Delek US Holdings Inc (DK) 2018 Q4 法說會逐字稿

Good morning. My name is Ella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek US Holdings Q4 Earnings Call. (Operator Instructions) Mr. Keith Johnson, you may begin your conference.

Thank you, Ella. Good morning. I would like to thank everyone for joining us on today's Conference Call and Webcast to discuss DK's Fourth Quarter and Year-end Financial Results. Joining me on today's call is Uzi Yemen, our Chairman, President and CEO; Kevin Kremke, EVP and CFO; and Fred Greene, EVP and COO as well as other members of our management team. The presentation materials we'll be using during today's call can be found on the Investor Relations section of Delek US' website. As a reminder, this conference call may contain forward-looking statements as that term is defined under Federal Securities Laws. Please see Slide 2 for the Safe Harbor statements.

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles, or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to comparable GAAP results, which can be found in the press release, which is posted on the Investor Relations section of our website. Our prepared remarks are being made assuming that the earnings press release has been reviewed, and we are covering less segment and market information incorporated in the 4Q press release.

On today's call, Kevin will review financial performance and Fred will cover operations for the quarter, before turning it over to Uzi for -- to offer a few closing strategic comments. With that, I'll turn the call over to Kevin.

Thanks, Keith. We had a great quarter with record results and solid cash flow generation from our operations.

As you can see on Slide 3, for the fourth quarter 2018, Delek US reported net income of $121.6 million or $1.48 per diluted share compared to net income of $211.1 million or $2.56 per diluted share in the fourth quarter of 2017. On an adjusted basis for the fourth quarter 2018, Delek US reported net income of $129.8 million or $1.59 per diluted share compared to an adjusted net income of $47.6 million or $0.58 per diluted share in the prior year period.

Our adjusted EBITDA increased by 52% to $251.4 million in the fourth quarter of 2018 compared to $165.1 million in the prior year period.

Our consolidated contribution margin improved to $285.4 million in the fourth quarter compared to $214.3 million in the fourth quarter of the prior year. This was led by refining as it benefited from a wider Midland and Cushing crude oil differential that drove a contribution margin of $235.3 million compared to contribution margin of $185.8 million in the fourth quarter of 2017. Logistics also improved on a year-over-year basis. During the fourth quarter of 2018, our G&A and overhead expenses were higher by $30 million on a combined basis, primarily due to the combination of higher expenses related to our incentive plan and refinery maintenance. We had great financial performance during the fourth quarter of 2018 and generated approximately $359 million of cash from continuing operation, as shown on Slide 4.

Taking into consideration, our cash capital expenditures of $94 million, our free cash flow during the quarter was $265 million. This supported our ability to return $179 million of cash to our shareholders.

Slide 5 highlights our capitalization. We ended the fourth quarter with approximately $1.1 billion of cash on a consolidated basis and $704 million of net debt. Excluding net debt at DKL of $696 million, we had net debt of approximately $8 million at December 31. The financial flexibility provided by our balance sheet should allow us to fund our midstream projects with 60% to 70% debt, depending on our cash generation and alternative investment opportunities. With the volatility and crude oil differentials and crack spreads, I wanted to highlight the potential EBITDA from our current operations. We have used variations of this slide in our IR decks in the past. Using a long-term average of $2.50, Midland discount to Cushing and the crack spreads highlighted on Slide 6, our current operations have the ability to generate approximately $750 million of annual EBITDA. Please note that this is before taking into account the Alky project at Krotz Springs that should be operational in the second quarter of 2019. We also included a potential benefit from the RINs waivers at our El Dorado and Krotz Springs refineries, which we have consistently received in the past. That would bring our EBITDA potential to approximately $826 million. I'd like to note that the 5-3-2 ULSD crack spread used in this analysis is $15.65 per barrel. We've seen an improvement in crack spreads from the lows earlier this year. Current trading and the forward curve from March to December is similar to the long-term average used in this case.

As we complete our midstream initiative, we should have the potential to generate approximately $1 billion of EBITDA before any IMO 2020 benefit.

As we continue to develop our operations, our goal is to add less crack spread and differential-dependent EBITDA over time due through the combination of our midstream investments, the Alky project at Krotz Springs and our retail business.

On Slide 7, we highlight our disciplined approach to capital allocation, the list of balance returning cash to shareholders and prudently investing in the business to support safe and reliable operations, while exploring opportunities for growth.

We have discussed this in the past, but as a reminder, our goal is to use our financial flexibility to balance the different aspects of this program based on valuations of each opportunity and how it matches our strategic goals for the company while factoring in market conditions and expected cash generation.

As we think about different investment opportunities and the nature of the industry in which we operate, our goal is to maintain a strong balance sheet in an effort to provide flexibility through the cycles in this business as we focus on creating long-term value for our shareholders.

On Slide 8, I wanted to provide some guidance for modeling in the first quarter of 2019. We added a couple of items this quarter, including our estimated diluted share count, excluding Q1 of 2019 share repurchases and a market structure outlook. We estimate, based on the forward curve, that our realized Midland discount and our gross margin would be in the range of $3.50 to $3.80 per barrel, which would help to continue driving cash flow generation from our operations. With that, I'll turn the call over to Fred.

Thanks, Kevin. During the fourth quarter, our total refining system crude oil throughput was approximately 272,000 barrels per day. As shown on Slide 8, for the first quarter 2019, we expect crude oil throughput in the refining system to average between 250,000 and 260,000 barrels per day.

This takes into account the upcoming turnaround at the El Dorado refinery, which will begin on March 11 and downtime associated with the pump seal fire in El Dorado on February 6. The refinery was down for approximately 7 days following the fire and began operating in a slightly reduced rate on February 13. It will remain at the lower throughput until the turnaround begins.

During the first quarter 2019, we expect the crude throughput at El Dorado to average between 37,000 and 42,000 barrels per day.

On Slide 9, I want to highlight our capital spending and give you an update on a couple of projects. Our capital expenditures during the fourth quarter were $106 million compared to $79 million in the fourth quarter of 2017.

For 2018, we spent approximately $317 million. Our 2019 capital expenditures are forecast to be $350 million. This amount includes $224 million in our refining segment, $18 million in our logistics segment, $18 million in retail and $91 million at the corporate level. Spending on the Big Spring Gathering system is included at the corporate level and for 2019 and is approximately $80 million. As I previously mentioned, we plan to begin the El Dorado turnaround on March 11 and the refinery is expected to be fully operational by around mid-April. The expected cost is approximately $30 million to $35 million. This is a shortened turnaround format that will allow work to be completed on the majority of the process units. During the September, October timeframe, this year, we have planned maintenance work on certain units to complete preparations to produce Tier 3 gasoline. Our Alkylation project at the Krotz Springs refinery is expected to be operational in early second quarter. We spent approximately $103 million in total for this project through the end of 2018 and the expected total cost is approximately $130 million. Based on current market prices, the expected annualized EBITDA will be in the range of $40 million to $45 million. As a reminder, this project should provide additional production flexibility at Krotz as it improves the ability to convert low-value butane and butylene into higher-value gasoline products. The future EBITDA generated by the Alky unit will further reduce the portfolio's dependence on crack spreads. Progress continues on our Big Spring Gathering project. During 2018, we spent $79 million, and we expect to spend approximately $80 million this year. This compares to our previous guidance of $125 million to $130 million for 2019. The change is due to a number of factors, including optimization of routing and timing changes for some producers on the system. Taking this into consideration, the expected total cost is approximately $170 million compared to our previous estimate of $205 million. The system will still have the previously stated capacity of 300,000 barrels per day. Currently, we have more than 200,000 dedicated acres and expect this to continue to grow. This new business line has an expected annualized EBITDA in the range of $35 million to $45 million by 2022, including accrued quality benefit in our refining segment. Next, I'll turn the call over to Uzi for closing comments.

Thank you, Fred. And good morning, everybody. We had a great year in 2018. Our business generated record $854 million of adjusted EBITDA for the year, which was 104% increase over 2017. We utilized the cash flow created by this performance to invest in our business while returning cash to our shareholders. We laid out our strategy to grow our midstream business through organic projects with attractive multiples.

These projects should provide more diversity to our EBITDA over time. Our Gathering system is progressing, and we continue to evaluate the potential combination of different pipeline projects. We believe this would create a more capital efficient and better-utilized projects for all our partners when it becomes operational. Also, a combined project should be beneficial to the supply takeaway balance in the Permian Basin. The combination of these initiatives grows our Permian Basin platform and it along with other projects, should help us achieve $370 million to $390 million of midstream EBITDA by 2020.

As shown on Slide 10, in 2018 total cash return to shareholders was approximately $445 million or about 16% of our market capitalization on February 19. Our capital allocation program balances cash to shareholders with potential opportunities for growth.

Currently, we believe our stock is attractive investment and we intend to repurchase $50 million of Delek's stock in the first quarter of 2019.

In addition, our Board of Directors approved a 4% increase in our regular quarterly dividend, which marks our fourth increase since the first quarter of 2018.

We remain focused on creating long-term value as we balance returning cash to our shareholders, investing in our business and exploring opportunities to develop the next stage of our growth. With that, Ella, will you open the call for questions, please?

(Operator Instructions) Our first question comes from the line of Neil Mehta.

I wanted to start off on the PGC pipeline and the latest in terms of your commitment to that -- developing that asset. It sounds like the message from the release and from the presentation today is, you absolutely want to continue to grow the midstream business in logistics EBITDA as you diversify the business over time, but then what is the potential to farm out some of that stake or merge that pipeline with an alternative?

Well, we all -- Neil, we all know that in the past, and we've said it many times, in the past not all -- enough pipelines will be built. We don't think that the situation is much different this time. We are working with our partners, our PGC, and also other opportunities to see if it makes sense to combine a few of these pipelines. We absolutely believe that our long-term strategy, especially in light of the fact that our Gathering is growing and growing faster than what we expected because of the thrust of the producers in our Gathering, and the return on the Gathering, you probably heard us say, that we are expecting 4 to 5x EBITDA on the Gathering as it grows, more and more barrels, we don't want to turn them away. So we are committed to continuing to grow this midstream asset or business if you will. While at the same time, and we want to be very clear, balance the supply/demand situation in the Permian Basin as we enjoy differential as they get wide.

I appreciate that. And then Slide 6 was helpful in terms of framing out what your normalized EBITDA potential could be. Uzi, I guess the counter argument would be with just so much pipeline capacity coming online, and Exxon and Plains moving forward, it looks like, with their pipe as well. Is the $2.50 Midland -- WTI Midland, a realistic base case, or could we see a scenario where that differential actually inverts? So your thoughts there. And then maybe if you want to combine that with your comments on it's not just about WTI Midland, it's about Brent Midland.

Exactly. And we heard other people. I'm sure some of your peers Neil will ask that question if we are cutting any production. And the answer is, absolutely no. Because as you know, our company is not based on Midland Cushing, it's based on Midland Brent. And that number, as of today, is a little less than $10. So that $10 is a huge tailwind to our company, and every barrel that we process we make money. We are certainly preparing ourselves to the situation that the $2.50 is not $2.50 we don't think that there is a big chance that the premium will stay here for the remaining of 2019. It may do though. We just saw yesterday the numbers are coming from the EIA saying that the production in January was 120,000 barrels more than what they expected before that. And in February, 160,000 barrels more than what they expected. So the balance in the Permian will shift again. However, I want to be clear, we don't think that in 2020, we would see $2.50 and that's the reason we work other initiatives to compensate for this $2.50. The $2.50 are just an illustration for differential over a long period of time and not a data point at any given moment.

Our next question comes from the line of Manav Gupta from Crédit Suisse.

A quick follow up on Neil's question. Uzi, I've known you a long time and you've never done a bad deal in your life. We are basically seeing a little bit of an overcapacity here on the Permian. And I just wanted to know, if you see these pipes, which are coming on before you, and for some reason they are not filled because another big E&P producer in Permian today announced a 17% CapEx guidance lowered. And would you even consider the option of not going ahead with PGC, if things don't work out the way you're thinking right now? Is that an option?

Manav, we do know each other for a long, long time. I don't think, and we don't think that we should do any project that is not targeting 5x to 7x EBITDA. So on the midstream side, obviously, the threshold, and Kevin laid it down on one of the slides here. So we certainly expect these returns, but that's our threshold to do a project 5x to 7x EBITDA. Now remember that these projects are long-term projects, they are not short term. But that's our threshold, and I don't think that we're going to change our mind in regard to any other project.

Okay. And looks like the Alon assets are actually outperforming the legacy Delek assets here in refining, so can you throw a little light of all the work that you are doing at Krotz as well as Big Springs, that's allowing you to drive the beat over there?

Assi, do you want to take the question about Krotz?

Sure. So you can see with Krotz that we're continuing to run more Midland-type crude. And this initiative paid off throughout the year. Also, as you remember Krotz in the past was losing a lot of money because of its inability to sell its products in markets. And we are making progress on initiative to go to the wholesale market. And as you know, a lower RIN price, really -- positively impacted us. And when you think about where we are today, RINs continues to stay very low, which is very helpful and supportive of the results of Krotz.

Our next question comes from the line of Phil Gresh from JPMorgan.

I guess one more follow-up just on PGC. I guess -- has anything changed or do you have any maybe quantification around if you were to move forward with PGC, what kind of capital that would entail at this point? And if you're looking at these alternatives, I know it may be a little bit difficult to handicap because there's probably some moving pieces here. But order of magnitude, what you would hope to save if you were to try to move forward with some other JV type of approach?

That's a great question. I understand where we're going from here. Let me be clear. We are just putting more numbers together as we understand the magnitude of every project. And I believe that in the next few months, we will be able to pin down the cost as well as what's the cost for Delek. It depends on the -- how the -- it shakes up. However, I want to be clear, and I think Kevin was clear about that as well, we don't see us writing a big check, all of a sudden, that prevents us from continuing doing the other things, especially returning cash to shareholders. We are very committed to them. So as we take into consideration the different projects, we also want to make sure that we are giving money or we are returning cash to shareholders as we think that our stock is very attractive.

So if somebody thinks that -- and I saw some analysts, and we didn't respond to that. Some analysts putting a check of $500 million or $600 million that we're going to put on the table, and then now, all of a sudden, there is no buyback over the next 2 years. Let me just assure you and others, that will not happen.

Okay, I think you just lead into my next question, and I guess, which is, the buyback at $50 million in the first quarter, obviously, it's a step down from the first quarter or from the fourth quarter. But it's still, if you were to continue, it'd still be a $200 million run rate on a full year basis, which is not a small amount of your market cap. So is the idea here (technical difficulty) as the Midland diffs has contracted that this new run rate is something you could be comfortable with or how should we be thinking about that?

Phil, I'll tell -- I'll let Assi answer that one. He is much closer to that.

If you look at Page 6 of the presentation, we're showing here that with the Alky and some RIN waivers, we can achieve this year over $800 million of EBITDA. When you reduce from that our CapEx of $350 million and interest and taxes, we can actually generate close to somewhere between $270 million to $300 million of cash -- free cash flow this year, which is -- as you can -- you're right, Phil, it's more than 10% return to the shareholders. We are targeting roughly $80 million in dividends based on the new dividend rate and the lower share count, which gives us around $200 million of buyback at current environment. And as you know, crack spread has come up in the last few days. But in current environment, we think that we can return this year roughly $200 million in buyback, which makes up for the quarter roughly $50 million.

Very helpful. And I was not on the DKL call because there was a competitor call. But is there any thought as to whether there might be some drop downs this year? Some additional cash that could come from that or is that still TBD?

As we communicated during the DKL call, we're still on track to complete the drop down for -- by the end of the -- probably the third quarter, sometime between the second and the third quarter. And the EBITDA on that drop down is roughly $32 million. So if you're using even a 7x multiples, it will add over $200 million to our cash balance, and it can fund projects and also buybacks. One thing we said and we will continue to say, we're not willing to leverage the company in order to do buybacks. We are planning to use free cash flow, which we have a lot of it to buy back stocks.

Sure, okay. Last one would just be, on the OpEx, I've noticed the trend here, not just for you guys but for others as well, but it's been trending a bit higher as 2018 progressed, particularly, in the fourth quarter. So anything unique there for Delek that might step down again in 2019? Or how should we think about the refining OpEx?

Phil, we did highlight that in the prepared remarks. We have combination of higher maintenance in the fourth quarter, which if you look at the guidance we gave, we're expecting that to be back in line for the first quarter. And also, we have -- that was a great year for Delek US, big bonuses in the fourth quarter. Other than that, Assi, do you want to add any more color to that?

Sure. So when we look at total OpEx for the company, we ended up at the year -- the quarter with $165 million. Including that number, reimbursement of $16 million of a settlement we had, which mean our actual OpEx during the quarter was $181 million. When you look at the forecast that we have given for Q1, that number is lower by $6 million to $16 million below our Q4 run rate. And the difference -- the biggest number there I will say is the combination of incentive plan and unplanned maintenance, including some adjusting our accruals related to our oil and insurance. So overall, we do think that what we saw in Q4 is abnormal and we expect Q1, if you use the middle of the range of $170 million to be $12 million below what we saw in Q4.

Our next question comes from the line of Brad Heffern from RBC.

You mentioned in the prepared comments, the 4 dividend increases in 5 quarters. Congratulations on that. I was just curious what the trajectory looks like going forward? I mean, you have kind of been stepping it up over time, and I think, maybe that was just gaining comfort with the performance of Alon, but how do you think about the dividend longer term in terms of growth or sustainability versus the buyback and so on?

Yes, we -- you said it right, we targeted to be sustainable through the cycles of the business, and we also aim to stay in line with peers. And at 3.2% dividend yield, we're pretty much in line with peers now. And we'll continue to look at that quarter-over-quarter. So given the -- as Assi mentioned, the cash generation profile of the business for 2019, we feel comfortable with where we're at and we'll continue to look at it every quarter.

Okay. And then a question on El Dorado. I noticed this quarter that the crude slate, the WTI crudes dropped pretty significantly and then the other crude line increased. I was just wondering, what that other crude is and what the dynamics were there?

We will need to get back to you with that. This is -- I'm not sure if anything abnormal in El Dorado with the crude slate. Going...

We'll definitely follow up with you. I think they may have run a little bit of WTS in there. And may have swung it around and what you were seeing. And, of course, you (inaudible) the operating right here in the quarter as well. So that must be probably playing a role in the percentage breakdown that you're seeing on the crude slate.

I want to add, you didn't ask, but I'll volunteer my opinion here, Brad. We do see WTI, WTS, pretty much at par now. However, the price of -- the volume of [debris] of the asphalt, especially in the El Dorado market, is actually close to gasoline, as crazy as it sounds. So we may heavy our slate a little bit after the turnaround.

Our next question comes from the line of Prashant Rao from Citigroup.

First, I just wanted to circle back, you guys have given some good color, but I had to pick up a cap allocation versus the -- in terms of the buyback versus project. But if there's some variability on the PGC in terms of pulling some capital out or redevoting it, I just wanted to get a sense of the balance of -- on one hand, the project that sort of the other alternative investments that you're looking at right now or evaluating, versus, where the stock is trading right now, which is at a historic discount. How would you think about, if this capital were to be freed up, just like sort of maybe more qualitative sense of how that apportionment would work in terms of those dollars that you free up? Is the project pipeline deep enough that, that could all be recycled back into projects or would that free up some for incremental buyback?

I'll take that question. As you saw already in 2018, in the end, the free cash flow went to -- returning to the shareholders. And as we saw that actually very good Q4, we stepped up the buyback during the quarter to almost $157 million. We don't have any huge project on site at the refinery level. And as you know, Kevin was very comfortable financing maybe of the Gathering businesses and/or the PGC pipeline. So I would say, the idea of Delek is not to look for -- with the extra money and just do project, but investors is really fond of us, especially when the share price is trading when it's trading.

Okay. And I guess that kind of leads me into my second question, which is on the forecasted EBITDA. I appreciate the walk you guys have provided here. I just wanted a little bit more color on the step-up from the $826 million to the $991 million that's the long-term midstream initiatives. Sort of, in sense of how much of that is the Big Spring Gathering? How much of that is the long-haul pipe? What are -- what's in that bucket, and sort of, a sense of how much variability that could be or where that -- how that could show up during the year?

Okay, so let me take that one, Assi. As Fred mentioned in his prepared remarks, we are -- we were able to optimize our -- to do a little better job with our Gathering system. And I want to be clear, we have partners with that system. The producers, obviously, are our partners. And I think that the commercial team did excellent job putting it together. We see more and more people coming to us as a point of interest when they come with new production. So that number of place holder of $150 million may change as we get more and more producers into our system. And while we've started that system 1.5 years ago, we're outgrowing what we were expecting. And no reason to expect that 2019 is going to be much different than that. I know that many people think that this is competitive market. However, being the only refinery in the area helps a lot. So with that being said, and the returns as we said -- as Fred mentioned in his prepared remarks, the returns are 4x to 6x EBITDA, then we need to look and say, what other projects give us that return, and that's the reason we put everything together, the place holder versus breaking it down. If this makes sense?

Our next question comes from the line of Blake Fernandez from Simmons Energy.

If I'm not mistaken. I'm probably not going to get very far on this, but in March, I believe, you typically get your RIN waivers and biodiesel tax credits. And I just didn't know if there's any kind of update you had there or any thinking there?

Well, the shutdown of the government didn't help here. However, we think that we still have a good chance, and we mentioned that to get the 2 waivers -- the 2 refinery waivers. And we are working with the government. I actually think that there's some progress made around that. The BTC, the biodiesel tax credit, we're working with our partners, and we will update you over the next couple of months. But as Assi mentioned in his prepared remarks on Page 6, we just showed the magnitude of these 2 waivers. We did not include the BTC waiver -- the BTC tax credit, which usually get it retroactive for last year.

Right, okay, fair enough. That's helpful. The second piece, this is a little bit, I guess, unconventional, but looking at your interest expense, you have in your general slide pack a waterfall and kind of uses of cash and your interest expense is about $120 million, which is basically in line with your growth CapEx. And I know your balance sheet, overall, on a net-debt basis is very underlevered, but you are carrying a decent amount of cash, and I guess I'm just wondering, it sounds like based on Assi's comments, you're not looking to dip into that in order to fund buybacks. So I guess, I'm wondering is there an opportunity to maybe delever a bit, get that interest expense down, if you're caring $1 billion or so of cash here throughout the balance of 2018 and into the future?

By the way, Blake, don't take $100 million away from us. We worked very hard for this $1.1 billion. Why are you saying $1 billion?

Sorry to short change you there.

Okay, yes. I mean, part of our capital allocation philosophy would look to potentially delever over time. I mean, sitting here at 0.8x today, we're more than comfortable with the current leverage profile. And as you know, last year, we refinanced the entire balance sheet. And today, for example, the term loan at DK is LIBOR plus 2.25%. So reasonably efficient cost of debt capital and the [ADL] bares even lower interest rate than that. But it's a balance of using cash to do share buybacks, delever, invest in the business but I would say, in general, we're more than comfortable with where our leverage is today.

Our next question comes from the line of Doug Leggate from Bank of America Merrill Lynch.

This is Kalei on for Doug. It seems like during your comments, you have a goal of adding stable midstream cash flow to your portfolio. And you don't have to look far for under-valued assets. I think you own some at DKL. So my question is how would you feel about buying out the LP similar to Valero?

We've looked at the performance of the MLP market and specifically, ours, and it wasn't extremely good in the last -- since actually 2016. With that being said, with the growth opportunity with DK and the potential drop down, we still think there is a value, at least, for now in holding DKL as a public company. With that being said, the Delek -- I'm not ignoring the fact that there is almost no equity available and the trading is very limited.

So what we want to do is to make sure that we are developing a long-term strategy for DKL. If we can execute it and we will get value for it, DKL will continue to operate as a public company. Otherwise, we'll have to consider doing what Valero did.

I know that's not an easy one, so I appreciate your answer. My follow up is just on your near-term view for WTI Midland, just wondering if you're optimistic for another dislocation prior to the year-end pipeline starts?

I'll take that one. We watch that very carefully. And we -- what we see now is similar to what we saw last year. And when prices went down to $45, $46, we saw a big slowdown coming from the producers. The idea of cutting CapEx, you probably follow that as much as we do and even more. However, we see activity picking up in the Permian Basin, and we won't be surprised if we will see a $4, $5, $6 differentials coming back over the next couple of months as -- of the capacity tighten up. However, and then the third quarter, when we start seeing the 3 pipelines that are supposed to come -- we expect this to [mill] back. I want to be clear about one thing that we're checking very carefully. I don't know that the terminals at Corpus will be ready for the export once these pipelines come online, so that's a question that may -- even if the pipeline capacity comes online, which we expect it will, I'm not sure that we will have all that export, all these barrels exported day 1 because of the constraints in the terminal -- and the constraints in the terminals around the Corpus area.

Our next question comes from the line of Matthew Blair from Tudor, Pickering, Holt.

I just wanted to ask about the Q1 guidance for this realized MidCush discount of $3.50 to $3.80. It looks like that's actually narrower than what the market would show, which we found a little surprising. I think you're on FIFO accounting at 3 of your 4 refineries, so should be an extra lag going through. And normally, we would've thought that you would post a wider MidCush discount in a period of narrowing diffs. And so I don't know, could you just walk us through that? Are there hedge impacts rolling through that would contribute to this narrower diff here?

First, Matt, I was lucky enough to read your note this morning and I think even last night, and I saw that you spoke about the Delek accounting and the impacts on the financials. What we posted here was the actual 1-month delay and not 2 months delay, as you suggested. And we'll say that probably due to year-end, the inventories, the impact and LCM. We figured this point that this is how it will show up. It may come up different. But right now, we are confident with the $3.50 of differentials for Q1.

Okay, sounds good. And maybe could you also talk about just retail in the quarter, fuel margins, really, really strong but it looks like you were down on merchandise margins and merchandise sales. What were some of the headwinds on the in-store side of retail?

Well, let me be clear. We weren't down, we weren't as high or we were expecting. So let's talk about the margins. We try to optimize our system, and as we start introducing other programs into our margins initially, mainly, the food-service side, which we expect, eventually, to pick us up, that's one thing. Second, in terms of sales of -- inside sales, we didn't see something -- anything abnormal. So I wouldn't read too much into it.

Our next question comes from the line of Jason Gabelman from Cowen.

I just wanted to circle back on the Krotz Springs performance in 4Q. It was obviously very strong. I think it was one of the best margins you guys posted for a number of years at the site. And I know you mentioned some of this was due to just running more Permian crude through there. So I wonder if you could break down, how much of the benefit was kind of a transitory impact seeing as the Permian discount has narrowed since the quarter ended? And maybe you won't get that benefit at Krotz, moving forward? And how much of it is due to maybe more structural things going on, on the ground?

I'll let Assi answer the past. I'm just going to tell you that don't be surprised if come second quarter and margins, of course, will improve even further just because of the fact that the Alky will come online.

And that we said that's $40 million to $45 million, and we are in the final stages of this project. Assi, I don't know if you want to take -- to make a few more comments?

Sure. So even in Q1 environment, when you think about it, when the Midland Basin dropped $3, $3.5, with transportation costs, we could land in the crude in the Krotz Springs refinery. That is the Midland one, it's even below WTI. And you think about the alternative for this refinery to running on less barrels that it's trading $8 to $9 over WTI, there is still a lot of value. It's running the almost 60% of the crude as a WTI's slate. So as I -- I want to say that there's still running Midland is very beneficial for the refinery.

As we all know, prices of crude came up during the first quarter and they're actually from when we finished them in the end of the year, which also provide us the ability to enjoy the product, the positive yield, we have in the refinery. We actually produced more than what we buy due to the way the refinery worked. So it's actually in the higher crude prices, we are doing better. So together with the Alky, I think that a lot of the changes that we saw in Krotz over the last year are permanent, and we are very encouraged by the fact that we have a WTI refinery located in the Gulf coast.

Great. And then just quickly on the cash flow statement. It looked like cash from ops came in pretty strong, but also financing cash outflows were a bit higher. Can you just provide some color, I don't know if there's a working capital impact and anything else for the quarter?

Yes, so we did see a working capital improvement for the quarter. Like all things, working capital is a bunch of puts and takes, AR was an improvement at a little over $200 million. Prices were down, so that was a driver but also, Q3 ended on a weekend. So quarter-over-quarter, we ticked up a couple of more days of receivables. And then the other big driver was inventory and then was LCM impact. We had, in Tyler, for example, 700,000 barrels less inventory sitting on the books. And then Q4 over Q3 Midland prices were down about $2.25 or so. So big movers there and then, obviously, net income favorability quarter-over-quarter was helpful.

Our next question comes from the line of Benny Wong from Morgan Stanley.

Just noticed your number of stores in the quarter, kind of, took a dip there. Just wondering if you guys sold some of your retail sites? And if you did, is that part of a longer-term strategy to, kind of, sell that down? Just looking for an update in terms of how you view that segment?

We did sell -- Benny that's an excellent question. Good catch. We did sell a few stores in the Waco market. We exited that market. That's part of our strategy, and we were very clear that we will take underperforming stores, sell them, convert them to dealer and continue to sell fuel from the Big Spring refinery and take these means and use them to build our megastores. Actually, we just opened new megastore in Midland, the first one, and we have outstanding results. So the strategy will be all along, like we did with the macro stores, to get rid of underperforming stores, and at the same time, take the money and build the megastores, the new generation stores. And obviously, that's a long-term strategy. But as we all remember, it paid off when we did the macro transaction.

That's great. Just a follow-up question, is really to build upon the prior questions on the dividend. I know you guys want to set that at a level that can be maintained through the cycle. Just curious how you guys define that or look at it particularly, with your significant logistic growth over next couple of years. Is there a leverage target or a payout ratio that will make sense for us to, kind of, think about as we go forward?

Yes, we haven't really targeted a specific payout ratio necessarily. Assi walked through the free cash flow earlier. So targeting $80 million a year in dividends gives us $200 million of cash available for share buybacks. And as we continue to buy back shares, obviously, the dividend burden becomes lower. So with the lower share count, we'll potentially look at increasing the dividend further, but as I said earlier, our intent is to stay in line with our peers.

And Benny, I want to add one more thing that what -- to what Kevin said. I'm sure you saw that on the sheet, the guideline sheet or guideline slide, that our number of shares are now expected to be below 80 million. And we're working our way toward getting back to almost pre-allotment action with the number of shares. So that's the strategy all along.

Our next question comes from the line of Paul Sankey from Mizuho.

(technical difficulty)

that you're circling for EBITDA, what are you thinking about IMO within that? And could you extend the commentary into the outlook for oil markets? I know you've, sort of, addressed this, but I was wondering if you think that sanctions will be imposed on Iran?

So first, we didn't know -- we did not factor any IMO numbers into anything here. We do think that there will be a benefit from IMO, but that's not part of the numbers. That -- the reason we think that there should be continued upside from these conservative numbers like we showed in this quarter or even previous quarter. That's one thing. Second, the sanctions on Iran, I think the combination of Iran, Venezuela and the OPEC cuts, as we all see in the marketplace, drive the heavy sour spread higher. So if this continues then our position as running like with barrels mainly come -- not mainly, entirely coming from the United States should pay off.

Okay. So you think you're a beneficiary of the current market environment? And do you have a sense for what impact IMO could have?

In our internal modeling, we use sometimes $1, sometimes $2, for 18 months.

Of what?

Of better crack spreads. 5-3-2 better crack spreads?

On IMO?

Yes.

We have a follow-up question from the line of Neil Mehta from Goldman Sachs.

Sorry, to circle back, really 2 quick questions here. Kevin, did you call out the working capital number in the quarter? What was it again?

The total working capital benefit, we didn't call it out, but it was somewhere on the order of a little over $200 million.

Okay, great. And then the follow up is just El Dorado. Can you just talk about what happened at the asset and with the game plan to get it back online?

Fred?

Sure. Neil, so we had a fire on a pump seal in one of the areas of the crude unit. Fortunately, that wasn't a critical area and it allowed us to be able to restart the refineries in about 7 days. All of the damage that existed, if we haven't already repaired it, will be fully repaired at turnaround during March.

(Operator Instructions) There are no further questions at this time. I would now like to turn the call over back to the management for the closing remarks.

Thank you, Ella. Wanted to thank my colleagues around the table here for a wonderful, wonderful year. I want to thank, you investors and analysts for your confidence and interest in our company. I'd like to thank my friends to the Board of Directors for their continued support, but mainly, I'd like to thank our employees for making this company the great company it is. Have a great day, we'll talk to you soon.

This concludes today's conference call. Thank you for your participation. You may now disconnect.