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 Fourth Quarter and Full Year 2018 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 your questions following manager’s prepared remarks. [Operator Instructions]
Please note, today’s call may be recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.
Thank you, David. 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 available on our website.
Before getting started, I’d like to direct your attention to the Safe Harbor statement contained in today’s press release. 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 describe in our filings with the SEC.
Consistent with our prior quarters, we will discuss our quarterly and annual results, excluding certain after-tax special item charges of approximately $483 million and $256 million, respectively, which are primarily comprised of a non-cash lower of cost to market or LCM adjustment.
As noted in our press release, we will begin -- we will be using certain non-GAAP measures of describing PBFs operating performance and financial results. For reconciliations of non-GAAP measures to appropriate GAAP figures, please refer to the supplemental tables provided in today’s press release.
I will now turn the call over to Tom Nimbley.
Thanks, Colin. Good morning, everyone, and thank you for joining our call today. This morning we reported the results of another good quarter, where we ran our assets well and delivered a solid financial performance.
Adjusted earnings for the fourth quarter were $126 million or $1.03 per diluted share. Our strong fourth quarter results highlight the benefit of having a geographically diverse high complexity multi-asset refining system.
During the quarter of Mid-Continent and East Coast refineries were able to benefit from lower cost Canadian crudes. The wider Canadian differentials were largely driven by high inventory levels, takeaway capacity constraints and high paid to maintenance activities.
The differentials have since narrowed, in large part due to the mandated production cuts by the Alberta Government, but are expected to widen back out as the underlying takeaway capacity issues have yet to be solved.
Globally refineries ran at very high utilization during the fourth quarter, taking advantage of a well supplied crude market and strong distillate margins to maximize outputs, high utilization through the quarter set the table for above normal seasonal builds in gasoline.
On top of this, currently the market is experienced an extraordinarily narrow differential between light and heavy crude oil. This is due to a well supplied market for light crude oil and a significant number of heavy crude supply constraints starting with opaque, non-opaque, supply cuts, the Alberta containment, an Iranian and Venezuelan sanctions. Any one of these issues is digestible by the market, but the complements of the constraints had led us to where we are today.
I have been around this business for a long time and I will say that both gasoline margins and crude differentials this narrow are not sustainable. We have a weak margin environment that is primarily driven by neat narrow feedstock differentials. Demand remains good and as history has demonstrated the supply constraints will get solved.
We are anchoring maintenance season with planned maintenance globally projected to peak in March and a challenging crack environment, high levels of maintenance combined with a series of weather related disruptions across the industry should translate into lower utilization. We believe this will improve the market for refining margins and particularly gasoline going forward.
Fundamentals are strong with global demand continuing to support product markets, distillate inventories are down globally as days of cover is tracking well below the five-year average and that is with the global refining system in a max desolate mode.
Gasoline economics on the other hand are effectively at breakeven levels at the moment. While it may seem unusual a large part of this movement is seasonal. We seem to frequently have conversations in the beginning of the year about the weakness in gasoline markets. We believe this situation as in the past will correct itself. Lower gasoline prices should also have a positive impact on demand.
On the supply side as we enter spring, we will see increased maintenance activity, which should further decrease the amount of gasoline being supplied. The switch to some great gasoline will also help in this regard as the amount of butane blending decreases. We will continue to watch both the crude oil and product markets going forward and adjust our operations accordingly.
Looking forward toward the latter half of the year and beyond, as Matt will discuss in a moment, we are making some changes to our plans for 2019 in order to put our high complexity refining system in the best possible position for the upcoming marine diesel fuel standards ship with IMO 2020.
We believe that there will be an increased demand pull on the desolate markets as the move towards cleaner fuels continues and that higher sulfur feedstocks will see differentials as a result of high IMO.
In closing, the economy is still growing and we are encouraged by the environment we see for 2019 and beyond. Our strategy in this environment as always is to put our assets in a position to succeed by running them well and being a safe, reliable and environmentally responsible operator. By executing this strategy, our assets will be profitable and our employees and shareholders will benefit.
I will now turn the call over to Erik to go over our financial results for the quarter.
Thanks, Tom. As previously mentioned, PBF reported fourth quarter earnings of $1.03 per share and $3.26 per share for the full year, fourth quarter EBITDA comparable to consensus estimates was approximately $311 million and $1.1 billion for the year. PBF’s effective tax rate for the quarter was approximately 27.5%, which was impacted by state tax rates and certain discrete items. For modeling purposes please continue to use an effective tax rate of 27%.
Included in our fourth quarter results was $27 million of rent expense which resulted in a full year total of approximately $144 million. At the current price we expect full year 2019 rent expenses in the $175 million to $200 million range.
Consolidated CapEx for the quarter was approximately $265 million, which includes $177 million for refining in corporate CapEx and $89 million incurred by PBF Logistics including the acquisition of the East Coast terminals.
Our quarter ending liquidity was more than $1.9 billion, with approximately $1.6 billion at PBF Energy and $360 million at PBF Logistics. The year-end consolidated cash balance was approximately $600 million and our net debt to cap was 27%. Importantly, we repaid one 100% or $350 million of the outstanding balance on our ABL credit facility. We are pleased to announce that our Board has approved a quarterly dividend of $.30 per share.
Finally, we are pleased to announce that PBF Logistics and PBF Energy reached an agreement to eliminate the IDR’s currently held by PBF Energy in exchange for 10 million PBF ex-common units.
This is an important transaction for the companies because it strengthens the alignment between the GP and the LP, simplifies the structure and improves the cost of capital at PBF Logistics. This transaction demonstrates our commitment to the partnership, while positioning both companies for growth. I encourage you to listen to the PBFX earnings call later this morning.
Now I will turn the call over to Matt.
Thank you, Erik. Despite a declining market over the quarter, our assets ran well with total throughput averaging over 847 barrels per day. As Tom mentioned, we will adjust our system in response to the market.
Our East Coast and Mid-Con systems benefit from advance barrels and delivered very strong results. In other areas, we adjusted operations to account for weaker product margins and other variables outside of our control. We remain intently focused on the aspects of our business that we can control.
We are committed to our efforts to reducing operating costs across the system. There were some seasonal spikes in energy costs during the quarter particularly in natural gas in Torrance. But overall expenses were in line with our annual guidance.
In our press release this morning we lowered throughput guidance for the first quarter. The reduced run rates are reflective of both the current market as well as ongoing maintenance and turnaround activities.
Additionally, in order to strategically position the company for the later part of 2019, we have elected to accelerate the previously not announced 2019 turnarounds at Delaware City and Paulsboro.
The Delaware City coker turnaround will now occur in the March to April timeframe and the Paulsboro crude unit turnaround originally planned for the third quarter of 2019 will now occur in the second quarter. By moving a turnarounds forward, we will complete approximately 65% of our turnaround work by the end of Q1 and 90% by the end of Q2.
In addition the turnaround work we are also conducting repairs on piping in instrumentation associated with a pre-flash tower located Del City. Equipment was damaged during an incident last week. It is important to note that refineries crude unit was not damaged and has been returned to service.
As previously disclosed, PBF Energy is continuing to invest its assets to improve the strategic flexibility of our system going forward. We are progressing with the restart of the idled 12,000 barrels a day coker at Chalmette refinery and the installation of a new hydrogen plant at Del City.
Both projects are on schedule. We expect that coker will be in service in late fourth quarter and the new hydrogen plant which is being built and will be owned and operated by Linde will be in service in the first quarter of next year. We plan to continue to put our refineries in position to benefit from the tailwinds that we see driving the refining sector and PBF.
Operator that concludes our remarks, so we will be happy
[Operator Instructions] And your first question comes from Roger Read with Wells Fargo. Please go ahead. Your line is open.
Hey. Good morning.
Good morning.
Good morning.
I guess Tom, let’s dig in a little deeper on the guidance and on gasoline. I mean, seasonally, I think everybody agrees what you think should get better, as you could expect markets are little bit nervous that it want. I was just wondering if you could maybe give us an idea of some of the other things you are seeing either on the demand side or some of the supply changes that always occur and maybe put some numbers on that in terms of thinking about your system alone, just how much easier it is to make gasoline say in February than it is in May?
Well, yeah, a great question and Tom eluded this in his prepared remarks, but let me really dive a little deeper. If you look at the one week does not make a trend, but if you look at the EIA data, yesterday DOE data, utilization dropped almost 5% week-over-week, 85.8% refining utilization.
That is a combination of a number of things and makes no mistake about it. It’s a combination of number of things. As economic run cuts, PBF actually took some economic run cuts because of the poor gas crack in the quarter, particularly running our CAT units -- not running our CAT units full.
But in addition, there were unplanned outages as I alluded to because of the polar vortex and the significant extreme weather conditions that we had in the Midwest and there were still some refineries struggling as a result of that in the Midwest and even in the Northeast, and frankly, the incident that we had at Delaware City, which we were fortunate did not have severe damage was a weather related event.
When you add to those things and talk about the accelerated turnarounds and we are not the only ones doing that. It just makes common sense. You don’t really -- you don’t have good coking economics right now.
So why not move your turnarounds up and that’s what we are doing as Matt mentioned in the Delaware coker and we are also moving up the crude unit, the bigger crude unit, the little crude unit in Paulsboro, but that we are also doing because we are going to fix a problem that is impacting our ability to produce loops. So it’s margin play for us as well.
We are entering this heavy turnaround season. We have a continued incentive to crack this split and if you believe the projections for IMO, that trend will continue throughout the year and it will be interesting to see what happens with the product yield shift if indeed that is the case.
Butane is coming out of gasoline. They have already come out of gasoline. We made the transition. We are in process of making a transition in California. The rest of the country will sequentially come behind it and frankly you can buy gasoline in Morristown, New Jersey for $2.10 a gallon and then a large portion of the country for below $2 a gallon. I actually think that we are going to see a bounce in demand as a result of that elasticity, of course when the prices come back, that there may be a pushback.
And the final comment I will make about the data yesterday. It was interesting to me that gasoline built 200,000 but PADD 1, PADD 2 and PADD 5 drew gasoline. The main build was in the Gulf Coast and the United States, and some of that was impacted by fog-related difficulties and shipping material out. Time will tell, but I believe we are in the process of turning the corner.
Great. Thanks. And I can confirm we have had a lot of fog down here on the Gulf Coast. Change in direction a little bit here. Erik, the cash flows in Q4 had a big CapEx number come through. Can you give us an idea of maybe the change by accelerating the turnarounds? How you think about managing cash flow, I guess first half of the year versus may be full year?
Quite honestly I think it’s probably going to be very similar to the trajectory we saw in 2018, where a lot of our work was going to be frontend loaded during the first half of the year. So cash management as we have always said is one of our top priorities here and ultimately between the turnarounds, some maintenance, as well as the strategic projects where the coker and hydrogen plant at Chalmette and Delaware City. Ultimately we should see probably close to three quarters of our CapEx spent during the first half of this year.
Great. Thank you.
Our next question comes from Brad Heffern with RBC Capital Markets. Please go ahead. Your line is open.
Hey. Good morning, everyone.
Good morning.
Tom I will also ask you to dig in a little more on your opening remarks, just around the mediums and heavy being so tight. Can you just talk about how crude sourcing looks sort of in the short-term and the medium-term, is there difficulty just finding barrels? Where you getting them from and so on?
We have been able -- well let’s deal with Venezuela since that’s obviously living, breathing, moving target right now. We will continue to be able to get some cargoes to third parties, but basically we are not worried about Venezuelan ability. We can source other crudes and have been successful in doing that. So it’s not the problem, it’s not getting the crudes, of course, the problem is that those crudes have tightened up and the spreads are narrow.
So as others we have the ability to basically swing probably 50% of our system to lights. We will do some of that. But we don’t believe that this is going to be a sustained event. I do think it was exacerbated significantly by an ill-advised move by the Alberta Government to go ahead and force mandated cuts.
The law of unintended consequences has played out perfectly here. There was a time as you all well know, not only because you no longer economically rail crude to either the East Coast, West Coast or the Gulf Coast, you couldn’t have pipeline economics in the money when WCS moved to below $10 versus WTI.
We see indications now, some of that with some other things going on, obviously we met now about $20 on to Brent and it appears as though that is starting to unwind and move in the right direction and at least this chatter that perhaps those cuts will be undone quicker.
The last comment I’d make and it’s going to be a question of time. The Saudis, the Russians, all the people who are cutting back right now and cutting back medium and heavier crudes, which is exacerbating this problem.
Production E&P companies get paid to produce oil and again I just don’t think that they are going to be able to sustain this. And you can actually make an argument and I have made this argument, but a lot of work we are seeing right now is simply due to the fact that there’s too much crude out there and that’s shell crude from North America and the United States, as well as we have had some companies in from Canada here recently who have told us their growth projections for the next three years or four years.
There’s a lot of reserves. There’s a lot of crude and there’s going to be a lot of crude on the marketplace. At the end of the day, if you are a refining company and there’s a surplus of crude that’s a good thing, but I do think we are going to have some time here that we are going to have to work through the Iranian sanctions, the Venezuelan situation and even there ultimately it may take a year, it may take 18 months, I have no idea. But there’s perhaps promise for the Venezuelan people and there’s ability to then rebuild that industry, it’s going to take some time. So longer term, certainly, I am bullish.
And with IMO coming in the second half of the year and I do believe it’s going to come. We are going to see again a $3.5 million barrel stream that disappears and there’s going to be some stranded feedstocks associated with that. So next couple of months, you are bet is a little bit as good as mine, but it could well be like it was last year tale of two halves.
Okay. Thanks for the detailed answer. I guess maybe for, Matt, on the Ace pipeline that PBFX is participating in. Can you talk about the potential benefits for Chalmette?
Yes. We for the benefit of everyone else we announced an open season with our partners at Phillip 66 and Harvest. It is interesting project, not only on its own, but you obviously have captive refineries are part of the sponsors of the project.
So it opens up St. James. We believe it is economic in -- there’s not too much I can say about it other than Chalmette will be a shipper on the pipeline and we think it will bring more advanced crudes to Chalmette and we think the project is a good project for PBFX and is in line with what PBFX announced a year ago in developing organic projects. This is one of many projects that they been working on.
Okay. Thanks all.
Our next question comes from Manav Gupta with Credit Suisse. Please go ahead. Your line is open.
Hi, Erik. Can you comment on this line item early return of railcars which was expensed, are you actually cutting back on your crude by rail runs from Canada?
Ultimately that if you go back to Q3, we experience probably close to $40 million hit in terms of expense associated with early return of railcars at simply rationalizing the fleet to make sure that reusing all the latest and greatest cars and that ultimately we had some idled cars that didn’t make sense to use anymore.
I think ultimately what we have seen is absolutely we will see a decline in some crude by rail through part of the first quarter, just simply driven by economics as we shift back to more water-borne economics that are better for the refinery on the East Coast.
But longer term, I think, I will probably echo what Tom mentioned in response to a previous question that ultimately we think that crude by rail is a long-term via viable strategy for heavy crude out of Canada.
And a quick follow-up, what was the working capital headwind in the fourth quarter?
We probably overall used about $125 million, nominally of working capital during the fourth quarter.
Thank you, guys. Thanks for taking my questions.
Our next question comes from Blake Fernandez with Simmons Energy. Please go ahead. Your line is open.
Hey, guys. Good morning.
Good morning.
Erik, just going back on CapEx, I know you said about three quarters or so maybe two thirds to be spend in the first half. I think on previous call, you had gone through some general ranges, which if we did our math right would kind of land for full year spending around $600 million to $750 million. I didn’t know if you could maybe help narrow that or just kind of confirm if that’s a good number for this year?
Those are -- absolutely Blake. Those are still good numbers, just high levels what we would say is order of magnitude. Turnarounds are about $300 million for the year. I think Matt commented on when we are going to have maintenance downtime and ultimately that we are going to be through the bulk of that during the first half of the year.
Then we have got another call it between $200 million $250 million of maintenance related expense. That’s going to be a combination of regulatory spend, environmental spend and just general maintenance.
And then we obviously have about $150 million of call it strategic projects, discretionary CapEx related to the coker and ultimately the hydrogen plant. That’s probably got a longer runway in terms of overall CapEx outlay through the course of the year. The coker is expected to be up and running by the fourth quarter of 2019 and the hydrogen plant during the first quarter of 2020.
So that CapEx outlay is going to be spread over, call it, through the remainder of the remaining three and a half quarters of the year, but ultimately the bulk of the turnaround in maintenance, that 75% is probably going to be call it between $500 million and $600 million during the first half.
Perfect. Thank you so much.
I think the key message here is that ultimately we understand the decisions made to accelerate a few of these turnarounds that bring maintenance forward ultimately, yes. There will be use of cash, but ultimately we will have a very clean runway as we look towards the back half of the year.
Understood. If you could maybe just spend a quick minute on the IDR simplification, I think this should be viewed as a positive step, but just dose this change anything, is there anything eminent may be drop down potential self funding just any kind of general comments you might offer?
I will think ultimately our view for both PBF Energy and PBF Logistics is this is a transaction that they work for both parties. We have shown pretty significant sponsor related partnership in growth here associated with support that ultimately comes through in the form of we still have the dropdowns that are out there, but our real focus is on organic projects and third-party acquisitions at PBF Logistics. This was clearly something that the investment community was pushing for.
We are all for and very supportive of a lower cost of equity at PBF Logistics. We have always said that logistics and energy should work in tandem and that ultimately the plan would be the streamlining of the structure should ultimately help both companies continue to grow.
We have not provided guidance in terms of what’s coming next in terms of drops or anything else. There’s clearly been significant strain and stress in the MLP equity market. Although, we are starting to see pretty significant movements there, there obviously is a new fund that was raised earlier this year. We have been successful and essentially self funding over the past couple of years. We brought in a strategic equity partner in Tortoise during the middle part of 2018.
So our long-term view is this is a viable strategy. It’s a way for both of these companies to grow and we still firmly believe that for discrete projects, accretive transactions there will ultimately be access to capital. It may just come in a form that’s slightly different than what we have seen in terms of the old regular way MLP equity fundraising from the 2014, 2015 timeline.
That’s great. Thank you, guys.
We will take our next question from Neil Mehta with Goldman Sachs. Please go ahead. Your line is open.
Hey. Thank you very much. Appreciate you taking the question guys. So I guess my questions are a little bit more tactical in nature. I guess the first one is at the forward curve, do you see PBF generating cash flow from operations that exceed the capital spending levels and the dividend. And the reason I ask that is if there is a funding gap, we are just trying to figure out is there a risk of incremental debt issuance, do you work down cash balances or how do you think about the need for incremental equity. You guys really effectively time the last equity issuance. So I just wanted to see if any thoughts on whether you would be willing to tap the equity market again if there is a funding gap?
As we sit here today Neil, quite honestly, I don’t think we will have any comments around potential equity raises. We feel very confident with -- we just repaid $350 million on the ABL. That is exactly what that ABL credit facility is.
Therefore, in terms of if we are going to be building some inventory during the course of turnarounds to then run it as we are coming out of turnaround or if we have some strategic opportunities related to crude and we want to store crude for a period of time, and then as we are coming out ramp up runs, I think we will do that.
As we sit here with the forward curve, Tom, provided a lot of color on the distress in the gasoline market and while we think that ultimately things will rebound near-term and I think this is consistent with what we heard from our peers over the past couple weeks. Ultimately, this is unsustainable, but it’s not very much fun at the current point in time.
And so, ultimately, yeah, we will probably burn some cash throughout the first quarter and potentially into the second quarter. But we feel very good with the liquidity position that we have today. So don’t anticipate any type of equity fundraising related to needing to fund anything at PBF.
Okay. That’s helpful. And then just follow-up on PBFX, you guys have taken a different approach to some of your peers with MLPs and since that you are leaning into the business this morning and it feels like if anything you are saying is very core part of your strategy, when we look at the MLP eligible EBITDA that sits at the PBF level, what is the best way to monetize that, given the challenges in the drop down markets right now from a capital markets perspective. How do you best get credit for the midstream and logistics assets that sit up here?
Yeah. I think it all depends on what the prevailing market is. When you say, we leaning into the MLP, we work very, very hard internally here to strike the right balance. Clearly, IDR’s we are going by the way as the buggy vapor other things have left and so there’s clearly a trend and certainly we talked quite a bit about.
If the MLP works, it is a sort of perfect sidecar for our refining business, because there is certainly a crossover between midstream assets within the assets that we own and then you have a cost of capital differential that you can provide investors with different investment classes that work for both.
But it’s all a function of the MLP market working and being open, and one think that PBF is not interested in is simply dropping down assets if the markets aren’t open and taking back equity. So to the extent the markets are open.
We firmly believe we can grow the business and are quite comfortable with the growth projections we have put out there. That’s not only from drop-down assets to which we have a large inventory of drop-down assets, but all the different projects that we are working on and as you saw in the fourth quarter, we also brought a thermal from Lindsay Goldberg.
So our growth strategy is there and ready, willing and able. It’s going to require the markets to be open and only time will tell on that.
Perfect. Thank you, guys.
We will take our next question from Paul Sankey with Mizuho. Please go ahead. Your line is open.
Good morning, all. On the accident, the initial headlines read pretty bad, it seems like it wasn’t that bad, could you just talk a bit more about what happened with the understanding that there wasn’t injury? Thank you.
I will just make a couple of comments, Paul. We still have an investigation underway and as always the case in this thing, one of the things I have learned from my career is don’t believe the first-hand things you hear when you have an incident like this.
But we can, say I absolutely have to give a tremendous thanks to emergency responders, firefighters inside and the mutual laypeople who responded, because we had a pretty good fire there. We are honing in now exactly at what happened, but we are not quite done.
But because they were able to get water and phone on to the area that the fire was burning and because there wasn’t that much equipment in that area, it was really just a fair amount of instrumentation damage that occurred, and as we mentioned, we were effectively able to get that unit back up seven days after the fire occurred. Again, I think it was testimony to how well the emergency responders handled that situation.
Sure. Tom, thank you. It’s tough as you mentioned the current environment looks like it will eventually recover given the shortage essentially of heavy crude. From a planning point of view, how are you thinking about timings and how to respond and as far as it’s extremely difficult to now I guess we can say that the Canadian crudes will come back in due course logically. But it seems the Saudis may have stepped down to a structurally lower level of production with a view to $70 oil and it seems like Venezuela isn’t going to recover anytime soon. Are you sort of planning on an outlook of right sight of what timeframe, because your comments suggested you expect to re-widening in due course? Thanks.
Certainly we do expect the re-widening and again of course in due course. We do believe that Canada will lead the path that areas, this curtailment simply did not work, I mean, it work in terms of narrowing the spread, but you may have seen that, one very large company who was railing a north of 100,000 a barrel of crude had indicated they will railing zero.
So when your transportation limited that perhaps becomes more of a problem. So we believe that we are already starting to see the Canadian differentials widen up, but then I think you hit the [inaudible] is and to me some of this is circular.
We have seen this movie before. The price gets too low, Permian growth is high. OPEC, non-OPEC says we got to come in and balance the market, they cut back their crudes, effectively, had then get face with the price might go up, but their market share maybe getting diminished.
At the end of the day I will go back to what I said. I actually think there’s plenty of crude out there, plenty of heavy crude, medium crude and light crude and that will ultimately play out in our favor, but it certainly is going to take a little bit more time to get the Venezuelan situation and the Iranian situation behind us and then it is going to be a function of what the Saudis, and frankly, the Iraqis, there’s a lot of crude in Iraq that could solve this problem if they will open it up.
Paul also just low prices affects low prices and so as the U.S. complex refining system pushes back, heavy and sours, and starts running late some crude, that will have impact on to itself.
Yeah. True. And just Tom it seems like you are pretty much expecting Iranian sanctions?
Well I wouldn’t rule it out. Certainly the administration is very aggressive. So I am not in Washington D.C. and I try not to be in Washington D.C. But the fact is there’s a high probability that he is going to continue to do some of these things.
Okay.
I just want to amplify what Matt said and this simply you all know this, when you have the type of heavy, medium crude differentials that we have, that tight differential. When you have six oil, 3% six oil in New York arbitrating at higher price than gasoline, mostly we call it breakeven will Brent and you have got a $15 diesel to $16 diesel crack, so you don’t have good coking economics. Clean, dirty spread is not wide enough, so then what happens, people will start pushing back those crudes and try to lighten up to the extent you can and it will fix itself over time.
Great. Thanks. Look forward to seeing you all in Napa in April. Thank you.
Indeed.
We will take our next question from Doug Leggate with Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi. Thank you. Good morning, everybody. And I will plug our refinery conference as well Tom. I am looking forward to seeing you guys in a few weeks. Tom I wonder if I could just get your updated thoughts on IMO and it’s really more high level, given the timing of everything that’s going on with heavy oil, because it seems that it does role through, I will say the next year or so, which kind of coincides with the timing of when it one was anticipating otherwise weakness on sour crude. So any updated perspective please and I have got a question on gasoline? Thanks.
Yeah. I think, our view is a lot of the concerns about IMO was predictably on the supply side for the compliant fuel. We have come down or I have come down to state that is not going to be an issue. Now -- and the reason I say that is everybody assume that it was going to be ultra low sulphur, diesel and it may be ultra low sulphur diesel along the margin, that meets that new demand to this 3.5 million barrels a day, or 300 million barrels a day picky number of a 0.5 fuel. But a lot of that can be supplied by just frankly Hydro treated gas oil in a refinery.
And if you add a situation and you are going to talk about gasoline next but a gasoline remained under pressure, frankly, you could just take gasoline out of the cat cracker that’s already compliant fuel. It’s below 0.5 in many of our refineries, because we take sulphur out before it goes into the cat unit.
So I think the ability to supply the fuel is going to be there for the industry. The industry is ready to do that, obviously you might be on a margin doing that with higher light sweet crudes or whatever and that will impact price structure.
Personally what I am more interested in or I am waiting to see how it plays out is. There’s a significant amount of distillation capacity and crude capacity in this industry mostly in other parts of the world that run medium and medium sour crudes and that where they go with it, is into the international bunker fuel market and that market is going away.
So that becomes a 3 million barrels of stuff that if you continue to run the crudes you got to figure out where they are going to go where’s the home. You can try put it in asphalt, there’s not enough coking and conversion capability, so than does it go on to margin into the power the generation system.
Can you lighten up sweeten up? I will tell you United States is probably darn close to being able to process oil as much light crude as it can until you get some of these investments that are being talked about. So our view is IMO is going to come and in fact that it’s going to be good for companies like PBF who basically run a kit that is very high complexity and that’s why we bought the refineries in the first place.
I appreciate the long answer. I am afraid my second one is also kind of a micro issue given how much time you spend talking about gasoline weakness and surely just to get your perspective on some structural changes or whether you agree with this or not, I am just trying to get our head around what happens next. I remember the good old days of seasonal strength in gasoline and I am trying to figure out if with all the windfalls behind us, we are just going to get imbibed very simplistic view of the world. What I am also referring to is the fact that the U.S. is running the highest API slate in its history currently and obviously storms aside when you don’t have a storm it seems that we end up with very weak gasoline in the winter. Do see that as a structure repeating cycle now or do you think there is a little bit more to it than that?
No. I think it’s a little bit more than that. I will agree with you that certainly worldwide -- the gravity of the crude inputs worldwide has increased and it certainly increased in the U.S. And I suspect that, I did say that, I think, absent additional capacity coming on you are going to get pretty close to being able to absorb all of the -- as much of the shale that is being produced in the U.S. before you start running into production cuts or operational problems.
I think that you will see -- seasonality will continue. You also have some knock on effects. One of the things about some of those shallow oil crude is it’s got a higher cut of straight line. Therefore there is more gasoline yield. At the same time the octane component of that stream is lower than normal, and frankly, you have pretty good octane spreads in the harbor that will probably benefit as we move forward into summer.
You guys are responding and we like that Tom. So thanks. We will see you in March.
We will take our next question from Prashant Rao with Citigroup. Please go ahead. Your line is open.
Thanks. Good morning. And thanks for taking the question. I wanted to ask specifically on some IMO 2020 preparations and certainly the opportunity pipeline of it we are getting closer towards implementation. There is some recent news about your contract with Merck’s in the East Coast for providing the Marine fields compliant IMO 2020 Marine fields for I think it was 10% of their fuel needs coming out of the East Coast. I am wondering if we can get a little comment on that and then certainly the greater opportunity set and storage and providing those fields. What does that pipeline feel like and in a next few months should we expect to see more of these deals with the size of those and then what does it say about how close we are to in terms of progress of putting our standardization of a new look for fuel blend?
So on the Merck’s announcement that that came out this morning of course that is a PBFX announcement. PBFX bought the old Crown Point term roles where I think we refer to them as the East Coast storage assets.
And we bought the assets with this transaction sort of being worked as we did. It is a total processing deal for the MLP. It is a direct result of IMO and its good business that’s for sure for PBFX, but a big reason why we are going to be able to create synergies with those East Coast assets in our PBF refining assets is you have millions of barrels of heated dirty storage.
And so we believe the opportunities are going to be many. We have been reached out to with -- by counterparties that don’t have the complexity or the coking capacity that we do and I think there are a number of companies that are running more simple kit that quite frankly are making money today because of some of the perverse differentials that are in the marketplace, but are staring down the barrel of what could be a very challenging time.
So I think we are well positioned for it. The deal with Merck’s is -- just enhances our returns on the Crown Point acquisition and so we think it certainly makes a lot of sense and we are excited about the transaction and working with them over the next number of years.
I will just add very quickly that package that Matt referred to, obviously, we have large Coking operation in our East Coast facilities. We do believe there’s going to be opportunities with people not running the crude or heavy crude but people who were saying we have this stranded -- potentially stranded stream call high sulphur resin and that’s three million barrels of tankage who can allow us to bring that in and move it into the Delaware or the Paulsboro.
Okay. Thanks very much for that. I guess stepping back the next question I had was on broader macro. Tom, we have seen numbers out there in the IA on what was out yesterday within repeating the 2.6 million barrels per of incremental capacity adds 2019 and we have just got around that number, the back cash loaded with some of those projects remains to be seen what the progress is. I was wondering if you could get your big picture thoughts on what seems more likely if we were to haircut that and what are some of the risks that would, to the downside that might help us may be come to a more balanced market versus incremental products demand maybe sort of a check on that would be great?
Yeah. I think ‘19, we -- I wouldn’t expect to see none of that high may be 0.5 million less than that, at least that’s what I have read and that’s not, I am just reading the same some of the information that’s put out there, hiring others who say that that’s probably overstated.
When you look at a three-year look-ahead, frankly, many people say you are going to have a, assuming there is no recession with 1.3% -- $1.3 million their growth numbers in demand or north of that, almost a balanced situation.
Now longer term when you see things like Exxon in capacity in the U.S. because of the integrated model that they are going to have with the Permian, that’s going to be something that the whole industry is going to be looking at and factoring in. I will leave it at that.
Thanks. Thanks, Tom. And just one very quick, sort of detail question if I would before I turn it over. We have gotten a few questions given the sort of cyclical industrials are kind of slowing a little bit in terms of transportation, not necessarily hitting contraction, but just maturation in the industrial cycle, some questions on demands, which I feel like cracks have been great for the last couple of years. With IMO coming up, it’s asked about a little bit less, but seems like there will definitely be some support for wider jet cracks on balance though you could see a little bit of fracking in demand or maybe little bit slowing down the demand growth. I am wondering how you are thinking about the knock on effect to jet fuel specifically for IMO 2020 as we get closer and you are thinking about how you are going to run your kit and configuration and options once as you get closer to Jan 1 and will that be sort of a dislocation that’s similar to other middle distillates, more pronounced or less pronounced, any thoughts there would be great.
Yeah. It’s really a very great question because when I said, our views or my views are morphed a little bit on what might happen with on a product side, it is really everybody assumed that it was going to be a 3 million-barrel poll on ultra low sulphur diesel or very high component of that.
I think its 3 million barrels, $3.5 million barrels a day of light products and that even could be unveiled gasoline by taking gas oil out of the cat crackers I mentioned earlier. We convert -- take jet fuel and put jet fuel, it’s a compliant fuel.
So I think the reality is IMO on a product side will give some underpinning and support to all light products, jet gasoline and diesel. And so we will see that maybe a drag certainly economically where we are mature in a cycle, but IMO should be a nice boost.
Okay. Thanks very much for the time guys. I will turn it over.
We will take our next question from Benny Wong with Morgan Stanley. Please go ahead. Your line is open.
Yeah. Thanks guys. Just wondering if you can give us your outlook of product exports for you and as well as the industry. Just wondering what’s happening in Mexico? How much of that is going to get affect it? And the second part of the question as it relates to IMO is as it approaches and refinery starts changing behavior slightly? Do you have any early thoughts on how product slows or even crude flows will change or evolve?
So just on exports, we made some investments down in Chalmette over a year ago and our exports out of that facility have been fairly consistent. Actually in the fourth quarter there were some opportunities to make some aspect exports out of the East Coast, which we did and it just speaks to our optionality of being able to deliver products at different refineries on the coast. And then we are developing project that is about to take hold in Toledo where we are going to be exporting finished products into Canada starting almost as we speak over the next couple weeks.
So there’s -- we have as a company a base level of exports that are not dependent on Mexico per se, but it is a big driver in the U.S. refining bull case in that the U.S. refiners are providing fuels to the rest of the world because we have the most complex kits. We have access to attractive crude. We have cheap natural gas and we have the best workers in the world. So it’s a good combination and it certainly makes our market more buoyant, because the U.S. is competing with products with the rest of the world.
On the feedstock side if you will and what might happen with flows and trade patterns, et cetera, I am going to be fascinated by how this all plays out. As I say this is over 4 million barrels a day of distillation capacity that doesn’t have any -- has low complexity and is significantly more than that, that doesn’t have coking capacity.
So on paper, if you lose the outlet for your high sulfur fuel bunker model and that stream is still there, personally I think you are going to see an opportunity or a shift away perhaps from filling your coker on the margins from crude and filling your coker on the margin from somebody else’s stranded feed stream.
So we will have to see how it all plays out, but certainly we are positioning ourselves as a company with the tankage in the East Coast that we have got to be ready to be able to have the catches to take somebody stranded oil and not necessarily just still the cokers recruit.
That’s helpful thoughts, guys. Thanks.
We will take our next question from Phil Gresh with JPMorgan. Please go ahead. Your line is open.
Hey. Good morning, guys. This is John Royall filling in for Phil.
Hi.
So I know you have spoken about wanting to get bigger on the Gulf Coast and the West Coast, but would you ever consider expanding your refining footprint in the Eastern Canada and how do you think about that market from a competitive advantage perspective?
So let me answer it this way. We will consider anything, but our priority is going to be trying to get an asset, obviously, at a reasonable price and fix the model in PADD 3 and PADD 5 if there was a great opportunity to look out in Canada. But one of the things we very conscience of is going to a foreign company to become an operator has a little bit of a bandwidth issue with it in terms of management’s attention span.
So it would have to be very good opportunity, otherwise we are going to keep the strategy, which obviously regarded as a strategy but is always depending on the bid ask to try to grow. We intend to grow and to do it by having an additional asset in those two PADDs.
Okay. And thank you and then it looks like one of your peers is in California shutting an FCC, what impact do you think this is going to have on the West Coast product market?
Yeah. It’s already shut and that was done that was Tesoro, now it’s MPC, obviously, with the takeover endeavor, but when Tesoro was -- had acquired the two plants in Southern California, Carson, Wilmington, they undertook a project to try to hook those plants up and make a more synergistic between the two plants and they did ultimately get a permit to allow them to do that, but a condition of the permit was to shutdown what’s that cat 40,000 -- 42000 barrels a day FCC.
Los Angeles is so short gasoline. By and large even when the California balanced, there’s a net movement from the Bay Area or Pacific Northwest down to LA to supply that market. So there’s going to have be more supply that gets down there because that’s coming -- that is now shutdown that unit.
Thank you.
We will take our next question from Paul Cheng with Barclays. Please go ahead. Your line is open.
Hi. Good morning.
Good morning, Paul.
Just curious that Tom and Erik, when you are looking at PBFX, does it really have a cost advantage on capital cost or any other funding cost related to PBF and so from the for you to have that as a subsidiary, which while and also that on the evaluation standpoint, quite frankly, I am not sure that’s really to really that much of the of the C-Corp. anyway is pretty small.
Yeah. I think Paul we obviously had a fairly strategic announcement this morning related to the IDR conversion into common units. We are believers in the MLP strategy as we go forward but obviously we need to see how things unfold here over the next few years in the equity market, because clearly for the MLPs to grow we need that equity market to rebound in some way shape reform.
For us we run the math at couple of different ways in obviously with the IDRs coming out lower cost of equity should be a real benefit for PBF Logistics. We still have a couple of different things in market where there is enough arbitrage between where refining companies tend to trade and where MLPs trade that we think the math works.
But ultimately today’s announcement is extremely strategic for us and we are going to need how market response to what we think is overall a very positive message and we feel like PBF and PBFX came to a very reasonable agreement between the two parties that ultimately not mention that as a sidecar vehicle these two companies should be working in tandem to continue to help grow both the Refining business, as well as the Logistics business.
PBA by itself would not be able to have acquired these coal storage assets going back to plains assets. But those are very good deals for PBFX and they bring with synergies with the parent. So markets go up, markets go down and they certainly been sideways in the MLP space and we have tried to position, as well as we can and to the degree as well received in the markets opened we think it makes a lot of sense.
Thomas the fourth quarter margin realization seems to be a bit stronger than we would expect comparing to the market indicator, any particular reason that why that may be the case?
I think ultimately Paul it’s just a combination of things over the past two years we have clearly spent a lot of time a decent amount of capital and the team has continued to develop combination of all those things. We think we will continue to lead to performance coming out of torrents that’s consistent with what we laid out on the front-end.
When you run well real well it says in the discussion and the refinery is run well and they continue to make improvements and optimizations around the assets and I think the core performance I have ever seen.
I have to add that operation and the refinery has improved is so work to be done there OpEx is going down but the commercial activity in torrents has been impressive. What I mean what that getting into new markets I mean getting asphalt market running the marketing system at very high rack numbers. So I think the business unit and I mean the business unit, Commercial, Logistics and Refining itself is continuing to make improvements in strives.
Tom can you share how much is the marketing contribution in torrents the fourth quarter? Is it a big number?
What we really don’t break that out Paul, it’s just what I can tell you we are moving a lot about.
A final question whether you guys will be willing to share what is the benefit in the fourth quarter from the different crew defenses? I mean that Exxon have said year-to-year from 4Q ‘17 to 4Q ‘18 to better crew fence so have captured about $1.2 billion after-tax. So if Exxon willing to share with that whether you guys willing to share?
I am sorry. What was the question?
How much is the crew benefit crew defense benefit that you received in the fourth quarter? I am saying that as to everyone’s presence apply on Exxon given the number saying that from the fourth quarter ‘17 to the fourth quarter ‘18 the much wider crew defense or what the capture in the downstream is $1.2 billion after-tax. So I was just saying that Exxon that the most ultimate that don’t want to share information will be willing to share I hope that you guys will be willing to share also.
I commend Exxon for their willingness to share but that’s not saying we spitting out today.
Okay. Thank you.
We will take our next question from Matthew Blair with Tudor, Pickering & Holt. Please go ahead. Your line is open.
Hey. Good morning, everyone. Thanks for squeezing me in here. I am not sure if I missed this but could you share your WCS crude by rail volumes in Q4 2018, as well as your outlook for Q1 2019. And do you feel -- are you receiving the full economic benefit of these barrels in Q4 or are there any like fixed-price contracts or hedging that might have limited the upside?
Basically we ran north of 70,000 barrels a day I think through the fourth quarter by rail and we have captured by in large all of the benefits from the distortions in the marketplace in the fourth quarter. That wasn’t true to our necessarily the whole year but in the fourth quarter.
As we move into the first quarter I think the month of January we probably would have continued to move somewhere around 60,000 barrels a day by rail but that is coming off, as Erik said and others have said.
Right now we think that we are probably going to bottom out somewhere around 30,000 barrels a day in the March April timeframe and then based on what we are seeing in the numbers is the big lag in the system. Based on what we say now with the spreads widening out there lot of $0.20 now versus spread we believe we expect to be ramping up in the second quarter.
Yeah. We absolutely believe as Tom said that that market is bottomed out and we did we did and we will be able to evidence that we responded with the differentials shifting from being the cheapest crew of the world to being the most expensive on an economic value and so we responded and that all goes to the markets fixing itself and then we will decidedly ramp-up as the crews become more attractive.
Sounds good. Thanks. And then turning to your RIN guidance looks like guidance is up approximately 30% year-over-year for 2019. If I look at year to date ethanol RINs about $0.21 in 2018 ethanol RINs averaged about $0.30 cents. However, biodiesel RINs are up year-to-date. So could you just talk about what’s really driving the year over year increase in your RIN expense does it have to do with the biodiesel side?
There is an element of the biodiesel side and quite frankly there’s probably an element of conservatism in there just based on what we have seen in the market thus far where things have traded over the past few months.
But I think that’s something that we will continue to kind of update as we go, well, obviously as the year progresses we will have booked a certain amount related to rents for both ethanol, as well as the bio component but ultimately there’s probably some conservatism built in there.
RINs will be what they will be although we are entering kabuki feeder for I don’t know what number this is the acting secretary is going to try to get confirmed by the centers. I think he received a letter from five senators this past week, voicing their concerns over the wind market and the impact to the manufacturing base in this country.
He no doubt is hearing from the powerful core lobby and so it’s just again it’s a snapshot of why big government can be a whole bunch of unintended consequences. But we -- I am actually comfortable certainly with the administration that they recognize high RIN prices not only affects the consumer, but can absolutely damage the manufacturing side and the refining side. They have done a reasonable job of keeping wind prices in check and I expect that will continue.
Thank you.
We will take our next question from Jason Gabelman with Cowen. Please go ahead. Your line is open.
Yeah. Hey, guys. Thanks for taking my question. Firstly, just on PBFX or organic growth I know you have that $100 EBITDA target out there. How much of that was realized last year and is this mask deal that you announced today. It doesn’t seem like it was embedded in East Coast acquisition EBITDA target, is it part of this organic growth target? Thanks.
No. And I want to shy away from giving forensic accounting on $100 million. We invest a fair amount of money last year and we continue invest money this year on projects. I mentioned the Toledo export facility. That’s part of it. I think by this year we will have $10 million of run rate EBITDA as a result of those investments.
In regards to the [inaudible] I would not characterize that as an organic project. It is absolutely incremental to the economics that we shared when we acquired the facility. So that’s been in the plans for some time and so we identified it as upside. But this is the first time that the market’s learning of the upside and like I said it is definitively incremental to the business.
All right. Great. Thanks. And just a quick question on IMO 2020, I just want to go back to your comments about potentially blending vacuum gas oil into the marine fuel pool. There’s been some industry chatter that there could be some issues with blending. I am not sure if you guys are running tests to kind of sanity check that or what your expectations are on the vacuum gas oil blending? And just to follow from that I understand you still expect IMO 2020 to be positive for PBF, but if the magnitude of the benefit that you are expecting in 2020, the same magnitude that you were expecting say six or eight months ago? Thanks.
Second piece of that I think it will be and frankly, certainly on the feedstock side and the stranded side, I don’t see anything that’s changed that outlook in service penetration or people figuring out what they are going to do with these streams.
And the whole key there is if indeed you can’t comment on the margin that you are going into the power sector then you are going to wind up with this $30, $40, $50 dollar clean dirty spreads which will push coke and economics to be very attractive.
I think on the blending side, made one other comment after that, we are going to leave that to the Exxon, BP’s and Shell to the world. They are actively working through trying to do formulations and blending with a variety of different source -- what will be compliant from a self standpoint fuels. I can assure you every one of those companies has the ability to do a lot of hydro treaty on the gas oils and turn that gas oil and it’s a higher density fuel than diesel, because obviously it’s got BTU’s in it.
So we are going to wait and see. We are not doing any of our own formulations recognize though that we are burning 0.1% sulfur in all of the EPA zones around the world and there’s not been real issues with that. I guess we will find out what they do.
I would say, I suspect that this industry on the product side will figure out how to solve this problem with less of a problem than was originally forecast and it may be that you will get an initial pop that will be the same as what we still have.
But I suspect that on the product side and the availability of fuel that will be solved in a short- to mid-term and the longer implications might be on the stranded feedstocks and for longer heavy crude sweet sour crude differentials.
I will now turn the call back to Tom Nimbley for closing remarks.
Thank you everybody for joining us today. We look forward to talking to you in our next quarterly call.
This does conclude today’s program. Thank you for your participation and you may disconnect at anytime.