik, I wonder if I could take you back to the liquidity question just for a second. And obviously you have taken a lot of steps here to bolster your cash position as you walked through with Roger. I'm just curious how you see the levers that you can pull, if we ended up with an extended period of weakness in terms of demand, what do you expect your cash, what are you planning for by way of a cash burn?
What would your priorities be for use of free cash if and when we get back there? I'm just trying to get a feel for it, because obviously the cost of the debt is pretty onerous. I'm just wondering if there's flexibility over the next several years to try and reset out lower at some point, just walk us through how you're thinking about that please?
So, I believe where you were going on the front end of your questions, Doug was, if we have a sustained demand issue, and I would say from a cash burn perspective, then we're probably no different than other refining companies that we would need to evaluate. Do we need to idle any assets, our perspective there is zero point in operating to lose money. So when we think about what it costs to actually maintain our system, from May through the end of the year.
We'll probably have an incremental $120 million to $130 million of CapEx that we need to incur that's essentially call it roughly $15 million per month. That does not include turnarounds right so a portion of what we've done is terms of reducing our CapEx burn is ultimately push out turnaround. So that's one of the biggest levers that you have overall from a CapEx reduction standpoint.
So reduce CapEx, then ultimately, do you idle any plants, right? I think on average, our refineries costs roughly $25 million per month to operate in terms of operating expenses. In a shutdown scenario, you're probably spending $5 million to $10 million a month per plant. Clearly, some of the assets out on the West Coast were a bit more expensive to operate, versus some of our legacy assets, but on average, those are general numbers.
And quite frankly, then I think you also evaluate what you do with inventory. We do carry 30 to 35 million barrels of inventory at any point in time, if you have an idle asset. Does it make sense to do something with that inventory? We do have an intermediation agreement with J. Aron. We think there are levers associated with that inventory if we're thinking about a true draconian scenario.
I think we're probably going the other direction at this point though, and we are starting to see demand. Not so much rebound, but we are starting to see green shoots here. We're seeing more cars on the road. We're seeing more barrels run across all of our various racks. So ultimately, I think we're not planning to get back to where things were prior to the pandemic. But I do believe at this point, we are starting to see green shoots related to recovery and as states start to reopen, I think we go the other direction.
I know it’s a tricky one to navigate the scenarios, but bottom line you think you've done enough with the steps you've taken at this point to navigate through this?
We do, absolutely. You hit the nail on the head. What we just did is absolutely a necessary step that was extremely prudent for us. The incremental 90 plus million dollars of interest expense a year is not something that we take lightly. I think we've talked about - we run our business for cash as we expect everyone else in our industry to do.
And quite frankly, our goal at this point is to generate enough free cash flow so that at the end of the two-year, no call period these notes go away and we can really get back to business as usual. But I think we are – our view was, we have different levers that we ultimately pulled back during the month of March for asset sales and clearly reducing our cost structure.
I think Tom mentioned on the front end, there are a variety of things that we believe longer term our business will be more optimized as a result of these cost reductions. Some of them are going to be temporary, but quite frankly, some of those will be permanent as we go forward. And so I think our view right now is, this gives us a clear runway to optimize the business the way we feel we need to do. And on a go forward basis, we have $2 billion worth of liquidity today and that's something that is extremely important to us.
I appreciate the lengthy answer. But the demand’s question has been floated out already, but Tom forgive me I'm going to float out a little bit more, because you pointed to gasoline and Erik just obviously talked about that as well. But I'm curious what you're seeing on the distillate side and let me preface my question like this. As we look at all the demand data that we can get our hands on, it seems to us that things like no mass transit for example is flatlining, whereas gasoline seems to be recovering?
So we're trying to figure out we're seeing a behavioral change here, not just in the U.S. but globally but more importantly, on the freight side. It seems that some of the third-party consultants that we use actually same things are holding up there a little bit better as well. So I wonder if you could sort of segregate down or – get in for a little more detail in terms of how you see the different demand trends between the different products. So I know it's a bit tricky, but any color you could offer would be appreciated?
Doug certainly, and we start with the immediate and most draconian impact was obviously – and that would be jet fuel. And when you take a look at jet itself, if demand is down 85% or something that or in that area actually production is down the same. So we don't expect jet demand to come roaring back anytime soon. There obviously is going to be most likely reticence on the part of some people to get on a plane and take a vacation to Europe and do those things.
But the thing with jet is, we have basically done a terrific job and just in PBF, we have actually reduced our jet production, what we were expecting to make was $90,000 a day. We're down to about 8000 and we basically only make the jet into refineries in small amounts. And we've gotten within the supply-demand curve on jet even with that low demand environment. So we don't think we're going to have an inventory issue.
Now, move to gasoline and of course that was the one that everybody worked on first, because jet we got it under control and then we went to gasoline. And then we've talked about the gasoline and same story exists there because the cuts and runs ourselves and the whole industry and turning knobs from gasoline to distillate, we're in - within the supply-demand curves. The demand crept up to last week to 7.5 million barrels a day per the stats, gasoline production was $7.5 million a day and is continuing to come up.
And I'm going to come back to, I think one of your questions, a part of your question on gasoline in a moment. Now distillate is holding up. I mean, but we obviously increased production of distillate by taking gasoline and jet fuel and putting it into distillate. We're actually starting to reverse that steps and we’re cracking some distillate, which is a step that in a cat cracker is to turn it into gasoline.
Not increasing runs, we're just shifting product from distillate to gasoline because we're little concerned on the distillate side what we saw and that is mainly being driven by the fact that the pandemic is now hitting South America pretty hard. And the ability to export the barrels out of the Gulf Coast to the United States into South America is being impacted. That being said, it does appear as though distillate demand continues to hold up better.
And your question in terms of behavioral shifts, yes I think we believe that there's likely going to be some headwind – tailwinds particularly on gasoline, because people are going to be not willing to get on subways. They're not going to get on a cruise ship and go on vacations. They're not going to get on an airplane. They may not even Uber. There's going to be a lot of people who are going to decide that I'm not going to take the bus.
The safest form of transportation that I have is to drive my own automobile. In fact, I probably want to drive it with only me in the car unless it's a family member. So I think some of the analysts have written that perhaps we could have a little bit of an upside or some significant upside from gasoline and I think there's a potential for that to occur.
We will go next to Brad Heffern with RBC Capital Markets.
Hey, good morning, everyone. I wanted to go back to an earlier answer about CapEx. So you talked about deferring some of the turnaround expenditures into 2021 or 2022. I think in the past, you talked about sort of an annual average CapEx for the system of like $650 million to $700 million. Post recovery, should we expect the number to be significantly larger than that or would ultimately sort of the whole turnaround picture get pushed out and it sort of stays level?
And then sort of within that question, can you also talk about how long you think you can spend at these levels before you end up having some sort of impact on reliability?
Good question. The short answer to the first part of the question is, we are already starting to work the issue on how to – our 2021 CapEx and the expectation is that we will get – continue to have a CapEx spend rate in that $650 million to $700 million range. We'll do that to a large extent. We have optionality on bumping out the turnarounds. We don't like to do too many turnarounds in any given year.
They're lumping in the base case, but we certainly would like to have it be smooth out for obvious reasons, the amount of throughput that you lose. So the expectation is that we're not going to have an increase on 2021 or beyond this we’ll just manage that. We certainly can handle the fit. We've already made the commitment that we're looking at a $15 million CapEx spend and that's basically we said we cut total CapEx by 360.
But the fact is that we spent a lot of that money already in Toledo because that was the biggest thing. We spent over $130 million on a Toledo turnaround. So we are going to sustain the $15 million range until the end of the year for sure, unless we see something really significant and a faster recovery and then maybe we might add some things back, but even then I'm somewhat suspicious.
At some point, your question is correct. And – it will be most likely in the turnaround area, where I mentioned earlier that in Toledo the unit was talking to us and it finally said, it's time to shutdown. Well, if we continue to defer all the turnarounds or high percentage of turnarounds, we ultimately could get into a situation where we'll have to take a unit down because it's the end of run and we won't run in an unsafe condition.
But again, I don't think we're there - anyway there right now and the rest of the year, we're going to stay at these levels, and then we expect to go right back to that range that you talked about.
Okay, thank you for that. And then just a question on contango, I know it can be complicated with the waterborne barrels about whether it's possible to capture contango profitability. So, can you walk through how it looks in the system? I would assume you got some of it at Toledo, but anymore color than that? Thanks.
Yes probably Toledo is probably the only area, but the system is so wonderful. If we take a look at what's happened in the last couple of days, we don't have anywhere near the contango that we had before. So I wouldn't think that that is going to have a huge effect – we’re going to take steps that we're going to try to focus at as being an area. We kind of just take the market as it comes.
We'll go next to Phil Gresh with JP Morgan.
Hi yes, good morning. A couple of questions for Erik. First, just on the new run rate interest expense, what would that look like after all these decisions you've made? And then the hydrogen plant sale, what would be the lost EBITDA there? And then finally with the CARES Act and tax situation is there any type of benefit you'd expect to see?
So Phil, we’ll take those in reverse order. At this point, we're still combing through various components of the CARES Act, but we do not anticipate having anything material coming at us from a tax standpoint as a result of the CARES Act. Our tax team has been pretty efficient to-date. So we don't have anything that we believe we will be able to carry back again in terms of the hydrogen plant. So we did receive $530 million dollars of gross proceeds.
Incremental EBITDA basically will be about $65 million to $70 million that will ultimately hit EBITDA that will obviously be split between the West Coast and the East Coast. Easy way to think about that is it's probably, call it 80%, is going to hit the West Coast, simply because that's where the bulk of the assets are. And those will, those will be costs, incremental costs every year that ultimately will be above the line. So they will reduce EBITDA on a go forward basis.
And then from an interest expense standpoint, I think our current general run rate for interest expense on a consolidated basis. So this includes roughly $55 million of interest expense at PBF logistics it’s probably going to be in the $275 million to $300 million range. That includes everything that is the new $1 billion notes issuance that we did back in January. We clearly redeemed a portion or I'm sorry, all of the 7% notes that were outstanding, and then we did just do this incremental $1 billion. So it includes the incremental interest expense from those two new issuances and then has reduced the interest expense that we no longer will have to cover for the redeemed notes.
Okay, great thanks. And then second question will just be for Tom. I know there's already a question on differentials, but maybe more specifically just on light-heavy differentials. Pemex did tighten the K factor again last night. So I guess, it's a little bit more of how do you see things playing out in kind of the near-term with the OPEC cuts just starting to kick in versus more intermediate term? You're talking a little bit about timing of OPEC barrels coming back, but just a little bit further elaboration on that? Thanks.
Yes, certainly we've seen with Maya has moved in significantly, it's no longer competitive. The sortie [ph] barrels was their focus on the Asia and even the European markets there appear to be less interested in trying to be – protect mortgage here in the U.S. right now. So we are seeing, and then of course, you've got the situation with WCS in Canada, which is - that's a tough business for those folks right now, given the lack of demand.
So we've seen these differentials narrow in significantly in some cases and being completely distorted. And as I said earlier, I think that's a function of not fundamentals. And ultimately, we'll clear that and get back to fundamentals. But until the demand picks up, you're probably going to have tighter diffs, light-heavy diffs. And we'll react to that, we're going to actually have the capability to run in lighter, and sweeter crude if we want to and if it's more economical then we'll do that.
And that situation will remain until demand picks up and then when demand picks up, I don't think you're going to see a rapid increase in domestic production. In fact, that's going to be some consequences on at some period of time. The incremental barrel that will be needed to supply incremental demand is going to be the medium heavy barrel and that will directionally lie in those differentials.
Interesting, okay, thank you.
We will go next to Paul Cheng with Scotiabank.
Hey guys, good morning.
Good morning, Paul.
Good morning.
There are a number of questions, so hopefully that short answers in each one. Tom, just two is that at some point the pandemic is going to be the highest? So after - at that point is this experience, whether it’s from how you run your operation, how you're looking at your balance sheet and how you're looking at projects in terms of the Ascension project or M&A, how that may have changed the way that how you're going to run your business if they are sending?
That's a great question, Paul. First of all, I would say yes out of – necessity is the mother of invention. We've had to take very interesting steps and aggressive steps in all the areas that we've already talked about. But one of the things that we're looking at is hey, we like actually been able to decrease our runs and get our throughput down lower than we ever would imagine. And I'll just point out that for example.
The people in Martinez, the people in Chalmette have reduced the safe operating minimums on the cat crackers in those facilities. So if we get into a situation where the pandemic is gone, and margins are good or demand is good fine, but if we get into a situation where we have some dislocations, there are some other tools that we've now got at our disposal.
We've actually turned down or turned the second stage high to crackers at Martinez in Taunton and shut them down and basically turned those into [indiscernible] machines instead of gasoline machines. There's a number of other steps that we think we're going to be able to continue to continue and to capitalize on to improve our overall efficiency.
As we look is through the M&A side and project side, I think we were very clear that we felt like the Martinez acquisition was an important acquisition for us to balance and have a second operation in Pad 5. But having done that acquisition, our focus now is, and it's now more than ever, since we've had to layer up some deck here is to focus on delevering the balance sheet and I'll let Erik just comment further on that.
I think that's absolutely the case, near term it is, as I mentioned before running this business for cash, we are firm believers that there is no point in continuing to operate a business that ultimately is going to lose money at the gross margin level. It just and I believe we have seen this not only as a result of what we just went through with the first – the beginning phases of this pandemic.
But we also, we saw similar activity from the refining sector in the first quarter of 2019, where ultimately when margin reach a point that become untenable, ultimately, there will be responses in the market. And so, I think from our standpoint as we go forward, it will clearly be how do we ultimately – there are some things we can do mechanically, that ultimately help us match the demand side of things.
If gasoline is more attractive from a profitability standpoint for us versus distillate, so there's a combination of operational or mechanical changes, but also just a sheer volume of we are managing this business to ultimately delever. And again, we talked a little bit about optimization. But now is the time for us to really take advantage of having six refineries, getting some economies of scale here. There are a lot of things that we believe we can do with this business on a go forward basis.
And Paul, I just add something to what Erik just said. If you look at the 2019 situation, what really happened there as well, we had very good distillate margin in the fourth quarter of 2018. And the industry does what it oftentimes does, started cranking up to take – try to capture those margins and watch gasoline build enormously through the fourth quarter. And I've said before, if you are running your business, and you're banking on the fact that you're going to get what is going to occur three months out, but you're running and you're not selling your product.
You're not getting cash for your product, and you are building an inventory, sooner or later that is going to cost you big time. So we're going to be very cognizant of and even now watching as we look at this right now we're watching it very carefully to reinforce what Erik said, it makes no sense to me to run and just build inventory or run and not make money. So I think one of the key learnings and I hope the oil industry gets it is that the only way you can really make money is you sell your products at a reasonable price and if it's not there, throttle back.
And I hope that everyone is going to take the same attitude. Tom is that - I know that I mean that we have some flexibility to push some gasoline into distillate, distillate get back to gasoline. And we also have reasonable factorability between jet fuel to diesel. The problem is that if everything is done, is there really any flexibility that we can push those light products outside those light products into other products?
Because, I mean yes, I mean distillate now we have a concern so you're trying to push it back to gasoline, but if that's the case, gasoline may become a problem. So is there any other option or the only option is that, yes we need to maintain the one overall one to be low?
Very good question. We’ve given this a lot of thought. There are some additional flexibilities that we think we've got that we've discovered. And again, if someone is around hydro crackers, because we can actually say jet fuel takes a year to recover, well you can only put so much jet fuel into gasoline or into distillate before you run into quality limits, whether it be sulfur or flash, as you know.
But we actually think we could use the hydro crackers if we wanted to, to turn jet fuel into gasoline. So there's some flexibility there, but sooner or later, because of the limits, and I'll go back to the issue, and it ultimately could be a constraint on the industry increasing in runs. If demand doesn't increase and if particularly if it doesn't, let's take jet for example, try to provide balance on jet production and jet demand and the tanks are pretty full.
So if indeed we've exhausted the ability to take jet fuel and turn it into distillate because we wanted to have quality limit, and then distillate remains long and distillate is building, I think you're going to have a constraint on how quickly you can increase your runs and it will impact utilization.
Yes, thank you. Erik, can I have a couple quick questions on the finance side for McKinsey refinery, you had two runs of the one factory margin yes at least that the first three weeks was good and then was quite horrible in March. So you said anyway finally we’ll make money at all in the first quarter so that's the first question?
Second, when you talk about the hydrogen, the EBITDA impact $65 million to $70 million, is that showing up [indiscernible] does show up in the gross margin or is going to show up in the OpEx. And then finally, the $140 million of the target savings, have you achieved any of them in the first quarter and how is the run rate is going to progress throughout the year?
Let's take those in reverse order Paul. The $140 million of savings is probably going to be recognized more second, third and fourth quarter. Again, these were all announced during the first quarter. So we were starting to take steps associated with those reductions, but ultimately we'll start to see the benefits as we go. And it's probably a bit more geared towards you're going to start to see it in the second quarter. And for now, let's assume that it's going to be generally rateable. However, it's probably a bit more back end weighted for the year.
In terms of the gross margin versus operating expense, where will the hydrogen plant costs be captured? At this point, we're still working through some accounting issues here, but we do know that it will ultimately be included in EBITDA so it will be above the line, and we’ll provide some more color as we have a full quarter of that for the next quarter or second quarter earnings call.
And from a Martinez standpoint look, I think we've never given specific guidance or detail around what each refinery is doing on a daily basis. But ultimately, Martinez when the market was better in California absolutely has made money but clearly, what we've seen is that the market has been a bit volatile out there. So I think directionally you should assume, though, that the consolidated West Coast numbers, ultimately you will see the benefit of Martinez hitting that P&L.
We'll go next to Matthew Blair with Tudor, Pickering & Holt. Please go ahead.
Hey, good morning, everyone. I'm glad to hear you are all safe and sound here. Tom, you touched briefly on OPEC there's reports of quite a few Saudi cargoes headed to the U.S. and at least on paper it looks like delivered discs for May were extremely favorable. So, we're wondering is PBF part of this? Are you looking to ramp Saudi barrels in the second quarter and if so, could you give us just any idea on the numbers here?
Well, let me say that we’re not going to give you specific numbers, but just the way this is played out has been somewhat strange. There was of obviously a decision made by the Saudis back several months ago, to get into a price war with Russia and maybe go after shale, and you'll have to ask them exactly what their motives were. And for a period of time indicating that the K factors effectively would be attractive, and they were going to put a whole bunch of crude on the water and they did put some crude on the water.
We were running – we obviously have a contract with them and we run it in [indiscernible] was lose crude. So we had some benefits there. But that went away as fast as it came. And then all of a sudden, they decided they had to do something maybe in OPEC plus, because of the pandemic. And in fact as I said earlier, as we look at the situation right now the Saudi barrels are not very attractively priced as you work through that one way that had which was almost what I called is one month phenomenon almost.
So we're going have to wait and see how the demand side is going to have to lead out of this, and that's all I can really say on that.
Okay, sounds good. And then Tom, you also mentioned that distillate exports to Latin America, we're starting to be impacted. We can start to see that in the DOE data here. I was hoping you could just contrast just overall export demand versus domestic U.S. demand in which at the current moment is holding up a little bit better?
Well, I think the U.S. demand is actually holding up certainly versus say the export market into South America. And we are seeing that, but the fact is, we actually, both on gasoline we were a net importer on gasoline in the last stats. That's because we weren't clearing barrels and coming out of PAD 3 or even other areas. And we were less than a million barrels, I think it was significantly less than 1 million barrels of exports on distillate.
And that is directly attributable to demand disruptions, and distillate being impacted pretty significantly as the way the pandemic wave apparently is now moving South and they're becoming more impacted by it than what the US has even though the U.S. has been tremendously impacted by it. And as you see Europe showing some green shoots, if you will in opening up. We're seeing some recovery there, you seen that and as we stabilized in the U.S. but we're definitely seeing much lower demand for the export barrel in South America.
Great, thanks for the insights.
We'll go next to Jason Gabelman with Cowen.
Hey, good morning. I just wanted to ask about the margin outlook and your comments on not reacting the way refineries typically react to margin improvements. So in terms of PBF, what are you guys watching, to give you the signal to ramp up rates? And do you expect the rest of the industry to be watching to in a manner that they don't respond to higher margins in the same way that they have historically?
And this kind of gets at the point that out of periods of economic weakness, you've seen refining margins, kind of stay subdued because you've had slack global capacity. And so refiners have ramped up at the first sign of margin improvements and that's kind of margins depressed. So do you see that playing out differently this time around?
I sure hope so. We're going to do that. I will assure you incremental economics is the bane of existence of the refining industry. We trace an incremental barrel because you think you're doing it on variable cost and you've already covered your fixed costs. And you wind up as I said earlier, storing a barrel in a tank and that just predicates lower margins because what you look at, well you look at demand, you look at inventories.
So if you are building inventories, somebody better asked a really good question as to what are we headed for? And so we're going to do that – that's just – our base mantra that doesn't mean that when margins improve, if we think there's stable and systemic, that we are going to go ahead and improve – increase throughput. But we don't want to do it by then creating something that kills the golden goose, if you will, running to make gasoline to kill and then killing distillate or vice versa.
One of the first things that I think everybody has to look at and I think it's on everybody's mind right now is okay we're starting to open up states in this country. We're not out of the pandemic yet. So we certainly hope we don't see a second wave. And if we can open up this country, even if it takes a little while, but don't see a repeat I don't know who is right in forecasting these things, and certainly we can't do it.
But we obviously hope and want to see that we're not going to have a lingering problem with the virus. As to the question of who do we think the rest of the industry will follow? I can only speak while I would only speak for the independents and this is an important point. If you take a look at just we're the fourth largest independent refiner. And if you take a look at MPC, Valero P 66, and PBF its over 8 million barrels a day of capacity and then when you throw Delek, CDI, Poly in there others.
We are by far a majority of the crude capacity, a throughput capacity in the country. And our competitors in their calls have recognized and acknowledged that they are not going to swallow the bait. They're going to be very tempered and making sure that any recovery in demand is sustainable before they increase run. So, I'm perhaps a little bit more confident than I typically am that the industry will respond in the correct manner.
Thanks. I appreciate that insight. And just maybe for – on the comments around liquidity improving if prices stay here can you give us an indication of the magnitude of that liquidity improvement or maybe the working capital benefit you continue to cue if prices remain stable?
The easy math is under ABL availability just the quick math this take roughly 30 million barrels times whatever average crude and product prices. So ultimately just for example, we had 150 million that we pointed to in the press release and on the call today assumed roughly $25 per barrel, average price for crude in products and we get 80% advance rate against that. So ultimately, every dollar move ultimately will result in a pretty significant swing upward in terms of availability, which obviously increases our liquidity.
Super, thanks.
We will go next to Neil Mehta with Goldman Sachs.
Hey, guys I recognize we're over time here, so I'll be quick. but the first question is just on the U.S. production profile or oil production profile. Tom, you made some comments that you think that what we're seeing now, is that structural impacts in terms of the shape of U.S. supplies. Can you talk about your volume outlook and also your thoughts on flat price levels at which are in production could return?
Well, I'm not an expert on the production side, but for everything we've read, it depends of course, the Saudis are the easiest ones to resume. The Canadians may have a more difficult problem resuming West Coast. Some of that could be – if it gets shut-in could be more difficult. From what we've read and believe is if demand recovers and prices get up into the $40 to $45 level.
Then there will be some economic incentive and if it's sustained to increase production, whether it be domestic, or foreign or Canadian. That being said, I think this is structural Neil. I think if anybody hasn't realized – all the problem – all the things I say about the refining business and chasing the incremental dollar is going to apply to the production business. And if anybody doesn't understand that, if there's 100 million barrels of crude demand if we get back to that level, if it's less than that.
It's got to be caught up in a way and that's what they're trying to do with OPEC plus. And I don't see a way that the Saudis, they've already told everybody and so the Russians are going to let the United States try to go ahead and capture market share. They're going to defend their position. So they may be content so that the U.S. produced 10 million, 11 million barrels of shale, but not 13.
And no efforts to go up because they're going to defend that will be back into some type of price wars. As it impacts us the domestic production most of that is going to be obviously shale that cut back, we don't participate in shale very much at all. There's plenty of crude that we can get our hands on. And of course, we learned more mediums and heavies if they're economic. And there's quite a few crudes that we still can get at a good crude for us to run.
So we're not going to have a problem, but I do think it is a structural change that's going to be its no longer just build up pipeline. And new offshore water ports so you can export and get up to 50, 60 million barrels a day of U.S. production being exported around the world or produced and the being exported around the world. I don't see that happening.
Okay, thanks, Tom. And a related question is on the refining side utilization 67% in the U.S. right now. How hard is it going to be to ramp supply back online for the U.S. system or is it relatively easy? And corollary to that is if we do get into situation where refiners will have to idle assets. Do you think that will result in capacity potentially structurally being taken offline or is there precedent for us to bring idled assets back to full capacity?
Well, there's certainly precedence to bring idled assets back. This industry has demonstrated that – the idle refineries have been characterized as zombies. They always come back from the dead I don't think you're going to see that right now because again, this is going to result in a structural change. The second part of – the other part to your question, okay? If you've just throttle back it's kind of sequential.
If you throttle back all your units to safe operating minimums, but they're all running, then it's going to be relatively easy to bring them back up you can do it pretty quickly. If in the case like we have done, we've got a hybrid, we've got everything to save operating minimums, and then we said, we're going to shutdown two FCCs in the system, cat crackers. So we shut to Toledo we started up after the turnaround, and we shut the cat crackers in Paulsboro.
They're being kept warm, they can come back up, but it will take a little longer, but not materially longer to get them back up. In the case where your idle refinery even though you're keeping it warm or trying to that is a little bit more problematical it will take more time to bring those refineries back. So what we'll see now the other question is, I can make a case that there may have to be some rationalization in this business.
And the United States has the strongest kit, by and large in the world with the exception of the Saudi and the Middle East and Asia refineries, Reliance, et cetera. So we should be competitively advantaged. But there are even some refineries in North America that are going to be under pressure if indeed, we don't have demand come back to the levels that we had before.
Okay, thank you so much Tom.
All right.
There are no further questions. So I'll turn it back to Tom Nimbley for any closing remarks.
Well, thank you very much, everybody. I hope you stay safe, healthy and take care of your families and we'll look forward to more optimistic call next quarter.
This does conclude today's program. We appreciate your participation and you may now disconnect.