PBF Energy Inc
NYSE:PBF
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
28.08
62.04
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
PBF Energy Inc
You don't have any saved screeners yet
Good day, everyone and welcome to the PBF Energy Fourth Quarter and Full Year 2019 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.
It is now my pleasure to turn the floor over to Mr. Colin Murray of Investor Relations. Sir, you may begin.
Thank you, Ashley. 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. Our 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’ll discuss our results excluding special items. This is a net $20.2 million adjustment which includes an after tax non-cash lower-of-cost-or-market or LCM adjustment, which decreased our reported net income and earnings per share. As noted in our press release, we’ll 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 our press release today, our throughput guidance figures, which now include the Martinez refinery as of February 1st acquisition date.
I’ll now turn the call over to Tom Nimbley.
Thank you, Collin. Good morning, everyone and thank you for joining our call today. Overall, we are pleased with our fourth quarter results, which reflects solid operational performance in all of our regions, following the extensive maintenance we strategically advanced into the first half 2019.
In the fourth quarter complexity mattered with changing IMO-based market dynamics. Oil trade flow shifted and crude’s rate changes were observed throughout the industry and at our refineries. Less complex refineries producing high sulfur fuel oil made significant changes to their business model and got lighter.
In the last six weeks, the oil industry and the world have been presented with some serious challenges. The markets have been volatile to say the least and they continue to be so. The mild winter in the Northern Hemisphere has dampened demand for heating fuels and more importantly, the coronavirus has limited commerce and mobility in highly populated areas as governments and health organizations work diligently to solve the pandemic.
With the losses to demand, the oil market will do what it always does, rebalance. Global refining margins starting – started this year fairly weak and runs were curtailed due to economics. It appears as though we were starting to see some life in the cracks, but oil demand losses in the first quarter have outweighed the IMO related benefits we were seeing in Q4. The magnitude of demand losses cannot be ignored or even accurately estimated at this point, but the oil market has continually demonstrated that it can and will rebalance.
The industry opportunities presented by IMO have not gone away. Rather, the pause button has been hit, the demand destruction we have seen from the weather and the virus are temporary. Product inventory had been building, but refinery runs are hampered by economics and are likely to remain constrained for the balance of the first quarter. The current health crisis will get sorted out and demand will recover.
Oil demand will likely recover more rapidly than refinery runs. We are entering an active planned refinery maintenance period globally. Planned crude unit downtime will peak in April, in the forecasted range of 7 million to 9 million barrels per day. There is light at the end of the tunnel as we execute one. Demand is set to seasonally pick up as we ended it with peak demand periods. We were very glad we had complex assets in Q4 and our results demonstrate the power of complexity and flexibility.
With the completed acquisition of Martinez on February 1st, we are very pleased to have added another highly complex asset to our portfolio. While the first quarter is facing some significant challenges, we will not waver on our base assumption that complexity matters.
Now I’ll turn the call over to Erik to go over our financial results for the quarter.
Thank you, Tom. Today PBF reported adjusted earnings per share of $0.60 and $0.90 for the fourth quarter and full year 2019. Fourth quarter adjusted EBITDA comparable to consensus estimates was approximately $272 million and $872 million for the year. PBF’s adjusted tax rate for the quarter was approximately 25%, but we just continue to use 27% as an effective rate going forward.
Consolidated CapEx for the quarter was approximately $119 million, which includes $110 million for refining in corporate CapEx, and $9 million incurred by PBF Logistics. As expected, our Q4 CapEx was our lowest quarter of the year, with most of the spend associated with the successful restart of the Chalmette Coker and continued work on the Delaware City hydrogen plants tie-ins.
Our strategic decision to front-load maintenance in 2019 allowed our refineries to run unimpeded during the fourth quarter. As a result, we were able to generate more than $500 million in cash from operations prior to CapEx, including returning inventory to normalized pre-turnaround levels. We ended the year with over $2.5 billion of consolidated liquidity, which includes approximately $780 million in cash at PBF and $35 million at PBF Logistics. Our consolidated net debt to cap was 25%.
Last month, PBF Energy successfully issued $1 billion in senior notes due 2028 at a 6% coupon. The proceeds of this offering were used to refinance and extend the tenor on a portion of our existing debt, and to fund a portion of the Martinez transaction, which closed on February 1st. The balance of the Martinez funding came from cash on hand and drawings on our revolving credit facility. Finally, we are pleased to announce that our Board has approved a quarterly dividend of $0.30 per share.
Now let’s turn the call over to Matt.
Thank you, Erik. Before commenting on our performance in the fourth quarter, I would like to take this opportunity to publicly welcome Martinez to the PBF family. This transaction was a long time in the making and we are more than pleased to add this premier refinery and first-class organization to our company.
We received regulatory approval at the end of January, which gave us a window to close a transaction at the perfect time as the West Coast market has into what historically has been a seasonally strong market. We believe now – we believe we now have the strongest kit on the West Coast. What does that mean? Our two refineries with combined Nelson Complexity of 15.5 can run the harshest crude slates and produce one of the highest clean product yields on the West Coast, across the industry for that matter.
Martinez in particular has over 103% volume yield across the refinery, and over 95% high value product yield. Everything we have learned in the first two weeks of ownership has confirmed our assumptions on the strength of the Martinez machine. We have already begun to optimize our two refinery system on the West Coast.
Looking back on the fourth quarter, our five refineries delivered a total throughput averaging over 840,000 barrels per day and overall ran reasonably well. Looking ahead, we have begun our Toledo FCC turnaround, which is by far our largest single turnaround for the year. We expect to be substantially complete with Toledo turnaround by the end of Q1.
As we have stated, our refineries are well positioned for IMO. The benefits may have been pushed out by global events, but PBF circuit has been able to prove out the power of our complexity over the last couple of months by demonstrating our capability of running high sulfur fuel oil or resid.
Given the right conditions, we believe we can run up to 125,000 barrels per day of fuel oil across our system. Our decision to run alternative feedstocks will of course depend on economics. We will always seek to achieve the lowest input costs and highest yield of clean products. We have a dedicated team of planning and economics people that are evaluating countless iterations of alternatives every day.
Finally, in regards to our strategic projects, the Chalmette Coker project started up in November on time and on budget and we have achieved the coking rates we expected. Our increased capabilities improve our flexibility around additional heavy high sulfur inputs, while improving our overall yield of high value products.
The hydrogen plant project at Delaware City is progressing well, and we expect that to come online near the end of the first quarter. The additional hydrogen capacity at Delaware will allow us to run more high sulfur inputs and produce high value products. We are doing the work needed to put our refineries now at six in position to be successful. The markets will be dynamic, but we are focused on the safe, reliable and environmentally responsible operations of our assets.
With that operator, we’re ready for questions.
In a moment, we will open the call to questions. The company requests that all callers limit each turn to one question and a follow-up. You may rejoin the queue with any additional questions. And we’ll go – we’ll take our first question from Theresa Chen with Barclays. Please go ahead.
Good morning. Thank you for taking my questions. I wanted to touch upon the earlier comments made about the evolution of IMO and you know the currently muted effects. If you wouldn’t mind elaborating, you know your expectations of like when you could just see some goal posts and timeline for development? Are we waiting for, you know, March 1st with the carriage ban or is it going to be more of a second quarter of progress development?
Sure. You know the point we made is, we do believe that IMO is real, we saw the effects in the fourth quarter. It obviously has been completely blunted and candidly overwhelmed by the combined effect of the demand destruction associated with the warm weather in the first quarter and throughout the winter and now, the pandemic.
I don’t think the carry - the carriage ban will help, but frankly, we don’t think there’s a significant amount of cheating going on right now. What has happened here is a couple of things that I think it’s important to weigh them in. Mainly it’s the demand destruction.
So what happens is, well we’re going to see some things here. We’re going to – the winter is going to be over in five weeks. We’ll have to see how long it takes to get the virus contained. I think once that’s contained and hopefully that’ll be relatively soon, but who knows, we’re likely going to see more stimulus injected in some economy, certainly in China and we will see a resurgence of demand.
We’re also going into some structural changes that happened every year and that with the butanes are coming out of gasoline that’s already underway in the State of California. So I would guess that we would see a recovery on IMO sometimes in the early second quarter, but that is going to be completely dependent on what happens with the virus, I think.
What we saw is, demand destruction at the same time and Matt will maybe elaborate on this at some point. We ran a significant amount of high sulfur fuel oil, if you listened to what our competitors have said or our peers have said, they ran a lot of high sulfur fuel oil. We effectively traded out crude, because it was more economic to run resid.
Well, heavy – high sulfur fuel oil prices have come back in. And right now, the economics are going to swing that we’re going to run back to crude and we’re going to slow down the amount of high sulfur fuel oil we’re running as feedstock. So it’ll be an ongoing journey to turn the knobs to take advantage of what the most profitable feedstock is. So I think a long answer, but lots of knobs to turn.
Great color, thank you. And in terms of the virus, clearly, it’s very hard to contriangulate you know exactly what kind of demand destruction on the product or feedstock side and for how long. But do you have any anecdotal evidence of seeing for example, the stress cargos accrued in the market right now that’s related to the virus?
We are seeing, and this maybe early, because a lot of this crude that was being run was already planned for and had to play out, the runs had to play out. But certainly it looks like we’re starting to see evidence of Latin American, South American crudes that were going over to the East side are being pushed back because of the runs, cuts in China and economic run cuts throughout the entire world in many cases. And those crudes look like they’re starting to show up in the Gulf Coast of the United States and on the West Coast of the United States. Early, but certainly we see some movement on the medium sours that were being absorbed into the East.
And our next question will come from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.
Hey. Good morning, everyone. I was hoping you could talk about the performance on the East Coast. It looks like you outperformed some of your peers. What were the drivers behind the strong margin capture? Was that mostly the ability to run HSFO as a feed, and if so, could you please any sort of numbers around the upside you receive there?
Yeah, I would describe it in terms of the feeds that we are able to run, and that again goes to our complexity. So that can come in the form of fuel oil, which got exceptionally weak in the fourth quarter, where two refineries on the East Coast that can run high sulfur fuel oil. And obviously Canadian grades wind out quite as well. And you know, when that happens, we’re in the catbird seat to achieve that.
In regards to specific impacts from specific grades, it becomes very, very difficult to do. We’re not going to get into that specificity. But the fact of the matter is, we run to the cheapest feedstocks and we can run the harshest slates in the world. And so you know, when opportunities presented themselves, we go get those feedstocks and that will differentiate ourselves from other PADD 1 refiners.
Sounds good. And then I guess extending on that point, what were your East Coast crude by rail volumes in the fourth quarter? And can you share any expectations for Q1?
Total crude by rail between WCS and Bakken, I think was 75,000 barrels a day. In the fourth quarter, we would expect to have about the same level of crude by rail in the first quarter. And then probably it’ll drop off as seasonally the WCS tightens up as we get into the second quarter.
Great, thank you.
We’ll take our next question from Doug Legate with Bank of America.
Thanks. Good morning, guys. Thanks for getting me on the call. Tom, I wonder if can kick off to the macro question, because you mentioned you expect capacity utilization to remain constrained? I think you threw a number of 7 million to 9 million barrels a day of maintenance offline.
I just wondered if you could walk us through what you’re seeing there and how you think compares to prior years? Now, obviously, there’s a lot of moving parts right now with the Chinese situation. But just trying to – trying to figure out if you think that’s enough to kind of clean off this product overhanging that we’re potentially going to have as we go into the summer?
Thanks, Doug that’s a great question. The short answer I’ll give you is, I personally believe it will be the 7 million to 9 million, which basically, I think it was around a level that we had in a similar period last year, but a lot of that was being driven by people taking units down pre-IMO. A lot of that 7 million to 9 million is outside the United States, but it’s a fair number of units that are down on a – coming down on a planned basis.
The other thing I would mention, that does not include economic run cuts. So I think in addition to the planned unit downtimes, as we see the demand destruction that we’re seeing right now, and you know, there’s lots of numbers as to how much China has already cut back. I saw this morning reports that they’ve shutdown another refinery in total.
But I think the combination of the planned unit downtime, plus the economic response and the whole industry is going to respond, you can’t make money, you’re going to start cutting. So I think that will eventually cover the lower demand that we’ll see and balance the – it balances the marketplace.
Appreciate that answer. My follow up is probably for Erik. First of all, guys congrats on getting the Martinez deal closed. That was a big deal for your redundancy on the West Coast. But, Erik, what should be thinking now in terms of balance sheet, debt targets, how do you think about where you want the balance sheet to be and how you get there?
I think our message is probably consistent with where we’ve been since we went public in 2012 that there will be times probably post-acquisition where we may have net debt to cap that ticks in and around 40%. And I think on a pro forma basis, that’s kind of where we are today. But our immediate goals are to start to de-lever the business, we did use our ABL to finance a portion of the working capital that we acquired from or inventory really, we acquired from Shell.
So I think the long-term goal is to stay inside of that 40%. Obviously at the end of the year, we were in kind of the mid 20% range. I think that’s obviously a long-term goal as we go, but where we are now is, we’ve got our six refinery system. We think we’re going to generate significant returns this year, and the plan would be the immediate use of cash is to start to de-lever that balance sheet. And I think that message has stayed consistent since the end of 2012.
Apologies for just asking you to elaborate, Erik a little bit, but maybe just two points of clarity. So we assume new equity is off the table and can I also assume that there’s no imminent additional acquisitions fund?
I think at this point, our focus, as we said in the last call, our laser-like focus was on getting Martinez closed. We executed that transaction a couple of weeks ago. I think we put in place a long-term cap structure to ensure that we had a lower interest costs going forward. And I think right now our focus is on bringing Martinez into the fold, continuing to optimize our business, we have a lot of size and scale today that we didn’t have a few weeks ago.
And so ultimately the plan is, let’s go ahead and get Martinez into the PBF family. We’ve got some standardization to do internally and we should start to see some of those benefits through the end of the year. And ultimately, we are focused on operating our business.
So the answer to your question –
So no new equity –
The answer to your question is Doug, yes and yes.
Okay, got it. Thanks, guys. Take it easy. Thanks. Bye.
And we’ll take our next question from Neil Mehta with Goldman Sachs. Please go ahead.
Hi, this is Carly Davenport on for Neil. Thanks for taking the questions. The first one is just on high sulfur as it discounts which have obviously narrowed relative to what we saw on 4Q? So can you talk about the key drivers of that dynamic and what the path forward in 2020 looks like? And also, I think you mentioned capacity to run 120,000 barrels per day of resid feedstocks. So curious what drove the delta versus I think the 100,000 barrels per day that you’ve previously mentioned?
So a couple of things. In regards to prompt prices, I think if you take a step back and we’re reading a lot over the last couple of days in terms of speculation and what prices are saying about the market, I don’t think there is a price today that is not affected by what’s going on in China and obviously Tom mentioned, the warm weather compounds that.
But the ramifications of the virus and its impact on demand and then a subsequent resulting, you know, cuts in China has been through that – their refining system, it ripples through, rippled through every single price and every single crude and every single resid barrel that you can count. And so bringing a micro focus to you know, what it is today, I don’t think is necessarily a representative of what it will be once the world is through this crisis.
In regards to the amount increasing is simply we added another highly complex refinery and that refinery has its own ability to run high sulfur fuel oil. Don’t confuse our ability to run with our currently running, because if the prices move, our actions move with them. And so the market, I would say and serve across the spectrum is, you know, is twisted in knots on everything as a result of what’s going on in the world and we react and shows the rest of the world.
Great, thanks very helpful. And then the follow-up is just around cash flow. Was there any working capital impact to call out in 4Q? And then just curious if you have any high level thoughts on framing out normalized free cash flow power post-Martinez?
In the fourth quarter I think our prepared comments, just touched on getting inventory back to a normalized level, you know, our goal is always at the end of every year to get back to a certain level, we achieved that target. During the first half of the year, we built a significant amount of inventory as we were going through accelerated maintenance through the end of the June timeframe.
And so we felt like we work to that inventory down towards the back end of the year, we probably saw a north of $200 million to $225 million worth of working capital swing back in the form of cash on the balance sheet in the fourth quarter. That being said, that’s our normalized level of working capital.
So, I think directionally there are going to be times as we go through maintenance periods where we may be building inventory again, that’s normal course of business for us. At the same time, working capital will be affected by not only volumes, but price. And so we’ve seen some relatively volatile price moves here over the past six weeks to eight weeks, those may continue into the future. And you may see a period where we have lower inventory volumes, but higher prices well that will impact working capital as well.
I think our target is always making sure we have ample working capital, ample inventory levels to operate the business well, to take advantage of markets when they are there. But ultimately, the last thing we want to do is actually work ourselves into position where the refineries cannot operate safely, because they don’t have enough inventory to operate. So that’s kind of on the working capital side of things.
From a free cash flow. Look, I think we’ve never provided any type of guidance in terms of where the market is going to go, because quite frankly, we’re focused on those variables that we can control, operating expenses, working capital level and CapEx.
The six refineries that we have in house now, five of which are extremely complex, we think have a lot of earnings capability, the key pieces where do cracks go and probably most importantly, are we going to start to see a widening, a continued widening of light heavy differentials, we believe we will. We would like to think the six refinery system has more earnings power than our five refinery system.
Good color.
[Operator Instructions] Our next question comes from Brad Heffron with RBC.
Hey. Good morning, everyone. I got some - another one for Erik, probably. You guys have updated the 2020 throughput guides to include Martinez. But I think the expense guides that you gave at the beginning of the year still do not include Martinez. Are there any, you know, numbers that you can give us or should we expect that those are going to be updated at some point?
I think at this point, you know, we’ve had the refinery now for a little under two weeks. And we are working through what our plan is for calendar 2020. And I think we’re going to be coming out with some updated operating expense numbers, probably the end of this month, beginning of next month. We’ve got to do a few things internally before we were ready to kind of roll that out. I think our first step was to try to provide some insight into where we think throughput will be based on current set of economics. So we’ve included that in the press release.
Okay, got it. And then you guys talked about how complexity was a benefit, you know, in the fourth quarter, but when I look at the East Coast slate, the light crude runs were the highest as far back as my model goes. Was that just barbelling against the HSFO or any other explanation you can give for that?
It’s the combination of the two, we have to barbell when we run a significant amount of WCS or any very heavy crude, so we need to keep the top of the tower wet. And that means, you got to run a light crude to balance. But at the same time, Bakken was actually a very economic crude on the East Coast of the United States improved by rail and it was actually trading, you know, Brent plus one, Brent plus two. So that became the best light crude that we could run.
Okay, got it. And then if I could just sneak one more in. Just on G&A during the quarter. Obviously, it was a pretty large number. Was there anything unusual in that number and then how should we think about the run rate going forward?
I think our run rate going forward is consistent with the guidance that we laid out. There are really kind of two pieces that will impact that G&A number that, I would say are probably one-time we hope they are ongoing, because it means our business is doing well. And that’s compensation related expense so – and that’s incentive compensation related expense. We typically do not accrue that expense until the tail end of the year, because that’s when we have a lot more clarity on where the full year results will be. Ultimately, that’s what flowed through at the same time we did have stock-based comp that we do not include in our full year guidance.
Okay, thank you.
Our next question will come from Paul Cheng with Scotiabank.
Hey guys, good morning.
Good morning, Paul.
Matt and Tom, when we’re looking at Chalmette, we saw – I think has been inconsistent and has been challenging and including this quarter. What can be done with our non-op capital in order to fix it and get in much better?
I’ll start and then Matt can weigh in. First of all, I agree with you. Frankly, we were – have worked hard on Chalmette but we haven’t gotten to the Promised Land yet. We did make the move with the Coker that’s very much a positive that came up pretty much on time, on budget is running at rates.
The fourth quarter, though, we actually had a pretty significant turnaround in Chalmette in the fourth quarter and now we shut down its Cat Feed Hydrotreater for – and that was to effectively change out the catalyst and also do a minor project that will improve margin and increase clean product yield. But it did impact our ability to run fuel oil. We didn’t run any fuel oil in Chalmette in the fourth quarter. We are running fuel oil in Chalmette today.
So we have a lot of work yet to do, but the combination of some of the investments we’ve made restarting to reform and that the hydrotreater and now the Coker and this investment that I just talked about on a Cat Feed Hydrotreater which gives us more capability to run heavier, harsher material will help the Chalmette refinery. But the big thing which Chalmette which is like every – everything else in our system, is, if we get the light heavy dips widening out and we get fuel oil and IMO is that Chalmette will be fine.
Okay. I think in the fourth quarter, how much is the high sulfur fuel oil 50,000 or higher and how much that you expect to run given the current economy in the first quarter? And how that spread between your different system?
What we ran in the fourth quarter was about 50,000 across our system. I won’t comment necessarily on what we expect to run the first quarter mainly because I don’t have a clue where the markets going to go and we’re simply going to react to the market every single day. As I said, we have – over the fourth quarter and into the first quarter, we’ve been able to demonstrate to ourselves what we’re able to do and we’re in a position to do it, but we’ll react to the market.
And Matt in the fourth quarter everything that’s run in Delaware City are the high sulfur fuel oil?
Not 100% that was run in Delaware City, no. We were able to run some in Paulsboro as well.
Oh, in Paulsboro also. And that when looking at your I mean just simplistically, when you show the crude and this top percentage if the high sulfur fuel oil you run it together as a part of the heavy or you run it together as part of the other feedstock and brents?
The – actually what we show it at different refineries is different, you know, in some cases it’s shown as a feedstock in with the crude. And there’s another piece that is in the other feedstocks, but we’ve obviously, the total that we run is going to be or – what we run is going to be a total of those two areas. That makes sense here. So in one refinery –
So we can’t just base on what you report in here be able to tell whether that you have increased or decreased the one on high sulfur fuel oil.
No, you’ll have to rely on us telling that.
I see, okay. We do. Thank you.
And our next question will come from Phil Gresh with J.P. Morgan.
Yes. Hi, good morning. Erik, I know you’re going to wait to give us specific cost guidance on 2020. But perhaps you could remind us on the capital spending side, how we should think about a normalized CapEx run rate across your system as Martinez and they’re now not specifically this year, but looking out?
Just – well I can give you. I let Erik go to the out years and I don’t think it’s inconsistent what we talked about, but for this year in particular, we’ve done a fair amount of work over the last couple of weeks. And it only has been a couple of weeks. But in terms of what we said in June, I think we said $75 million for 2020 I’d moderate that slightly, it’s probably a range of $75 million to $90 million.
And then there is a project this year, which is a strategic project in many ways and we’re able to work it with Shell, where they are actually delivering new reactors for our Cat Feed Hydrotreater, we’re going to look to get those reactors in quicker than maybe otherwise, because they actually come with a return billing.
So will further increase yields across our converging units. So that’s probably another incremental of $10 million of spend this year, but that will come with, you know, some benefits overturn. In regard to our long-term forecasting, I don’t think anything’s changed.
Not that’s consistent with what we laid out in the guidance last month.
Okay. And then just one final question. I don’t mean to belabor the high sulfur fuel oil plant; I totally understand that. You know, there’s a lot going on that’s pretty dynamic with the virus of demand effects. But I guess I would have thought if demand generally is weaker, that that would mean prices would be weaker, but obviously prices have been stronger.
So, I guess is it the dynamic here that just the refineries evolved you know, chase to kind of the same high sulfur fuel oil feedstock opportunity and that has been the main driver of the strength and now that we’re going to see a rotation potentially back to heavy crude that that would soften back up. Is that how you see this playing out? Thanks.
Not entirely and that is certainly that has an impact and not to confuse on that. But you also have other impacts, which is a lot less high sulfur fuel oil is being produced, because refineries were running less. So, when we say, you know, sort of every number is sort of tortured by the effects going on, you know, it becomes very, very difficult but you know, you certainly have a supply of high sulfur fuel oil to market declining as a result of run cuts.
Okay. But to be cleared, Tom, you had mentioned that you don’t think folks are out there, you know, cheating and still running high sulfur fuel oil, so it’s creating excess demand right now.
Yeah, I wouldn’t believe that’s the reason for this. I would say in addition to the comments that Matt made and a lot of this is demand, shipping industry is not immune to what’s going on. So there’s a probably less consumption of high sulfur fuel oil or very low sulfur fuel oil which is now started to come off from the glorious heights that they had.
And then there is certainly as we talked about in our prepared comments, there has been some movement on the part of – meeting conversion refiners who do not have resid destruction capability. In the fourth quarter, we’re getting their clock cleaned, that’s a technical term.
And so what they had to – what they started to do was try to lighten up to the extent that they could which decreases the amount of fuel oil production. I suspect that you’re going to see even them maybe go back the other way, if the prices would remain, but I don’t think they will. I think it’ll widen back out.
Okay, yeah, a lot of moving pieces. Thanks, Tom.
Our next question will come from Paul Sankey with Mizuho. Please go ahead.
Actually a very good pronunciation, a Japanese pronunciation, quite right. Thank you. The – Tom and hi, everybody. I was wondering the way markets are shifting here. I was just wanted you to remind us if you would about the extent to which you hedge and whether you would be doing that and why you would and I think if you could continue into reminding us how much difference contango versus backwardation makes given the shift in the curve would be question one? Thanks.
Just in regards to how we hedge our portfolio, we have a fairly simple policy, which is, our investors are investing in the crack spread. And we’re trying to deliver that across, you know, a number of pads and regions. So we’re not actively hedging cracks or anything of that nature. What we’ll do is, we have a baseline of inventory and to the degree, we build from that, we’ll take hedge positions to bring us down or obviously vice versa, but we don’t play the game of hedging cracks in a material way. Tom, I don’t know if you want comment on contango or backwardation.
You know, we just watch it, Paul. And obviously shifting now and is now an incentive as we get data where the industry might look despite floating stuff on the water and we’ll pay attention, but we really don’t use that as a metric to change our business. I would go back to our business model, we’d go back on the hedging part of the equation, Matt is absolutely right. We don’t play speculative games on the crack, because of the investors.
We – people buy PBF stock as you well know, they buy the crack. They’re investing in a crack. What we do on long haul or even make some short haul crudes that we buy, we effectively hedge to manage the basis. So we lock in the price for the crudes when we get, when we buy it and so that we get when by the time it lands, that’s the number we’ve got. That’s the main area that we hedge.
And, Paul I think in the fourth quarter, we saw about $1.5 million worth of derivative related gain. So typically what you would see is, if there was a gain, you would see the offset on the physical side of the market and vice versa.
Yeah, I mean, for what it’s worth, we totally support your strategy and agree with your rationale for it. On the three – that my follow-up is just on the three foot squirrel bit light here, it seems for Q1, can you talk about Q1 the rest of the year and any if you sort of referenced this already, but any views on the overall industry throughputs given the situation that we will see? Thank you.
I’ll talk about and I think at your conference on a VGO conference earlier in New Year, we – I kind of put this out there. I actually think that we’re obviously going to have lower throughputs here during the crisis that is being managed or attempted to be managed, but that ultimately will pass.
But to a large extent, I think there’s going to be pressure, especially as we come out of this. And if IMO comes back and you start to see spreads on the light heavy crudes, and you start to see heavy fuel oil, the clean dirty spread, you know, clean dirty spread was up at 40 it’s 25 now, but that’s still quite a bit higher than it was last year.
But if it widens out, there’s going to be pressure on some of the inefficient refineries or the refineries that are running these medium sour crudes and making fuel oil. And so I wouldn’t be surprised that you have continuing run cuts throughout this year and maybe even some consolidation. So I do this as – I don’t know that we’re going to see the same utilization worldwide that we’ve seen in the past, until the new refineries come on, then okay, that will change the paradigm.
Thank you, guys. Look forward to seeing you in late March. Thanks.
And your final question comes from Jason Gabelman with Cowen. Please go ahead.
Yeah, hey guys good morning. I understand that and appreciate the fact that these IMO benefits have been delayed a bit. But I guess I’m wondering what your thoughts are on the duration of the benefits both on the light heavy crude quality spreads and on the product margin upside. And I ask this with the thought that there is going to be a lot of refining capacity coming online towards the end of this year, that could potentially be using heavy sour and medium sour crudes and impact the crude quality spreads a bit? Thanks.
Yeah, there’s two – a couple of pieces of that. And it’s certainly the case and there’s obviously deliberate and conscious constraint of medium heavy crudes that are underway and being exacerbated by the sanctions that have been imposed by Iran and Venezuela, et cetera. But right now, I would still say that we would expect IMO to have an impact and if we get through the virus, and it already is, but that will affect the light heavy spreads.
Now on product demand, it’s interesting and somebody referenced it. I haven’t seen a situation where we’ve had such volatility and so many knobs to turn to stay current with the marketplace. So what is some of our peers have referenced this. Right now, we have actually had had economic incentives to almost run a refinery backwards.
You take VGO that was going into a cat cracker, which would produce gasoline and diesel. And some of our competitors have announced that they were actually selling that – not running into a cat cracker by the way we’re doing it as well. And instead of running it and producing gasoline and distil it, keeping it that as VGO and then selling VGO into high sulfur fuel oil – very low sulfur fuel oil pool.
So what did I just say? Well, you’re probably going to put a floor under production on gasoline and distil it, if the cracks are bad. And now, again the markets will rebalance. And I think that will be fine.
All right, thanks. And just a follow-up, I know we’ve touched on running high sulfur fuel oil a bit and I think that as an analyst, it’s tough to understand what the economics of that are. So I guess very simply, in today’s environment, where prices are, doesn’t make sense to run high sulfur fuel oil.
The answer – short answer to the question is no.
All right, great.
So you’re – on a go-forward basis, if these prices stay, we won’t be running the volumes we are on with, we’ll switch out and again, the beauty here is this kit is got enough optionality that I can respond pretty quickly in any – to any change in the economic environment.
Thank you very much.
And I would like to turn the call back over to Mr. Tom Nimbley for closing remarks.
Thank you very much for joining us on the call today and we look forward to having the first quarter call and hopefully we’ll have to put this pandemic behind us, it’s a terrible thing. There’s people in that problem. Thank you. Have a great day.
And this does conclude today’s program. Thank you for your participation. You may disconnect at any time.