Calumet Inc (CLMT) 2022 Q1 法說會逐字稿

Good day and welcome to the Calumet Specialty Products Partners LP first quarter, 2022 results conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brad McMurray investor relations. Please go ahead.

Good morning. Thank you for joining us today for our first quarter 2022 earnings call.

With me on today's call are Todd Borgmann, CEO; Vince Donargo, CFO; Bruce Fleming, EVP of Montana Renewables and Corporate Development; Scott Obermeier, EVP of specialty products and solutions, Marc Lawn, EVP of performance brands, and Steve Mawer, executive chairman. Before we proceed, I'll remind everyone that during this call we may provide various forward-looking statements.

Please refer to the partnership's press release that was issued this morning, as well as our latest filings with the SEC for a list of factors that may affect our actual results and cause them to differ from our expectations. You may now download the Slides that accompany the remarks made on today's conference call, which can be accessed in the investor relations section of our website at www.calumetspecialty.com. Also, a webcast replay of this call will be available on our site within a few hours.

With that, I'll pass the call to Todd.

Thanks, Brad. And Good morning. Let's start on Slide 3. The first quarter was a busy one here at Calumet and we're progressing our business on all fronts. First, let me start on the people front. I'm pleased to introduce Vince, our new CFO, who you'll hear from shortly. Vince has been with us for a couple years now as our chief accounting officer and under his leadership, we were able to successfully resegment the business early last year and remediate a longstanding material weakness this past quarter. We've also seen broader internal people move throughout our system. It's great to have the depth and breadth of talent we have in the organization. And thank you to Steve, Vince and the entire team for providing for a smooth transition over the past couple months. It's also been wonderful to see our people plan play out MRL. Talent's a critical area, and we've been able to recruit a first-class team as people recognize just what a unique business model we are developing.

Last quarter, we mentioned how committed we are to our strategy, and I want to reinforce that nothing has changed. We're focused on creating 2 independent leading businesses. One is especially product business built on our Calumet legacy and the other is unique competitively advantaged, renewable diesel business. Both are built on lasting competitive advantage, will carry appropriate leverage, have simple capital structures and ultimately have access to competitive growth capital. We believe our renewable diesel business is built on the permanent competitive advantages of location and cost leadership. Our specialty products business is one that's built on a world class customer base, exceptional brands and a nearly irreplicable asset base.

While we think of these businesses as separate, they're strategically linked, and that we expect to equitize a portion of Montana renewables to expedite the de levering of Calumet specialty business. We started 2022 by refinancing our 23 notes, which cleared our short-term bond majorities and allowed us to focus on this remaining recapitalization. I'll provide an update on that shortly.

Unfortunately, it's hard to talk about the first quarter without somberly mentioning the humanitarian disaster in Ukraine. The event clearly exacerbated the already stressed commodity markets, which were short on the back of their recovery from COVID and the global supply chain crisis. Calumet has very little direct business in Ukraine in Russia, but the impact of the attacks on energy pricing were felt around the globe. Crude oil ran from a December average of $71 a barrel to a high of over $123 in the first quarter, which was the largest quarterly dollar increase in history.

In the face of these challenges, Calumet posted a first quarter adjusted EBITDA of $23.3 million and ended the quarter with a multi-year high of $412 million of liquidity. The rising cost environment most impacted our performance brands and asphalt businesses where price lag is most prominent. Other product lines in especially products and solution segment were certainly impacted too, but we're proud to post the specialty material margins north of $50 a barrel in such a challenging environment. I’d be remiss to not highlight, once again, the competitive advantage that our specialty business has to effectively manage rapidly changing market regimes.

This is an incredibly flexible business and we typically process crude oil to produce our own specialty feed stocks cost effectively, thereby also ensuring secure supply and quality control. Of course, we also make fuels during this process and we have significant optimization flexibility in control over the degree to which we process crude versus intermediate. When fuels margins were nothing during COVID, we tweaked our operation and feed mix to minimize fuels and focus on specialty yields and that generated cash. In a current environment, we're in max fuel mode and we limit the amount of third-party intermediates we process.

Calumet is a specialty products business, and that will always be our core focus, but our flexibility to shift feed stocks and integrate internally to match market conditions is a core strength and differentiator. As we do this, our assets are operating at high utilization with good reliability. And in the first quarter, our facilities recorded the largest production volume we've seen an over 3 years. We'll wrap with an update on MRL in a bit, but first I'll turn the call over to Vince to take you through our first quarter results. Vince?

Thanks, Todd. I look forward to meeting our investors and analysts and working with you all in this role. Moving to Slide 5, our specialty products and solution segment generated $28.1 million in adjusted EBITDA in the first quarter, which is flat sequentially. As Todd mentioned, we were pleased to deliver over $50 per barrel of specialty material margin in the face of a record spike in feed cost. The SPS team did a great job of rapidly passing through these higher costs. And ultimately, we ended the quarter well positioned to benefit from the favorable market environment. At the same time, fuel margins increase significantly throughout the quarter as the industry is challenged to keep up with global demand as European gas prices continue to provide a meaningful cost advantage for US producers.

Asphalt experienced the largest margin challenge in the SPS segment, as it is priced the month prior to delivery. For example, March asphalt, which priced when crude was approximately $90 per barrel. And there was a point in March when crude was more than $30 per barrel higher than that. Despite the challenge, fuels and asphalt material margins increased to $918 a barrel, which is the highest we've seen since we started reporting this metric. Our plants also ran very well throughout the quarter; late in March, we prepared for a planned secondary lube focused turnaround at Shreveport and in April, that was completed on time and on budget. During the turnaround, we also reinforced our utility system, which is one of the targeted high return reliability improvements we mentioned on the last call.

Moving to performance brands on Slide 6, you can see our latest true fuel offering, which is a larger 2.1-gallon container. We recently launched a national campaign to market this larger size, following a strong demand response from our regional marketing program on Slide 7, the business generated adjusted EBITDA $5.3 million. Last quarter, we reported that we were seeing a light at the end of the supply chain tunnel that we could catch up with demand make a dent in our backlog. We were able to accomplish this in Q1 as our backlog was slightly reduced. Unfortunately, just when we thought we had caught up with pricing, we saw the tremendous feed stock cost increase and the PB team went back to announcing price increases to catch up. Demand is strong in this segment. And we continue to expect to reach normalcy in this business in 2022.

Supply chain and price lag have dominated the headlines in performance brands over the past year. But our team has also been formulated and marketing new products. Our BioMax brand in particular is showing real promise. BioMax is a high performance environmentally friendly lubricant that was designed for the shipping industry. However, as its performance gains a reputation, we're seeing demand spread rapidly across other industries. Most bio based lubricant solutions, underperformed traditional products, but our customers and our team have been favorably surprised by no loss of performance from this unique and sustainable offering. It's an early-stage brand that grew over 100% in 2021. And in the first quarter more BioMax was sold than all of last year.

Also in the first quarter, we became ISO 14001 certified. This was no easy task and receiving this designation is a recognition of a changing world and the commitment we have to both progressing our high-performance brands and enhancing their environmental performance. Moving to Montana renewables, we turn to Slide 8, Slide 8, which shows a picture of a canola field. Canola is a crop that grows an abundance on both sides of the border, around our Great Falls facility. We expect canola oil to be part of our renewable feed stock slate. Recently, the EPA announced a proposal for canola's pathway into renewable diesel production.

On Slide 9, our Montana renewables business generated $9 million of adjusted EBITDA, which is roughly in line with the fourth quarter of 2021. Both of these quarters represent a good mark for the winter season. Fuel margins were good during the quarter, but here again, we see the impact of rapidly rising oil prices on our asphalt business, which is a significant portion of our total production. We also saw the normal slowdown in winter demand that is expected in Montana during the quarter, which typically reverses as we get into the spring and summer meaningful asphalt price increases are in and so far, so good on crude price stabilizing. In fact, we're extremely excited for this upcoming asphalt season in Montana, as we just completed the polymer modified asphalt project, which will upgrade our asphalt, which is already extremely high quality, into one of the premier paving materials on the market. We're also looking forward to the spring and summer margins awaiting us in Great Falls and even more excited about the Montana renewables project that continues to progress well. With that, I'll turn the call back over to Todd.

Thanks, Vince. Let's move to Slide 10 and continue with MRL. We've made substantial progress since we spoke 2.5 months ago, let's talk to project first and then we'll do commercial. First, our procurement team has been working miracles and we're roughly 80% done with engineering and procurement. We actually started a procurement process about this time last year as global supply chain challenges were starting and we felt the need to get ahead. It hasn't been easy, but our team has been able to deliver with essentially all purchases of long lead items complete. This leaves efficient construction in the field as remaining variable ahead of us to manage. On timeline, we remain on track to commission the plant in September.

Commercially, our geographic advantage is becoming more evident by the day as our feed stock efforts are moving ahead of plan. We've agreed to terms on approximately 5,000 barrels a day of renewable supply, which you'll remember is the volume that we'll use during the commissioning period starting in September. We'll start receiving loads late next month to start the fill plan. Through this feed stock procurement process, we focused on geographic advantage. We're not looking for specific magical feed stocks like used cooking oil, as we expect all feeds will evolve overtime to what we call CI parody. So, let's talk about how we've gone about this.

We started by identifying all potential feed sources, where we have a geographic advantage compared to other RD hubs. It's through this process that we verified there's roughly 10 times more available feed stock than we ultimately require in our advantaged area. We then went out and hired people who have the relationships and experience to de-risk execution. And as I mentioned earlier, we've been pleased to see how attractive MRL is to phenomenal talent. Last, we reached out to the suppliers. Even though we had conviction in our analysis of regional supply demand balances, the headlines of feed scarcity, honestly had us a bit nervous in the beginning.

What we've experienced has been the opposite. It's evident that farmers and meat renders are economically rational and they're very happy to sell to local purchasers with short supply chains. We're able to secure the first tranche of supply quickly, and we have a clear line of sight to the rest that will officially execute as we get closer to full run rates at the end of the year. We do believe that we're unique as not many other locations could identify as much oil seed and animal fat supply within 500 miles as Great Falls can. I'd also note the recent proposed rulemaking from the EPA that's clearing the way for a canola pathway through renewable diesel production in the United States. Even though we've expected to sell canola-based RD into Canada for some time given our proximity, it's nice to know that 60,000 barrels a day of Canadian exported canola oil will be suitable for US markets too as most of that production is close to the Great Falls than any other facility.

On off take, we feel that we're in the bottom of the eighth inning as commercial agreements have been reached with 3 major off takers, that account for all of our renewable diesel volume. We've also committed to the sale of roughly 2000 barrels a day of SAF or sustainable aviation fuel, which makes us one of the first movers in its early-stage high growth business. These are first class customers, and although we can't share their names publicly yet, you'll recognize the group immediately as large, highly credit worthy companies. Like with feed stocks, the demand for renewable diesel has been better than we expected. In fact, the intense demand from those who are most in to know leaves us thinking that renewable diesel market might just be even shorter than we even expected for the foreseeable future.

Last on MRL, our capitalization plan has also advanced meaningfully. A third-party transaction was done in a quarter that confirmed our valuation expectation and markedly thinned the field of independent, renewable diesel producers. And we've since engaged Lazard to formally optimize our equity options. We also expect to raise debt capital, which is strategically tied to the equity. Securing a $500 million term loan would replace our current Oaktree bridge loan with permanent capital, thus removing the convert and mandatory prepay. And it would provide the funds necessary to complete the project. This creates a clean and simple backdrop to execute equity upon, whether that equity is a cash sale, a public markets transaction, or ultimately both.

In summary, as we sit here today, Calumet is more than optimistic about 2022 in all of our business lines. We know we live in a very volatile world right now, but the margin environment looks to have some staying power. And while our core de leveraging plan sits within MRL, we expect our specialties business can potentially generate excess cash flow this year to further deleverage the company. And at MRL, we'll continue to execute the plan to stand up this truly unique and transformational business. With that, I'd like to turn the call over to the operator to open the line for Q&A. Operator?

(Operator Instructions) The first question will come from Amit Dayal with H.C. Wainwright.

Good to see all this progress. Congratulations on executing against that. With respect to sort of any additional color on spreads and margins, guys? Can you talk a little bit about how you are situated for the next few quarters, from that perspective? Is there maybe some risk where you're capped at the top line in terms of prices, et cetera, but feed stocks remain elevated?

Hey, Amit, it's Todd. Let's start with specialties kind of on that, and then we can go to kind of renewable diesel outlook, if that's where you're going. But on specialties pricing, I think we feel pretty competent and very comfortable with where we're at right now. Obviously, we had quite a run-in feed stock prices in Q1. Thank goodness we made the commercial excellence progress we have, because we were able to keep up with those increases pretty ratably. As we sit at the end of the quarter here, those increases are in and we feel pretty confident about the next quarter and path forward. So, like we said on the call, we're in max crude mode.

Honestly, this is kind of funny to say, given here, we're specialty focused, but the specialties are a little bit along for the ride here. We're really pleased with how margins have held up in Q1. We're pleased with where we sit for Q2, but we're going to process as much crude as we can at the same crack spread kind of environment that we're seeing in the front. So, we think specialties will keep up. We're confident in demand so far, we've been able to push it all out and don't see a whole lot changing there in the foreseeable future. I don't know if Scott, if you have anything to add, or Bruce, we want to jump over to Montana.

Hey, Amit. It’s Bruce Fleming. So, on the spreads and margins question around renewables, I would just point you to the investor deck, the Montana renewables investor deck. We've got charts of how that has played out over the last 5 or 6 years. And we think vegetable oil is the incremental feed for the industry. It has more than tripled in price and that has done nothing at all to the margin. It's just like crude refining, we're going to float on the feed stock price and get a fixed margin above that.

Okay, understood. With respect to sort of the de-leveraging efforts, guys, I know you highlighted, you have certain things in prayer now. With the visibility you have, can you give us a sense of where you might end up by the end of the year with respect to quarterly interest rate levels, et cetera?

Yes, I think we're in a pretty positive position, like you said, end of the quarter super strong on liquidity. So, the days of kind of worrying about that seem to be behind us. So, 400 and some, $412 million, I think we ended the quarter with. Going forward, we do expect to generate excess cash this year. Obviously, given some assumptions on current crack and margin environment holding up, but as it sits right now, where we end the year is simply an outlook on what the remaining year holds as far as crack spread environment, which will translate to EBITDA. But I would say it's improved pretty dramatically throughout the first quarter. And as we sit here looking forward, we are pretty comfortable with our ability to improve liquidity and generate excess cash.

Okay. And then CAPEX is still at the $115 to $135 million range for this year CAPEX spend?

You got it. Nothing's changed there. In fact, got done with the turnaround in Shreveport in April, like we mentioned, that went really, really well on budget, on plan. So, that was a reasonable chunk and we'll continue to move forward, but no change to the forecast.

Okay. And you said you've engaged with R for MRL. So, should you assume that your prior comments about potentially spinning off MRL as its own public entity? Is that still in place?

Amit, it’s Bruce again. So, since we last spoke, there's been a number of developments. Todd mentioned one that was REG being bought by Chevron and that transaction pretty well confirmed our thinking on enterprise value. So, we've accelerated our Montana renewables recapitalization. The highest shareholder value for the Calumet shareholders is probably to get Montana renewables public, but that's not necessarily a current objective. We think the capital markets are open, very open to the kind of value proposition we've got here in Montana renewables. So, Lazard is going to be a strategic advisor as we test a couple of different, suggestions that have been made to us by third parties.

And the next question is from Roger Read with Wells Fargo.

Let me take a slightly different tack here. I mean, I think we all can look at the crack spreads. We can look at the outlook for renewable diesel be pretty positive, but I was just curious with some of the price moves and everything you've seen, is anything weakening on a demand front across any of the 3 segments?

I'll start off and then see everybody jumps in and responds. So far so good, Roger. There's always the risk and I think a lot of that's driven by just pure flat price and type of any recession risk or any of that you hear floating around. But as we sit here today, we are able to process crude to current price, move all of our products, including some of the higher priced specialty products without much impact on demand. In fact, obviously the highest margin area is performance brands and we see demand in that segment as strong as ever. So, as we sit here today, we're pretty comfortable with where demand is. If we see another skyrocket and flat price crude doubles from here, I think we may have to revisit that, but right now, I'll sign points to pretty favorable rest of the year.

Okay. Well, I was going to wait and see if anybody else jumped in for him into the next question, but on the MRL project, you obviously said you were very much more comfortable on both the supply and the offtake side. I was just curious when we've talked before, it's been that a lot of this product might ultimately go to Canada, about giving away the companies that you might have agreements with. Is that still the way we should think about it or is there a much larger demand coming from the continental US as well?

Hey, Roger, it's Bruce. I'll take that one. So, there's a tapestry of demand. You've got a bunch of jurisdictions in low carbon fuel space, state and provincial. You've got the rest of federal Canada coming online there next year. And of course, you've got the RFS umbrella over all of that. So, it's actually interesting that it's an optimization chance and what our off takers, who, when of course, we eventually reveal them, you're going to see our very recognizable blue-chip names and very sophisticated operators. They've elected to lift FOB. They're going to get to participate in the optimization that I just signaled and we're going to be fully compensated for that. So, we think that we're forming some pretty good partnerships with these off takers. I've been on record before, and I'll say it again. I'd be surprised if our physical barrels fall further than 100 miles from Puget Sound.

Okay. So, it sounds reasonably consistent with prior expectations. Okay. Well, I'll hold it…

There's no, yes, just to be clear, there's no change in our thinking and outlook there. What has changed is we've bolted on the sustainable aviation fuel offering. We always had the hardware capability for that, and we were looking for the renewable jet off take partner and we found one. So, we’re pretty pleased with that initiative. This is something that a lot of people talk about, but frankly, very few are actually doing much. And we’re a quasi-first mover. We are a first mover in the Pacific Northwest, so we think that's going to be an important growth factor down the road.

Yes. Like I said, I was going to leave it to 2 questions, but if no one else asks, I'll come back around on the SAF. Thanks, guys.

Thanks, Roger.

The next question is from Carly Davenport from Goldman Sachs..

Wanted to just start on the MRL side, particularly on the pre-treatment unit. Could you just give an update there on progress in terms of construction timing and how costs are tracking?

Yes. So, timing and cost are tracking. Progress is beginning in the field. It's at the site prep level. This is not like building a conventional refinery process unit. It's some pretty simple vessels. The critical path key was purchasing the oil water separator, which had been fabricated overseas and never installed for another client. So, we got a procurement success in that regard, which has allowed us to hold timeline.

Got it. Great. Thanks for that. And then the follow up was just kind of around the SAF comments. I think some of the other players in the space that we've heard from the view has been that the economics have been a bit more challenged for that product relative to some of the other renewable fields out there. So, can you talk about kind of, from your perspective, what's differentiated the offering that you can provide there, and how we should think about the economics of the SAF piece versus the renewable diesel piece?

Sure. The first key is that those molecules were always in the production, and so the base value is always going to be leaving them in the renewable diesel. The second disposition would be Canadian Arctic spec winter diesel, which is a higher uplift. And the third is sustainable, a fuel, which is a higher uplift. So, that's the seriatim, but we've got 3 places to go with the physical molecule. The question about the jet fuel sustainable pricing is an interesting one. That industry is still forming. I think this is bespoke, and we've got an offtake partner for the jet that definitely knows their way around the emerging segment. So, we're planning to exceed renewable diesel revenues. And look, if we don't, it stays in the renewable diesel. The fact that we've got the physical optionality is one of the keys to our competitive advantage in Great Falls.

The next question is from Gregg Brody from Bank of America.

Nice to hear the new team or the revised team, I should say. Looking forward to meeting you. Steve, I know you're probably sitting somewhere in the room, over there being silent, but it's good to hear all you. On the fuel product side, it's been a while since you've been able to think about this, but you used to hedge there. I'm curious what your philosophy is going forward. And if you're thinking about lock in some of the fuel products rates.

Yes, no, it's a good question. We're certainly happy to be back in an environment where we can have those conversations. So, it's actually something we talk about every day and a lot more recently. So, we did start layering on some cracks actually when they started spiking early in the Ukraine. That time is a little bit uncertain as to how long that would go and level certainty, et cetera, saw an opportunity to conserve some pretty strong margins for the year. So, we went ahead and bid off about 9,000 barrels a day of 211, which put it in perspective is about 20% of our fuels make.

So, it's something that we might add some length to out the curve. It's really hard to get too excited, honestly, given the extreme backwardation in the front months. So that's why it's been a little bit harder than normal. So, we look at it, we’re watching it closely. It's important to us to add some stability under, give our leverage position to kind of increase the likelihood that we're going to have that free cash flow to kind of ramp up the de levering. So yes, we're watching it close and it started.

Are there any, you mentioned you've put in some edges at the beginning of the Ukraine crisis. Are you, I guess you'll disclose in your queue what those are? I don't know if you could, I would think they might be a little below market where the market is today. Are there, do you foresee any collateral postings with that that are meaningful?

We don't, obviously our hedge positions are secured by the assets and the CTA. So just to give a little more color, it's 9,000 barrels a day of crude 211, around 27 bucks a barrel. So yes, clearly under market at the current extreme prices. Hope they go a little bit further under market, to be honest, but we'll see how that plays out.

And that's for all 22?

Yes. $27 flat across the year. Correct.

Got you. Maybe shifting gears just to the asphalt market, it's been a while since I've started this being a credit guy, just how is that market acting relative to what's happening with the fuels products market and the rise in crude? I know you said there's been a lag every on a monthly basis, but I'm just curious, are margins consistent or are they going up as well?

Yes, like you said, I mean, in the first quarter it was all about the lag. So, they look worse than they really are. We had a record asphalt price increase at the end of March. We expect quite a bit of stability under those margins, as we look at kind of alternative value for those molecules. And going into coker feed, obviously there's not some of the heavier Russian oil coming over that was feeding cokers on the Gulf coast. We're seeing those heavy molecules extremely short. So, our expectation is that we will continue to be able to push up asphalt prices in the event that crude was to run. We'll see a little bit of lag because that's just the way that industry prices, we priced a month prior, but as a whole, we don't expect much drag on EBITDA from asphalt.

Got it. And just remind us, in the SPS business, how much of that is asphalt?

We do about I’d say 5,000 barrels a day-ish of 5, 6,000 barrels a day of asphalt in SPS.

Got it. Right. And I believe it's like it's like 8 or 9 in Montana.

That's right.

When you, just thinking about now with, in this dynamic refining environment, you're going to have to shut down the Montana refinery, or can you talk about how you shut down the Montana refinery, how long it's going to be, will parts of it be working just so we understand how to model that?

Hey Gregg, it's Bruce. The plan is to be down, excuse me, in August. We need to de-energize the site, so we're not going to try to run part of it. We'll do the splicing or unsplicing, change the catalyst for the renewable feed stock and come back up. So, we'll have production in September. The turnaround execution guys are finalizing the details. So, I don't have the oil-to-oil outage. We do have a good amount of tankage relative to our size. So, we're going to leverage inventory build and draw plan as part of that. If you had to stick your thumb in the air, figure a month of lost production.

Got it. Then I get it. You got to max that out. And maybe just change to performance, you said you expect normalcy in 2022. Do you believe you can pass through higher crude price into your performance products and get margin back up to where it's been historically? Or do you think there'll be some challenges there?

No, we think we think we can pass through and we've been able to pass through as we've followed feeds up. The issue there is every time we think that we're caught up, obviously feed stops keep running. So, so far, we've been able to pass through the increase, like you said, it's just the 90, 120-day lag in that business. And the feedstock market hasn't given us time to settle out. Now we've got the supply chain, obviously that is, that is settled down as well. So, we do think that we can keep up with kind of increasing demand in that space as we move forward, which is kind of more of the normalcy in 2022 comment. I may stop there. Marc, anything to add on?

No, thanks, Todd. So, no, I don't think there's anything other than the, sort of the additional bit of color is that as we sort of see normalcy, there isn't a surplus of supply out there. So, we're not going to see a sudden reversal the other way in terms of sort of a large amount of material available, but to reinforce Todd's point is that it was a record set of price increases for the lubricants industry on record last year. And we facilitated 3 further increases this year already as well. So, it's back to Todd's point is that we can pass them. It's the lag that is the piece that we got to sort of factor in.

So, do you think that means we can actually, the Q2 we're going to see EBITDA come up quite a bit, just to levels we saw in 2020?

We'll see an improving - yes. Sorry. Yes, we'll see an improving environment there. Definitely, Gregg, based on what we see at this point in time, but as sort of Todd alluded to at the start is that Q1 was a record increase of basically in absolute terms in terms of sort of WTI move and the like. So, there's still an element of uncertainty around what the markets will do and where that volatility will be. We are 100% confident in being able to pass the prices through. So, that's sort of our start points. We've got the material; we’ll continue to work and move that along.

Yes. And I’ll pile on, Gregg. Obviously, the crude run happened primarily in March, so that was the spike. So, feed stock prices are up, they've been passed through, like Marc said, we'll continue to see margin improvement throughout the quarter, but by the time we get through the whole 90 to 120-day lag, your kind of into early Q3 by that point. So, expect improvement in Q2, full benefit in Q3.

Got it. And then just to, I'll turn to sort of 2 last questions for you. Obviously higher food prices, that's been inflationary. Are you seeing inflation in any other parts of your business and sort of how is that impacting the Montana refinery, costs or capital costs relative to your original expectations?

If I take the Montana one first, and then I'll give the general business one back to Todd, the fact that we procured most of the construction materials, the major vessels, the long lead items means they can't inflate. They cannot inflate. We have a lump sum engineering and procurement contract for the renewable hydrogen plant, so that cannot inflate. Mostly what's in front of us is paying the craft to complete the field construction activities. So, if we do see an issue, it would presumably manifest in wage rates site productivity, that sort of thing. It's hard to feel that that's going to be a material step change to our total installed cost outlook.

Yes, I feel the same about the rest of the business. Naturally, you'll see a bit of inflation everywhere, but we'll be following the trends of the market. So, nothing should really change as far as kind of structural dynamics, anything there. Obviously, the highest inflation is an energy prices, and even though we see cost of natural gas, for example, increasing, still pretty meaningfully advantaged relative to the international market, so expect to play for that to play through the cracks.

Got it. I think and just, you, obviously, it sounds like you've had your supply chain issues addressed that were that impacted business last year. Is there anything that you you're concerned about that you see that's worth highlighting?

I think generally just talking about unknown world environment, right? I mean, there are a lot of things that we think we're focused on in our business and the team across the companies every day focused on managing risk, but the unknown is just it's a pretty crazy world out there right now. And general inflationary impact, Ukraine, you name it, something that we're watching closely and trying to understand how some of those dynamics can impact our business.

And then I'll just tell one last one in here. So, I appreciate you've hired Lazard and you also have this loan process going on, which I think is near conclusion. What do you think the timing around monetization is right now? Are you, I think before you were talking about an IPO sometime next year, does this process with Lazard potentially accelerate that, and maybe just sort of frame up how we should think about it?

This is Bruce again. The sense that you've developed that we're accelerating our engagement with the capital markets is correct. We had a number of positive catalysts that led to that. So basically, if you take the existing Montana renewables entity, which is fully separated legally from the company already, we just happened to still own 100% of it, and you look at the way we put the balance sheet together last year, that was for the purpose of completing the business launch for Montana renewables. Oaktree was the great partner for that. And we feel good about how that is all moving, as you've heard. As you pivot from the business launch to a regular way corporate entity, we're going to want the permanent capital, which Todd mentioned.

We have always said that we will take on an equity partner at the right point. We would be looking for fair value, but we'd also be looking at the quality and the particular alignment aspects of that partnering and anything we entertain ought to be reasonably likely to get done, because these things can become big distractions for a small operator like us. So, Lazard will be very useful to pick our way through the specific suggestions that have come in from third parties. And yes, we think this year, not next year.

The next question is from Jason Gabelman from Cowen.

Hey morning. Thanks for taking my questions. First, going back to just the friends and the specialty margins, which seemed to be improving. I mean, can you give us a sense of where that shook out in April versus Q1, and then just so I understand, I think in the past, you've mentioned that specialty margins, to some extent, crack, what diesel prices are doing, is that fair in this environment, just given what diesel cracks have done?

Hey, Jason, Scott here. So, as we think about our specialty margins, in terms of where we're at today, Todd had mentioned during the first quarter, with the run up in crude, we did have some compression, but overall, we were pleased with how we executed against the run up in crude. Still delivered over $50 a barrel. What we've seen in April here in early Q2 is some of the flow through of our price increases. So, we’re feeling pretty good about where we're at today and managing this volatility in the market.

Got it. And just on that part about diesel, was that an accurate statement? Just that the, yes…

Scott here. So, certainly in some business, like our solvents, it definitely floats on top of the diesel. Other business base oils can float on top of VGO. So, I think the strength of the fuels and the intermediates market only serves to support our specialty margins and give us the optionality that Todd alluded to earlier that we have in our business model.

Yes. This Steve, if I could just show them what Scott says. I mean, I think the reality was at the beginning of the year based off market, to be honest, was looking a little squishy, and actually the way we collect that diesel value of the margin, excuse me, is some of the least special of the specialties end up in the diesel pool instead of going to specialties, which has snugged up the specialties market quite nicely. So, we play that optionality and optimize it all the way. And I reiterate think Scott and the team have done a magnificent job of making sure that our specialties business is by and large stapled really well to the diesel crack.

Got it. Great. That's helpful. And then moving to the green financing and MRL, can you discuss just, are there any kind of make costs or debt extinguishing costs for Oaktree? And then with the $500 million, I guess that you're looking to raise, do you have a sense of where that rate could come out and do you expect that'll leave you with any excess cash at MRL once the project is up and running?

Yes. Good question. So, I'll try to take it, and Bruce, feel free to pile on, but so debt extinguishment costs on Oaktree have always been 11%. So, on a $300 million think kind of $34, $35 million ish there, as far as uses for a potential loan. Rate, hard to tell at this time. Obviously, the market's not going with us, but the cost right now, rate isn't really what this is about. We're pretty comfortable that we have a strong project and we'll get a competitive rate, have a lot of interest, have a lot of positive feedback in that, but really primary function of a debt raise is to simplify, clear up kind of the convert pre mandatory prepay, simplify the structure before an equity deal.

Right. So, just highlight that. And then as far as excess cash, we're planning to have a little bit of buffer in this. So, if we were to do $500 million bucks, there's plenty of room for buffer on construction costs, et cetera. So, in the base case, we would expect to have some excess cash flow through to the balance sheet. And we're not going to cut it. Try not to cut it too close on that, give ourselves a little bit of room if needed.

Thank you. Ladies and gentlemen, this concludes our question-and-answer Session. I would like to turn a conference back over to management for any closing remarks.

Well, thanks, everyone, for your time and interest and joining us today, and go ahead and have a great and safe weekend. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.