Delek US Holdings Inc (DK) 2019 Q2 法說會逐字稿

Good morning. My name is Prince, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings call for Delek US Holdings, Inc. (Operator Instructions)

I'd like to turn the call over to Keith Johnson. You may begin.

Thank you, Prince. Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss DK Second Quarter 2019 Financial Results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; and Assi Ginzburg, EVP and CFO; Blake Fernandez, SVP of IR; and Fred Green, EVP and COO; as well as other members of our management team. The presentation materials we'll be using on today's call can be found on the Investor Relations section of Delek US' website.

As a reminder, this 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 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 as we are covering less segment and market information that is incorporated in 2Q release.

On today's call, Assi will give an overview of results, Blake will review financial performance, and then Fred will cover operations for the quarter. Then Uzi will offer a few closing strategic comments.

With that, I'll turn the call over to Assi.

Thanks, Keith. We had great financial results this quarter during the period of lower midline crude oil discount. As you can see on Slide 3, on an adjusted basis, for the second quarter 2019, Delek US reported adjusted net income of $90.6 million or $1.17 per diluted share compared to an adjusted net income of $78.9 million or $0.92 per diluted share in the prior year period. Our adjusted EBITDA increased by 10% to $204.9 million in the second quarter of 2019 compared to $196.1 million in the prior year period.

As Fred will discuss in a few minutes, we continue to develop our midstream initiatives, the announcement of our participation in the Wink to Webster JV, ongoing efforts to expand our gathering system and DKL's acquisition of Red River JV. Our balance sheet gives us the flexibility to evaluate the option to finance at least 75% of our Wink to Webster JV investment. This could include project financing or expanding our existing credit facility, which should allow us to preserve cash on hand.

Now I will turn it over to Blake to discuss the financial performance for the quarter.

Thanks, Assi. Delek US reported net income of $77.3 million or $1 per diluted share compared to net income of $79.1 million or $0.89 per diluted share in the second quarter of 2018. This was led by an increase in market conditions, including crack spreads, contribution from new investments, including the alkylation unit at Krotz Springs and Red River JV, along with continued commercial execution. As mentioned in the press release, prior year results were reduced by approximately $21.8 million related to a mark-to-market of RIN's inventory position.

On Slide 4, we provide cash flow a waterfall. In the second quarter of 2019, we generated approximately $102 million of cash from continuing operations. I should point out that this includes a negative impact of $44.5 million from working capital movements. Strong underlying cash flow, combined with a solid financial position, supported the investing in the business with cash capital expenditures of $76 million, along with returning approximately $80 million of cash to our shareholders between buybacks and dividends. Of note, overall investing activities in the quarter include equity investments, including the Red River acquisition.

Slide 5 highlights our capitalization. We ended the second quarter with approximately $951 million of cash on a consolidated basis and $965 million of net debt. Excluding net debt at Delek Logistics of $835 million, we had net debt of approximately $130 million at June 30, 2019.

On Slide 6, I want to provide some third quarter guidance and a few data points that may be helpful for modeling purposes. We estimate based on a forward curve that our realized Midland discounts and our gross margin would be in the range of $1 to $1.20 per barrel. Secondly, G&A was elevated in the second quarter due to bonus accrual, stock-based compensation and legal expenses. Our third quarter G&A is expected to be in the range of $63 million to $68 million, which reflects bonus accrual and stock-based compensation stemming from strong financial performance. Thirdly, a portion of the contribution from commercial activities, mainly hedging, is allocated to the Corporate and Other line item. This explains the increase year-over-year.

Finally, I think it's supported to point out that the Red River Pipeline is expanded in the first half of 2020. Our increased excess of 65,000 barrels a day creates an option to displace Midland barrels with Cushing barrels should that arbitrage exist. While our annual earnings sensitivity of $75 million for every $1 per barrel change still exist to the upside, theoretically, this sensitivity would be reduced to about $50 million per dollar a barrel change on the downside.

Hopefully, that is useful. And with that, I will now turn the call over to Fred to discuss operations.

Thanks, Blake. During the second quarter, our total refining system crude oil throughput was approximately 263,000 barrels per day. As shown on Slide 6, for the third quarter of 2019, we expect crude oil throughput in the refining system to average between 270,000 and 280,000 barrels per day.

On Slide 7, I want to highlight our capital spending. Capital expenditures during the second quarter were $86 million compared to $55 million in the second quarter of 2018. Our 2019 capital expenditures for the full year are forecast to be $396 million. This amount includes $239 million in our refining segment, $9 million in logistics, $21 million in our retail segment and $128 million at the corporate level. I should point out that CapEx excludes JV investments at both Red River and Wink to Webster.

Descending on the Big Spring Gathering System is included at the corporate level for 2019 and is approximately $123 million. We now have over 250,000 dedicated acres in our gathering system. We continue to target $40 million to $50 million of annualized EBITDA by 2022, including the crude oil quality uplift in our refining segment.

We've continued to move forward with our midstream initiatives. As shown on Slide 8, we've taken a 15% interest in the Wink to Webster Pipeline. We anticipate our net investment in the range of $340 million to $380 million. This project has multiple potential benefits, including attractive returns, integration, additional service to producers through our gathering system and more stable earnings over time. This pipeline is underpinned by a significant volume of long-term commitments.

Moving to Slide 9. In May, DKL announced the acquisition of a 33% interest in the Red River pipeline. Upon completion of the expansion of this system in the first half of 2020, we expect adjusted EBITDA of $20 million to $25 million on an annualized basis.

Next, I'll turn the call over to Uzi for closing comments.

Thanks, Fred, and good morning, everybody. As illustrated on Slide 10, we have taken strategic actions over time to unlock value and high grade our portfolio. This is starting to be reflected in our performance with resilient result in the first half of the year even in a compressing Midland differential environment. The alkylation unit at Krotz and the Red River JV are already contributing to bottom line performance, and we continue expanding our midstream footprint.

We are pleased to announce participation in the Wink to Webster JV with such a strong set of partners. We've been working on this for some time. This is a great investment that should generate a return well above our 15% targeted return for logistic projects.

As shown on Slide 11, our portfolio of midstream assets, including Wink to Webster, Red River and Big Spring Gathering, all progress us toward our goal of achieving $370 million to $395 million of annualized EBITDA by 2023.

As shown on Slide 12, cash return to shareholders remain a priority -- remains a priority. Over the last 12 months through June 30, we have returned $439 million or about 14% of our market cap to investors. Our capital allocation program balances cash to shareholders with potential opportunities for growth.

We intend to repurchase $40 million of Delek stock in the third quarter 2019. In addition, our Board of Directors approved 3.8 -- approved a 3.6% increase in our regular quarterly dividend, which marks our fifth consecutive 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 company.

With that, Prince, could you please open the call for questions?

(Operator Instructions) And we have our first question from Manav Gupta from Crédit Suisse.

Quick question on Wink to Webster. If I'm doing my math right, your EBITDA from that project could be about $65 million to $70 million on an annualized basis. So if you could confirm that number. And what I'm trying to understand is that tells me that you got into this pipeline at about 6, 6.25x versus generally people paid 9 to 10x to get into the pipeline. So I'm trying to understand the leverage Delek has so that you could get in at a much lower multiple versus being 9 to 10x.

Well, that's a great question. First, I'm not going to comment about the numbers. I'm just going to say that our threshold is 15% is well above that 15% threshold. That's one thing. Second, this is on an unleveraged basis. So Assi will talk about the financing of the pipeline shortly, but this is a straightforward return. You just need to remember, we were very vocal about it in the past. We don't believe that all the pipelines that were announced will be built. And many people should join Wink to Webster, and the returns are fixing to be pretty good. So for us, it was only natural and it treats us very well with a footprint to join that project.

Assi, if you could comment on the project financing?

Sure. So as we stated in our press release and we already discussed it in the script, we believe that we can finance above 75% of it. It is through project financing, all to our own anchorage facilities. We have a Term Loan B that we can expand like we did in May, and we think that this can be done through the time of the construction, so we will be able to preserve cash on hand at a very low interest rate cost.

Okay. And a quick follow-up on the overall strategy of paying shareholder returns. I think if I'm right, but from 4Q '17, your dividend has gone up 90%. So I'm trying to understand, would the strategy be to continuously raise the dividend to get to a very competitive year? Or would you actually be putting buybacks in front of the dividend hikes in the near term?

We got lucky with -- every quarter, we get lucky, and this was another one. And we continue to buy back stock. So if you look at this total increased cost to DK from the increase in dividend, it's actually nominal and in the last few quarters, is coming down. So overall, the -- our ability to pay $80 million of dividend a year is pretty easy with our excess cash flow. And therefore, we think we can continually increase the dividend as we continue to put good results.

Your next question comes from the line of Roger Read from Wells Fargo.

And I'll say congratulations to Mr. Blake Fernandez who escaped the cell site for the greener pastures of the corporate life.

Thank you, Roger. I appreciate it. Like what we told you, it would depend on the past performance.

Well, we'll see what happens. Future is always open. Anyway, I just wanted to hit on the crude differential flexibility, the Red River JV pipeline there and then understand maybe how quickly you can switch if we think about the arb going 1 direction or the other. Is this the typical 30 to 60 days? Or do you think you can move quicker, given both operational and consumer sides of this transaction?

Well, the flexibility between Midland and...

Hey, Roger, if you're on speaker, there's a little bit of background.

Yes, you have a background noise there.

Sorry, is that better?

Much, much better. Thank you.

Okay. Sorry about that.

Our ability to switch between Midland and Cushing is pretty imminent, so partly a nomination of 1 month, if you will. And that allows us the flexibility to move between Midland and Cushing.

Okay. So pretty standard, not really a change in terms of timing. Just really when the arb opens, your ability to jump will be as good as or better than anybody else.

That is correct.

Okay. And then since it's been our little favorite topic coming into earning seasons -- earnings season, excuse me, Tier 3 kind of give us an idea of how you're set up. I know the alky unit at Krotz Springs had a good quarter, obviously, and that's a key component going forward. But I was curious if you look across the other 3 units how you're set up and how things have been running year-to-date.

So hey, Roger, it's Fred. So I'll take this one. Of the 4 refineries, 2 can already meet the 10 ppm level. Big Spring and Tyler can already do it without any significant change in our ability to supply the market with premium gasoline and octane construction. Krotz Springs and El Dorado can both get close to the 10 ppm, but we do plan to spend roughly $28 million in the next year to allow them both to get well below 10 and continue to preserve octane. So not a huge amount of money and not much complexity in the scope, but we're -- we believe we're in pretty good position.

Next question comes from Patrick Flam from Simmons Energy.

I was hoping you could give us an update on your latest thoughts around the small refinery exemption process and any other regulatory issues that have been outstanding recently.

Well, these are 2 different questions, I think. So I'll take the small refinery exemption first. We continue to work with the government, and we continue to believe that some of our refineries are qualified for the small refinery exemption. And we'll see what happens in the near future. I think the administrator said that they are planning to issue a decision over the next few weeks. I think publicly he said that last Monday. We'll see what happens. We're pretty optimistic around that area.

Around the BDC, or biodiesel credit, that's another area that we believe that Delek -- the House and the Senate will work hard, and we believe that in the first -- I shouldn't say maybe the first opportunity that they have, they'll pass that one. The value for these 2 is excess of $100 million plus. And if you need to gauge our prospect, I would say that it's likely that we will get both of them.

Okay. Great. That's very helpful. I guess, kind of as a follow-up there, your thoughts around RIN's expense, and where you expect that market to go in the near future. I know it's definitely tied to the small refinery exemptions piece as well, but any other thoughts you can give us to frame that up?

Well, it's around $0.20 as you know right now. We believe that it will continue to move around that number. I don't see a spike of $0.90. And at the same time, I don't expect this to go to $0.05.

Next question is from Neil Mehta from Goldman Sachs.

Congrats to Blake as well. Welcome aboard Delek there.

Thank you, Neil.

The first that I had was just on some of the hedging gains and corporate and commercial initiatives that showed up in the quarter. Can you just flesh that out a little bit more? And how should we think about those? Do we think of them as nonrecurring items? Or is there an element of this that we need to carry forward?

Well, I think I'll let Avigal, our chief Commercial Officer, take that one.

So as we discussed last quarter, Neil, we think about the commercial initiative as a toolbox. And I will give you example, right? It's wholesale, lease buying, hedge paper, physical inventories and others. Our goal in the commercial group is to apply the right tool to the right market conditions. So it's much better between 1 quarter to another. But we are looking at that as a toolbox as a general rule.

And in terms of the -- because the hedging gains did look very substantial and the commercial gains look very substantial in the quarter, the -- as we think on a go-forward basis, which -- what of this is recurring versus nonrecurring? Any guidance here?

So Neil, what you don't see is that -- first, this is Assi. What you don't see is that the refineries actually in the refinery itself, there's a $25 million of inventory losses. And they were offset. But what you saw in the corporate -- because we are doing what we call a system-wide hedging to offset some of the inventory losses. So in the Delek US Q2 results, we don't see anything that is onetime in nature when talking about the inventory or hedging.

I appreciate it, Assi. And a follow-up for you is just kind of a big picture question about consolidation. You made a comment in the past, made a couple of comments around the M&A, one is there's -- there could be advantage in consolidating the Mid-Con, but at the same time, the only refinery that Delek wants to buy is its own stock price back. But so I'm just curious on your thoughts in terms of consolidation and the role that you see Delek playing in that.

Well, as we all know, CVI was very loud around their desire to be purchased or sold. And we are not participating in that game with CVI. We will need to see what happens with CVI before we consider other consolidation in the market. But I do expect more consolidation to come over the next 3 to 5 years.

Next, it's from Phil Gresh from JPMorgan.

First question is the as we think about looking ahead to the 2020 CapEx picture, realizing that you still would want to try and figure out the project financing opportunity, if there were no project financing and we think about the gathering project and the potential spending for the Wink to Webster, generally speaking, what kind of ballpark should we be thinking about?

Phil, this is Assi. So first, let's talk about the number excluding the Wink to Webster. We see a slight uptick in CapEx, excluding Wink to Webster for next year. This is -- as Fred mentioned earlier, we had some Tier 3 investment, and we continue to invest into the gathering. Of course, the gathering will generate more EBITDA. Second, on the Wink to Webster, as we mentioned, the total investment needed is $340 million to $380 million. And we do believe we have access to credit facilities. We can even borrow on our current revolver that is basically only utilized for $75 million this quarter. So we have no issues of doing it with at least 75% debt. I actually thought it will be higher. Uzi asked me to be conservative here. I think we can do it in more than 75% on that one.

Okay. So basically, take kind of the midpoint of $360 million and the vast majority of that put in, in 2020 was mostly debt financing? Is that reasonable?

Part of it will already be in 2019, and it will be through no to CapEx. It will go through JV investment. So it will not show up in the CapEx line. It will all be JV investment. And it's right, the financing will go alongside with it. We expect to finish the financing in the next probably 2 quarters.

Okay. Second question, just be -- you've continued to talk about drop-down opportunities. Krotz, I'd presume, perhaps, Wink to Webster would be another consideration for a drop-down. Is that reasonable? And how do you think about the potential timing of drop-downs? Is there still something under consideration in 2019 at this point?

At this point, the right way to drop the JV long haul is probably after we completed the construction, and there is already a cash flow being generated from the business. As of the drop of the Krotz Springs, I don't think we'll do it this year as the leverage at DKL is slightly higher and we have a great project inside DKL that's generating a lot of cash flow. As you can see in our presentation, we expect right now $20 million of EBITDA from Red River once we complete the project. So right now, I don't see a drop for 2019.

Okay. And then just in terms of the $150 million of the midstream EBITDA opportunity between the gathering project and Wink to Webster, I guess it sounds like you've now kind of lined up -- or you have line of sight to the vast majority of that $150 million, I guess. Is there -- are there more things you're thinking about here in terms of potential spending to hit the $150 million over the next 1 to 2 years? Or do you think that this is kind of what you have in hand is what you're focused on?

Phil, this is Uzi. We said we were very vocal that this going to be by then, by 2023. We are well ahead of our plan. And if anything, we may up these numbers in the future. For example, we're evaluating the Paline pipeline expansion idea and creating another hub at Longview. That is not in the numbers, as well as other means that we are looking at. So I -- we feel good, especially in light of the fact that both gathering and the Wink to Webster meet handsomely our threshold of minimum 15% unleveraged that we will achieve this $370 million to $395 million and even up the number in the future.

Okay. And last, I suppose, somewhat a philosophical question, Uzi. I mean, obviously, you guys have been buying back stock, a decent amount of stock here. And you can keep doing that or even buy back even more stock. If you didn't do the project at a 5x multiple or you could build the project pipeline at 5 maybe 6x and drop it and get some uplift there. But I guess, philosophically, is the idea here that you feel like you can just get a better multiple for the company by moving more in the midstream as opposed to just buying back stock?

Well, let's be clear. Let's talk about Wink to Webster. Assi was very vocal about that. We are saying that we are well above our 15%. This is our leverage. We think that the project financing is feasible. So this is an area that, if we are doing that, the returns is enormous if we look at the leverage. That doesn't prevent us from continuing buying the stock. We believe that what we are doing, and we were, again, very vocal about it, even in an environment that the Midland differentials were $1.70 or so, in the quarter, we produced above $200 million EBITDA. And just in a quarter that we had turnaround. So let's just not lose sight that the free cash flow that is coming from the company is substantial, so there's no reason to believe that we won't do gathering, Wink to Webster and continue to buy shares.

Next question is from Silvio Micheloto from Mizuho.

It's Paul Sankey, actually. Yes, so maybe if I put Sylvio's name then I will be asked to ask earlier. Blake, welcome. Uzi, I was just wondering, nowadays best practice is to have a structure for cash return, some kind of a formal structure for cash return and maybe an idea about CapEx, and so it's difficult. First of all, the question was really, can you give us an idea about the long-term CapEx and how you think about it? And then secondly, have you thought about putting in a structure for how much cash return you want to generate? I'd like Assi's comment about being lucky every quarter but maybe something a little bit more mathematical.

So Uzi directed me to take that question, so I will take it, Paul. If we put your name, maybe we would've put you earlier. So we're sorry for that, and we apologize.

We'll have the opportunity to shoot Keith.

We see ourselves somewhere right now between $900 million of $1 billion of EBITDA company. That's what we have been generated. It's our run rate, and that's we were able to do in the last 2 years. And we expect to do so also in the name of environment and also after that when the pipeline will come on. On a $900 million to $1 billion, we think that there are CapEx, including some growth, shouldn't be more than 30% of that number. So overall, I will say that around $300 million, and that will include some growth CapEx and 1 turn on the year for the refineries. As you can see, that will leave us with a lot of free cash flow on hand. And that's why when you look at us in the last year, we have brought basically, together with the dividends, close to 14% -- brought 14% yield, which is extremely high. I don't know if we can do 14% every year, but if -- when you look at this year, we are tracking to do a buyback of $200 million based on the $150 million we have bought so far for the year, plus almost $100 million of dividend, get you to around 10% yield for 2019. So we want to be on the high end of our peers when you end buy -- when you add buybacks and dividends. And we want to be somewhere in the mid- when we are -- of the dividend, just the dividend yield. We are lowering our dividend yields that's why we've been increasing it every quarter since 2017.

Yes. Understand. That's helpful on the 30%. And Uzi, I was surprised that you said -- well, I wasn't surprised, but your view of consolidation. Did you mean that you expect more refinery consolidation? I understand that there's a couple of bits and pieces around that. But it feels like the industry now is reaching terminal consolidation really soon, some marathon endeavor.

Well, when I said that, yes, I thought that there would be a couple of 2, 3 more deals in the next 3 to 5 years to consolidate our industry. I didn't mean refinery.

Yes. Okay. And then just finally for me. Any observations on demand? It's, obviously, a very controversial subject right now. But I just always appreciate your perspective. And I'll see you later.

Well, obviously, demand in our area is very strong because of the drilling and the growth in our areas. We don't have good visibility right now to the Northeast, which we used to have, but we don't see a big issue in our areas.

Next question is from Doug Leggate from Bank of America.

Let me add my congrats to Blake. Besides the volatility, Blake, you might hang on without saying hello here a bit longer, but anyway, congratulations.

Thanks, man.

So I'd like -- my first question, Uzi, if I may, just to kind of wrap a couple of things that have been asked already but wrap them into a kind of more concise framework. You've, obviously, raised slightly the midstream target today. But at the same time, the buyback remains the dominant part of the share return strategy. So what I'm really trying to understand is I just -- well, I guess first of all, what line of sight do you think as a percentage of that $370 million to $395 million target do you think you have visibility on today? Maybe not everything disclosed, but in terms of what you think internally. You've got visibility on. And then as that evolves, is there a target payout ratio that we should think about in terms of the balance between the dividend and the buyback as your earnings stabilize more towards that midstream over time? So kind of a part midstream, part dividend question. And I've got a quick follow-up, please.

Well, I'll take the first part of the question, and I'll let Assi answer the second one. The -- I think the first question was about visibility of the $370 million to $395 million. When we put a number out, we always create a set of project and set of ideas that are more than just ideas, not because we just made up a number. So to answer your question, absolute, we have visibility to $370 million to $395 million. And as I said, we progress, we may even have that number as we get more clarity about other projects that we work on. That's the first part.

The second part, the combination between buyback and dividend, I'll let Assi take it.

So Doug, as you look at this year, so far, we had a $450 million of EBITDA, and if you're analyzing it, analyzing it's going to be close to $900 million. And we are on pace to basically pay almost $100 million of dividend, plus $200 million of buyback, so that will be, I think, give us roughly 30% payout from the EBITDA perspective. And that's in the year where we are investing heavily in our gathering business. So this is something, I think, we can sustain, especially when we expect a CapEx over the years to reduce as we don't expect every year to have such a heavy investment in gathering. Also, it's going to be much easier to pay an increased dividend to a much higher level when the EBITDA will come from logistics versus refining. And that will enable us, over time, to be extremely competitive on our dividend yield.

Yes. I guess what's at the back of my mind, Assi, is there's always a lot of controversy over how we should be valuing the sector in light of the inevitable volatility, and dividend discount modeling has become something of a fashion, I guess, in the sector. So just any visibility you can offer in future in terms of how you are thinking of that strategically, I think, would be quite helpful. But I appreciate the answer. My follow-up to you, just a quick one, is on the Red River comment and the release. And I'm not sure who wants to take this one. But there's comment about the incremental 65,000 barrels increases optionality in the event that Cushing becomes more economically attractive. By inference, that implies that Midland is less attractive, which would be a bit of a change from, I guess, the perspective you've offered in recent years. So are you now concerned that Midland could end up drilling at a premium to Cushing?

Well, we were very vocal about the idea of Midland drilling at a premium to Cushing. In order for this to happen, there should be 900,000 barrels that are flowing now between Midland and Cushing to be reversed. We don't see that happening so easy. However, the Red River gives us the optionality. If it happens, to change up quickly. At the same time, the Red River, together with the Paline pipeline, creates optionality between Cushing and the Gulf. So if we look today at WTI versus LLS, obviously, we are making money selling it to the Gulf. So that deal allows us to move from different markets or different hubs, like crude from different hubs, depends on the market conditions.

Understood. I guess, Uzi, the thing that was at the back of my mind was we saw EPIC announced the rate fell below $2 last week. So obviously, there's a lot of questions around this issue as well. But guys, I appreciate you taking my questions.

Next question is from Paul Cheng from Scotia Howard Weil.

Good luck, Paul.

Thank you.

Everybody that works at Howard Weil is against us for us 1 day. So be careful now.

Well, Blake, I just want to say congratulations first.

Thank you.

Wish you the best of luck over there.

Thank you, Paul. Tell my friends hello for me, will you?

Absolutely. I have a number of short questions. First, El Dorado. Maybe, Fred, you can help me. Margin seems to be extremely strong given the downtime. Is there anything you need in this quarter in terms of why the margin capture would be so strong?

We came back from turnaround. And as a result, there was some change in inventory that were very positive. And that's why we made so much money in that refinery. It was offset by the other refineries like Big Spring that have negative inventory impact. So it's just a play between the refineries and inventories the way that they impacted the -- this refinery.

I see. Uzi, can you add -- actually, can you tell me how big is the inventory benefit in El Dorado?

We don't allocate during the call for each refinery, but I think we'll be ready to discuss it later.

Okay. Secondly, on the Webster, the 15% return, is that just purely on the tenders that you're going to receive? Or that also include other integrated benefit or trading opportunities that you foresee?

First, there are trading opportunities. They are not in the -- when we say well above 15%, that doesn't include commercial initiatives.

So it does include commercial initiatives.

It's does not. It does not.

Oh, it does not. And Uzi, does it include any tie-up integrated benefit as I think Fred was mentioned earlier?

I'm sorry, I miss the question.

Does it include any of the integrated benefits within your system?

No, no, no. No. No.

Is the 15% just purely based on your share of whatever is the tender that you will receive?

The well above 15% is purely the project itself.

Purely the project itself. And is your commitment is equal to your -- in terms of the shipping one, equal to the 15% of your working interest?

We never disclose commitments, and that's something that we are not going to disclose now.

Okay. On the Red River, the incremental 65,000 barrel per day, in the event, if you take that optionality, what's your corresponding transportation commitment related to your Midland crude? Is there any amount that you have to continue to pay?

Paul, can you repeat that question just real quick?

Let's assume in the event that you decide to take the optionality, the option to run more to Cushing crude, so back away from the Midland, now the crude purchase, the nomination is only 1 month in terms of the commitment. But in terms of the transportation arrangement, is there any longer-term commitment that you have to continue to pay if you decide not to run the Midland crude?

So let's start with the saying that there are long-term commitments for us, even if we don't run in the Midland crude for mostly for El Dorado and Tyler. With that being said, when we're going to move more barrels on Red River or on Paline, these are our pipeline, basically. So there will be no additional tariff for the system. It's just going to see an uplift in gross margin.

No, I understand. Just saying that for the -- but the commitment, is on -- within your own system to El Dorado and Tyler?

No, that's the third party.

Right. So I guess my question is that can you share with us that how big is that commitment that roughly if you decide then not to run that 65,000 barrel per day of the Midland crude?

As you know, we do have 207,000 barrels a day that we can run Midland. Of that, it's roughly a 75,000 barrels a day in Big Spring. And then as you know, we are moving through the end of the pipeline up to 4,000 -- 40,000 barrels a day to Krotz Springs. So those are part of our day-to-day business. The remaining big portion of it is commitment on the West Texas Gulf pipeline.

Okay. I will take it offline. On the -- Uzi, have you looked at the Citgo asset? It seems like that 1 of the creditor is trying to push it for bankruptcy.

We were very vocal. We said that the best refinery to buy is our refinery nowadays. So we haven't looked at any refineries lately.

I see. Final one. Assi then, what -- can you tell me how much is the realized hedging gain?

$38 million.

$33 million?

8. $38 million.

$38 million. Do you have a split between the different refineries?

We do not provide split between the refineries, but you can see that there is a big piece that is actually at the corporate level, $10 million.

$10 million in the corporate level. And so the other $28 million is in the refining segment?

Yes. That was offset completely by the inventory losses.

Next question is from Matthew Blair from Tudor, Pickering, Holt.

Assi, you mentioned the Big Spring gathering business. Are you willing to provide an EBITDA number for 2Q? And can you just talk generally about the ramp for this project through the back half of the year and into 2020 and 2021?

Sure. So, so far, the EBITDA is very minimal. We just started to see the volume coming in. We expect the volume this year to be around 60,000 barrels a day. And by 2023, it's going to be basically 3x that amount. As we mentioned, for 2023, we expect EBITDA to be somewhere from $40 million to $50 million. But right now, it's quite minimal.

Got it. And then, can you talk a little bit more about the Big Springs margin capture in the quarter? It just seems a little low. Obviously, Midland just came in, but cracks really improved. It sounds like -- was there like an inventory impact that also flowed through Big Spring?

So when you look at Big Spring this year versus last year, there's actually inventory in Midland impact of $2.70. And that was negative in Big Springs. On the other hand, in El Dorado, we saw an uplift, and that's what I mentioned, that we are not allocating inventory between the refineries. But overall, for Big Spring, compared to the same time last year, it's $2.70. And that's why you see a lower capture rate.

Great. And then final question. Assi, can you just remind us what is the, I guess the max leverage limit for the consolidated entity?

There is no max leverage for DK. With that being said, we are always targeting it on a long term when you look at the net debt to EBITDA normal than the 1.5x.

(Operator Instructions) I'm showing no further questions. I'd like to turn the call over to management.

Thank you, Prince. I'd like to thank my friends around the table here. I'd like to thank my colleagues, to the executive team. I'd like to thank the Board of Directors for their continued support and you, investors and analysts, for your interest in our company. But mainly, I'd like to thank each one of the employees who make this company the great company it is. Thanks. We'll talk to you soon.

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