Delek US Holdings Inc (DK) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Delek US 2021 Third Quarter Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Blake Fernandez. Please go ahead.

Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' third quarter '21 financial results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Reuven Spiegel, EVP and CFO; and Todd O'Malley, EVP and Chief Commercial Officer; as well as other members of our management team.

The presentation materials used during today's call can be found on the Investor Relations section of the 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 statement. 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 the 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 release has been reviewed, and we are covering less segment and market information that is incorporated into the third quarter release.

On today's call, Reuven will review financial performance I will cover capitalization and guidance. Todd will cover operations and CapEx, and then Uzi will close with a few closing strategic comments.

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

Thank you, Blake. On an adjusted basis, for the third quarter of '21, Delek US reported net income of $9.9 million or $0.13 per share compared to a net loss of $99.5 million or a loss of $1.35 per share in prior year period. Our adjusted EBITDA was $110 million in the third quarter compared to a loss of $11 million in the prior year period.

The second paragraph of the press release highlights $11 million of after-tax tailwind or $0.15 per share of items included in adjusted results. Page 10 of the release provides a breakdown of inventory hedging impacts, and Page 14 provides other inventory impacts in the quarter.

On Slide 4, we provide the cash flow of waterfall. In the third quarter of 2021, we had a positive cash flow of approximately $75 million from continuing operation, which includes a working capital detriment of $42 million.

With that, I will turn it over to Blake.

Thanks, Reuven. Slide 5 highlights our capitalization. We ended the third quarter with $831 million of cash on a consolidated basis and $1.39 billion of net debt. Excluding net debt at Delek Logistics of $896.5 million, we had net debt of approximately $495 million at September 30, 2021.

Moving to Slide 6, we provide fourth quarter guidance for modeling. Operating costs are forecasted to be in the range of $150 million to $160 million. This reflects the impact of elevated natural gas prices and assumes no impact from ongoing insurance proceeds.

Before turning it over to Todd, I would refer you to Slide 7 where we illustrate our cost structure relative to peers. Due partially to different permissible classification methodologies, our G&A tends to screen high, while our OpEx screens low. Based on investor feedback, we thought it would be helpful to combine the 2 expenses juxtaposed against different metrics, including enterprise value, refining capacity and number of employees, to gauge competitiveness of our overall cost structure against peers. As you can see, we screened very competitively.

With that, I will now turn the call over to Todd to discuss operations and CapEx.

Thanks, Blake. During the third quarter, our total refining system crude oil throughput was approximately 282,000 barrels per day. Krotz Springs incurred a planned shutdown due to Hurricane Ida but was one of the first facilities back online, resulting in a fairly minimal impact to throughput rates during the quarter.

In the fourth quarter of 2021, we expect crude oil throughput to average between 280,000 and 290,000 barrels per day or approximately 94% utilization at the midpoint. The next major plan turnaround is at our Tyler facility, which is currently scheduled for 2022.

On Slide 8, capital expenditures during the third quarter were $29 million, representing a significant decline from the first half spending levels. The full year 2021 capital program is expected to be in the range of $205 million to $210 million on a gross basis, which is consistent with previous guidance that contemplated the potential net impact of insurance proceeds.

I will now turn the call over to Uzi for closing comments.

Thank you, Todd, and good morning. The significant EBITDA improvement reflects better operational performance and reliability compared to the first half of the year. With no major turnarounds planned until next year, our system is well positioned to capture the improving macro environment.

Ongoing insurance proceeds and potential for small refinery exemptions offer tailwinds into the fourth quarter. DKL units recently reached an all-time high, which lowers their cost of capital and reinforces the value embedded within the Delek portfolio.

As we move into 2022, Wink to Webster should provide a positive contribution throughout the year.

Finally, later today, we plan to publish our 2021 sustainability report. We encourage investors to review our progress on our ESG efforts.

With that, operator, will you please open the call for questions?

(Operator Instructions) Our first question comes from Ryan Todd from Piper Sandler.

Congrats on the results, gentlemen. And maybe a first question, Uzi, you've done a great job stabilizing and strengthening DKL over the past couple of years, which I know was one of the things you were initially focused on. But the market still doesn't appear to really be reflecting in the valuation of DK. We've continued to see numerous of your peers consolidate their MLP affiliates. Can you give us the latest on whether you still see DKL serving a useful purpose, at least as an entity, thoughts on consolidation or a minimum -- thoughts on selling down part of your stake in DKL to try to force the market to reckon with the valuation discount?

Ryan, thanks for taking the time to ask us these questions this morning. Let us take them one by one. The strategy all along, 3 years ago -- and I remember a couple of notes coming from you guys saying it will take time to unfold that strategy. Well, it's coming to fruition. DKL is hitting all-time high. The cost of capital of DKL is on the low end of our MLP peers, if you will. And also the situation with the drop-down that is -- or the Wink to Webster that is starting and maybe in the future drop-down as well as the fact that DPG from an organic standpoint is coming up because of all the activities in the Permian. We feel that DKL is a very strong tool in our toolbox.

We're not going to limit ourselves to any of the options you mentioned. We are looking at it carefully. We thought that $50 is a fair value for DKL. At the same time, DK is not of any need of cash or anything like that. I know that some -- most -- the market sometimes is anxious for actions, but sometimes the best actions are no actions until things clarify.

We know the value in DKL were not down. We see the difference between the valuation of both companies while there's an arbitrage, but we are not in a hurry to do anything just because of the fact that we want to protect DKL. And also with a DK turning to a positive cash flow, as you saw, and turning the corner and the outlook for SREs, which we continue to believe that we strongly deserve them, I don't know that we're in a rush to do anything or not to do anything. We just continue to value our options.

Okay. And maybe -- I mean you just mentioned the inflection in cash flow and in free cash. As we think about looking into next year, any thoughts on what the CapEx budget could look like and priorities for the use of -- how would you think about the priorities for the use of that excess cash should you continue to generate meaningful free cash flow?

Absolutely. I'll let Blake earn its nickel for this morning and answer this question.

Yes. Let me -- Ryan, I'll take the CapEx piece. So obviously, we need board approval. And I think next quarter, we'll come out with a more formalized budget. But the way I would just help frame it up for you in terms of having a placeholder in the model, if you look historically, we've said maintenance capital plus turnarounds is roughly 175 to 200. Obviously, during periods like COVID, you go through a deferral process and you go to the low end of that. So I think it's fair to think coming out of this, we're probably trending toward the upper end, so call it, $200 million in terms of maintenance and CapEx. There are some additional projects now that we're generating free cash that I think we're going to probably look to have some minor growth, and examples of that would be systems upgrades that I think are going to help us from an efficiency standpoint. There's some small quick-hit projects that are very low capital but quick returns on EBITDA. And of course, we have the retail build-out. So again, without giving you a formalized number, I think you're at the upper end on maintenance and then maybe a little bit of growth.

The final thing I just want to make sure and point out on CapEx is, keep in mind, as DKL is becoming a much larger entity and coming into growing on its own, that's a self-sustaining entity. So whatever the CapEx is for that going forward is really not impacting the cash flow to DK. So again, we'll give more formalized guidance on what the spending numbers look like next year. But hopefully, that helps in terms of framing up something for you on modeling.

The next question comes from Manav Gupta from Credit Suisse.

Uzi, I wanted to extend my condolences to the entire Delek family on the sad and untimely demise of Louis. As I only met him once or twice, he was a very nice gentleman. So I'm sorry for your loss, Uzi.

Thank you, Manav. Thank you. We really feel sorry about it. I was planning to say something by the end of the call, but I'll say it now. Louis was a great leader, great friend. And the entire Delek family feels very sad about him, going away too early. And we keep him and his family in our thoughts and prayers. Go ahead, Manav. Thank you for your kind words.

Uzi, quarter-over quarter, El Dorado, excellent improvement, whether it's gross margin, whether it's OpEx, both fronts. So help us understand what you did different, how things came together because this is a very strong improvement quarter-over-quarter if you look at that refinery.

Well, Manav, we just came out of the turnaround at El Dorado. Remember, we -- the turnaround in 2 tranches, actually 2.5, if you will. We fix the -- that refinery. And I think the refinery manager, [Mike Reed], is doing excellent job over there. We're running the refinery more than 75,000 now, actually close to 80,000 this month. Now obviously, we will continue to optimize that.

Now the second part to do a better job over there is to improve the commercial initiative. You see in the refining organization a big number of refining. These are initiatives or things that we do on the commercial side that something that will continue to happen in El Dorado or Krotz because we want them to be as competitive.

Now one thing we need to remember, we do believe that both Krotz and El Dorado specifically, we do believe others as well, but specifically these are SREs. As we continue to work with the administration, and we strongly believe that we deserve these 2 like we got them in the past. So if you think about that and you add the strong operation changed after the turnaround led by Mike Reed , the commercial part that is changing as we speak and the SREs, which we believe that we should get them, you're looking at a very competitive asset also for Krotz. So thank you for that question.

Next question comes from Carly Davenport from Goldman Sachs.

My first one is just around refining profitability in the quarter. It's great to see the inflection there. Are you able to talk about what is reflected in sort of the other refining bucket? I guess if we think about the earnings from the 4 core refineries, results were probably more in line with our forecast, and the other bucket was a very positive contributor. So any colors on that would be helpful.

First, Carly, I want to thank you all for the word of confidence lately. And as we said, we'll do everything we can not to disappoint you. Vis-a-vis the refining organization as a whole, and I can let Todd talk about that. I'll just say a few words before him. This is -- we run our refining organization as an integrated system. And some barrels sometimes find themselves in one place versus the other. We are looking at our obligations vis-a-vis third parties. We are looking at our RINs, and sometimes we move things around. It's very difficult to allocate that activity to specific refineries always.

Now sometimes these numbers are small. Sometimes they are actually taking a hit, and sometimes they are more -- bigger than that. So in this part, there are several activities that as a result of us taking steps ahead of the market in different areas that contributed to that. I'll leave it to that, unless Todd wants to add anything to that.

No. I think Uzi covered it very well, Carly. It's a number of different things that all add up in small little pieces. And we're obviously watching that every day and making sure that we're managing it actively in the market.

Great. That's helpful. And then the follow-up was just a bit higher level. I guess as you think about where we are on the macro, curious how you would frame the path towards the company inflecting back to positive earnings. Refining margins have certainly improved here. But on the other side, you've got Brent-TI has compressed a bit. So if you could talk a little bit about some of those moving pieces and how it ultimately impacts your ability to get back to that kind of more normalized refining earnings profile.

Yes. Absolutely, Carly. And we don't look at the Brent-TI as a normal thing. We look at Brent Midland. Only 3 weeks ago, Midland was positive, what, $0.75. And now we are at breakeven -- around breakeven. So if you look at that, our -- we can move between Midland and NTI pretty easily. And that's what we do on a daily basis. That's what actually you expect us to do. So I don't know that we are too concerned about Brent-TI versus Midland-TI because of our ability to go back to Midland.

Now please remember, you know it, and we see it every day. I know that producers are saying that they are going to be very disciplined. Our DPG gathering system is growing by the day. So if we thought a few months ago that the growth next year for Midland will be 500, 600, we're changing our mind as we speak because of price of oil being at around [$80], I know that it was a little lower yesterday. But just to answer your question, point blank, we are not concerned about Brent-TI because we think that if it compresses, then Midland should come into a negative territory. Otherwise, the arbitrage won't make sense for export. That's one thing.

Second, vis-a-vis the crack spread. We always thought that '21 will be a year that things will change, and they're actually changing in front of our eyes. I saw that Pfizer came today with an idea that they have a medicine for this pandemic. I think the Board will start working towards a solution here. Also, let's be clear. People are tired of sitting at home, and also employers are tired of people not coming to the office. So there is a chance that 2022 in our mind will be a very, very strong demand year. That also on top of the idea that in Europe, the energy prices or the energy crisis that led or that leads to the energy prices don't make refineries over there as competitive. So I think that we are pulling out of the downturn as we speak. That was a long answer to a short question, but I hope I covered everything.

(Operator Instructions) Our next question comes from Roger Read from Wells Fargo.

Just, I guess, in some ways, I'd like to follow up a little on the last question, Uzi. It's been a long time since we've been in a market where we didn't have an inland dip. And obviously -- let's say, obviously. But I don't think we've seen enough production growth to really change that anytime soon. So when you started the company, first acquired the Tyler unit, that was the kind of market we're in. So as you look at it today, what changes, if any, would you make in terms of where you're trying to sell the product or any other crude sourcing opportunities besides switching between Midland and TI to help you on the feedstock side?

That's a great one. Do you want to take that one, Todd?

Yes. Sure. So Roger, I think, again, we've talked about this on a couple of previous calls, but one of the beauties of having the DKL system surrounding all of our assets means that we have just incredible embedded optionality. And that optionality is not just simply to run light sweet barrels. We have the steel on the ground that gives us the capability to optimize across grades, across sweet and sour. So on the crude side, we're looking actively at a lot of the dislocations that are happening in the market as we speak and shifting our crude slate around.

On the product side of it, obviously, with the unfortunate circumstances in the RIN market being overvalued, we're also looking at how we can optimize the product slate in terms of pushing more of the selling arcs away from the bulk supply region in the refining system and out into the rack availability that surrounds in PADD III and other pads. So from that perspective, we're looking at that every single day. We're actively working with partners. We look at exchanges and, obviously, different crude slates. So I hope that answers your question.

That's definitely helpful. And kind of the unrelated follow-up, closing in on the completion of that renewable diesel facility in Bakersfield or at least I imagine they're closing in on it, I was just curious how that looks to you. And as you look at other opportunities in renewable fuels, I know you do a little bit already, but what are some of the other things that are out there, some other opportunities that you'd be considering, I guess, it would be a good way to put it at this point?

So Roger, I'll just give you a quick update. And really, there's no frankly, pivot from what we've said in the past, which is that the facility needs to become operational. We have a 90-day free look. And so I think stay tuned 1Q event where we could potentially exercise that option.

Obviously, we have our 3 biodiesel plants. We are exploring other opportunities to look at different feedstock options around the country. But I think Uzi has been pretty consistent in the past saying that renewable diesel is a bridge but not necessarily a solution to the global transition. And I think anything outside of what we have in front of us would be extremely capital-intensive. And I think we want to be mindful of where we're spending our money. So we'll continue to evaluate. But I think for the time being, we're going to stick with our capital-light approach, which is kind of what the market already seeing. So I hope that answers your question.

The next question comes from Prashant Rao from Citigroup.

First one was just on the SRE status, broader landscape. There's various litigation going on against the EPA. Just curious sort of big picture, if you could just help us to understand where things stand. I think there were some news or some expectation that one of those cases we could hear something this week, and that might start to give us some clarity or some line of sight into resolution of those applications to that litigation in the coming weeks. So you guys are a lot closer to that. Just wondering if you could help us sort of walk us through what you see out there and kind of what the prospective time line could be on that front in terms of what we should be looking for in the market.

Great question, Prashant. So anyway, around SREs, we continue to believe -- by the way, we do continue to work with the administration, answering questions if they have one. We do believe that the SREs should come soon. It has been past due -- long past due, almost [700] days that we are behind the deadline. I think that many people in different parts of the (inaudible) understand that SREs are something that help them keep gasoline prices low. We all heard President Biden asking OPEC to a lower -- or to increase input in order to lower crude prices. I do believe that they should come soon. Now how soon? I don't know, that's in the end of the administration. We continue to believe that we deserve several of them.

I'm going to remind you again that we -- over the last year, 8x out of -- of course, we got it 7x out of 8 that we submitted and at El Dorado 5x -- I'm sorry, 6x in Tyler, 5x out of 8. So we certainly believe that we are more impacted than others. And we do believe that the deadline for compliance on the SRE or the RINs market for small refineries is by the end of November, November 30. We're 1 month away from that. So we believe that they should come very soon. And again, as I said, we think that we are entitled to several of them, like we discussed with the administration.

Okay. End of the month, sometime in the next few weeks. That's helpful. Second question, maybe a different tact on what was asked earlier. The existing biodiesel production that you have, could you maybe help us understand -- there's a lot of RD or just let's call it BBD capacity coming on stream over the next couple of years. Your existing biodiesel production, could you help us 2 things? One, give us an update on what production levels have been like this year and what you expect for next year? And two, where do you think it sits sort of competitively with some of the new production facilities are coming on stream, the incremental supply? Do you feel comfortable with the CI score you get there and the netbacks you get out of that biodiesel?

That's a great question for one thing, what RINs will do. And if RINs stay high, then every plant is competitive. If RINs goes down, then the refining -- our refining, of course, will enjoy it. So it's a play between the 2. Now these are very low capital -- or very low capital demand. They have a very low capital demand in these assets. I think that the President that runs them, [Mark Reed], is doing excellent job running them as efficiently as close to capacity. We will just need to see how (inaudible) will price next year and how RINs will react to that. We do believe that RINs should come down. And if RINs come down, then we will need to look at how competitive these assets are.

Blake, I don't know if you want to add anything to that.

Prashant, I guess on a longer-term kind of mid-cycle basis, if you're asking like what kind of profitability this should have, we have said to investors before that in general, $0.20 a gallon on a full year basis times 40 gallons a year, basically $8 million to $10 million a year EBITDA. So I mean, hopefully, that helps you from a general modeling standpoint. Obviously, that ebbs and flows per quarter.

The next question comes from Phil Gresh from JPMorgan.

This is actually John Royall sitting in for Phil. He's traveling today. Is there any update you can share on your views on capital allocation? I know you spoke about the CapEx piece. But given the improvement in your profitability in the macro environment will be better going into next year, just any updated thoughts on returns to shareholders?

Yes. First, thanks for taking the time. I'd like to add something to the mix here that our cash position -- while we are adjusting our earnings down, our cash position is improving more just because of onetime events that are helping the cash position. And I'm just going to use several of them as an opportunity to give you a background about the capital allocation that you asked.

We do have insurance that we got, what, $21 million this quarter, and we expect a significant more amount coming in the upcoming quarters. Now of course, we will adjust for that. But that, of course, cash coming to the door.

Also, the settlement that we had with WTW, not building the connector, this quarter will be cash. In the fourth quarter, there will be $25 million -- $24 million coming to our -- coming our way. Also, of course, SREs may impact the cash position dramatically.

So if you look at all these events on top of the improvement in the underlying business, if you will, we start to look -- to think about capital allocation. And honestly, we are too small as a company right now, and we will see how we pay debt, how we reinstate the dividend. We don't want to reinstate the dividend too soon and then change our mind. We want to think about that and also how we look at the market with the energy transformation. Generating free cash flow is something that many companies don't have. And when we have that, we want to use it prudently.

That's really helpful. And then I know you've touched on inland differentials a couple of different times. But just specifically thinking about the low levels of Cushing inventories, how do you think the Cushing and U.S. crude flow situation is going to play out in the next couple of months? And then how do you think that's going to impact, I guess, the Midland would be more important for you guys with Brent-TI there as well?

Yes. I'll let Todd take that one.

Yes, John. So obviously, the sky is falling according to the market in Cushing. But if you look at what happened this week, we saw builds -- high prices cure high prices. And the differentials in Cushing are attracting barrels into that market that's ultimately going to cause that bathtub to fill back up again.

To Uzi's point earlier today, we really are not super exposed to the Cushing market. We prefer to look at the market in terms of the Midland to Brent differential. And that differential has been performing in our favor coming back to kind of flat. In fact, a couple of weeks ago, we even saw a trade fairly significantly negative for a day or 2.

So we feel pretty good about where things are, where they're headed. And in addition to that, obviously, again, reinforcing the comment around DPG volumes that we see coming on much faster than we believe the market is anticipating, I think, gives us a lot of potential tailwinds as we move into next year with a strong margin environment and relatively weak Midland differentials.

The next question comes from Matthew Blair from Tudor, Pickering, Holt.

Just given the increasing activity in the Permian, I guess, I would have thought that your retail segment would have been a little bit stronger. It looks like your retail fuel volumes were down both quarter-over-quarter as well as year-over-year. And then your merchandise sales per store were also down quarter-over-quarter and year-over-year. So I guess could you talk about dynamics in the retail segment?

Absolutely. First, we -- as you see, we elected to close some stores. But if you look at some stores, we are still recovering from the pandemic. We are starting to see the recovery. If you look at September and October, of course, you don't have the numbers, we see the recovery coming on the gallon side. We -- and that will bring the merchandise. We always manage that business very carefully in terms of profitability because we want this year to be a profit year. Now please remember, as we continue to bring online the NPIs, the new stores, that will improve. But you're absolutely correct that we elected this quarter to keep our margins high and to wait for the market to do the activity in the Permian to pick up. It will pick up. And then like has happened in 2014, we are certainly expecting 2022 a very, very strong year for retail.

Got it. And then circling back to the conversation on valuation. So Uzi, on our numbers, Delek is the only company where refining is trading for free. You're sitting with a big stake in DKL. You also have the interest in the higher multiple retail, and the stock has lagged year-to-date. So what -- I guess I'm just not sensing much of an urgency to monetize these parts. And could you just talk about what actions you're looking at to improve the valuation here?

That's a great question, Matt. As you know, the market is (inaudible). I have a friend that became a CEO of a public company, and he texted me a week ago saying, "Hey, I've been a public company CEO for a week. How did you do that for 20 years?" So -- and over my career here, I've seen it up and down with valuation, and markets can change dramatically. I think that what the market was expecting us to do to start producing free cash flow, which we are obviously continue to improve, especially with, as I mentioned, the insurance SREs and the improvement in the underlying business, we believe that valuation will improve. With that being said, all options are on the table vis-a-vis other assets if that doesn't happen. So by the end of the day, we'll wait for the market to improve. But if it doesn't, we will act.

The next question comes from Paul Sankey from Sankey Research.

Let me second Manav's condolences to you all. So Uzi, a lot has been covered here. I was going to ask you about crude differentials, but you've pointed this pretty clearly at the Midland-Brent differential there. One thing that's changed, seeing as we had a couple of moments of history on this call, was the natural gas price. Can you talk a bit about how that's changing things for you and the industry? And we're particularly thinking about some of the crude differentials and if they're being affected by the change in natural gas prices and the change between particularly natural gas prices. Firstly, here, obviously, in the U.S., much higher; but secondly, the major arbitrage between here in Europe.

Paul, first, thank you for the kind words vis-a-vis Louis. And also in regard to the natural gas situation, if I told myself or anybody a year ago that natural gas would be at $6, somebody would have told me -- that anybody that I would have told him that would have said to me, "You lost your mind." And we are -- here we are $6. I think that this is one -- it is a unique situation. I don't think that it will last more than a year or 2. And I don't know that we changed our business model, especially in light of the fact that we are very well positioned in terms of our natural gas. We are getting very cheap natural gas because of our proximity to the source of the -- of that gas. So I don't know that we're changing our business model much. With that being said, if it continues, then we will need to look at it very carefully, and especially in the Permian, with the associated gas to see what to do with it.

I don't know if you want to add anything to that, Todd.

The only thing I would say, Paul, is obviously, with the elevated prices in Northwest Europe now trading, let's call it, roughly about $22 an MMBtu, maybe slightly higher today, that really puts a bit under the distillate crack. As you see fuel switching around the world mainly focused in Northwest Europe and then in Asia.

So from that perspective, you're seeing headwinds probably of $3 to $4 a barrel in Northwest European cracks because of that. And then again as a result of that, we see a pretty good solid foundational base being built in the distillate that could set up for very robust crack environment, margin environment here in the U.S. continuing through 2022 and out the curve into 2023, if that persists.

Got it. Just a final follow-up. Could you just explain it to me like on a 5-year-old, but you expect Midland to go to a much bigger discount next year? Can you just run us because it's so important for you guys. Can you just run through that? That's sort of (inaudible)

Yes. I don't know that it's going to be -- we never said much bigger. Do we -- what we see is that if Brent-TI closes, then still, the Midland barrel needs to leave Midland and to go to the export market. So if it closes, then something needs to give. Otherwise, producers -- the cost should be reflected somewhere. So I don't know that we think a much bigger discount, but we already saw it at minus 10, minus 20, minus 30. That's especially -- and we are especially surprised with that, with the Wink to Webster coming online right now with the line fill and still Midland is weak. So we will see if Brent-TI opens up to $8, and there's a chance that Midland will go to a premium and vice versa. That's how we look at it.

I'm going to have to stack around the room. My head and my hand is thinking about that, Uzi.

The next question comes from Kalei Akamine from Bank of America.

Standing in for Doug. I've got a couple here. The first one is on the value of the refining business. So there is a perception by some that refining is free but ex DKL. Wondering what you see as the sustainable free cash flow for the stand-alone refining business without the SREs and fully loaded for additional drop-downs from DKL that burden the cost of the refining business and, of course, applying what your thoughts are on maintenance capital. So what does that number look like on a mid-cycle basis, perhaps assuming, I don't know, a $3 WTI-Brent differential?

Well, okay. So let's go one by one here, Kalei. First, you asked about the maintenance CapEx. I think Blake mentioned that it's between $150 million to $200 million, depends on the year. So that's our number, if you will, and you can write it down.

Second, vis-a-vis the ability to maintain free cash flow regardless of SREs. First, we think that we (inaudible) to SREs, and the administration thought that we were (inaudible) to SREs because we were granted them year after year after year. So I don't know that this assumption is the right assumption. It's like assuming that (inaudible) doesn't exist. So all these renewable diesel should go away. I don't know that this is an assumption that as a CEO should take. But let's just put it aside for just 1 minute and assume that we will go back to $0.10 or $0.20 or $0.30 regardless of SREs just because the RVO will be normalized.

We said it and we continue to say it again and again and again, under $15 of crack spread with no backwardation or contango, i.e. 0, neutral, which is now I know we are in backwardation of the SMEs in one backwardation. I know that. But under $15, and with the cost structure we have and RINs being normalized numbers and Midland being at 0, no differentials, we are -- we think that we can generate $500 million of EBITDA refining only. So take $15 with the cost structure that we have today and Wink to Webster, there's no burden on refining. So I don't know why there will be burden on refining with drop-down. And with Midland 0, as CMA of 0, which right now, it is negative dollar. So it works against us, was in our mind, $500 million.

I don't know, Blake, if you want to add anything to that.

Kalei, the only thing I would add, and I think you and Doug were asking about mid-cycle earnings power last quarter. If you go through this quarter and isolate refining EBITDA and you kind of back out the headwinds from Midland, contango, natural gas, et cetera, we generated about $50 million to $60 million of EBITDA. And obviously, I think the messaging there is our $10 breakeven seems to be holding up. So as Uzi said, I think as you kind of escalate toward more of a $15 rent-adjusted crack on a mid-cycle basis, the earnings power of refining is going to exacerbate quite dramatically.

Got it. I appreciate that. So the nuance there is that the $500 million of mid-cycle EBITDA depends on a normalized rent environment. I hope we get back there 1 day.

Well, now let's be honest, if it's not normalized, and the cracks will go up, but also, we do not -- in that number, we did not include the SREs, which we -- anybody can assume whatever they want. But if we are getting them year after year after year, I don't think that we should assume that we won't get them.

Got it. The second question is on the strategic rationale of Delek Logistics. It's really a question about governance. So the pushback that we get is that the free cash flow capacity of the refining business has been burdened by the fixed costs that have been added to it by DKL. So in a trough, DK doesn't pay a dividend, but DKL does. And that raises the concern about the governance where management owns a little bit of both entities but may be influenced by the dividend mix of where it gets paid out. We're sure a lot of this came up in the [Coffeyville] meeting, and they challenge you on a number of things, but I think the market would like to hear you guys address it.

Well, I don't know that management is being -- our compensation as management is largely vis-a-vis DK, very little -- or very small group of people with very little are being compensated, if anything, around DKL. So I don't know that there's anything that impacts management with DKL or anything like that. This is the typical structure that we have a -- with a sponsor MLP.

Now please remember, DKL served very well with the cost of capital. So DK -- very well with all these drop-downs that allowed us over the years to take that cash, pay dividend and buy shares at the DK level. So I don't know where it's coming from that DKL is -- our management favors DKL. Also, the IDRs were eliminated 18 months ago. So I'm not sure what concerns there are, if any. I'm a little surprised with the question.

The next question comes from Jason Gabelman from Cowen.

A couple of quick ones. It seems like a lot of the very material stuff has been covered. First on sweet to sour switching, it seems like some of the impact from higher natural gas prices is weakening sour depths. Can you just discuss your ability to switch between Midland and WTS crude and if you capture kind of that full dip or if there's an offset in terms of the yield.

And then the second one, just a clarification on your cash flow numbers. I think you had discussed getting a CARES Act benefit in 3Q. Did any of that come through? Or is that move to 4Q?

So Jason, this is Todd. I'll take the first part of that question in regards to the sweet to sour. Obviously, the market is moving right now, so we're not going to go heavily into detail around exactly what we're executing just simply because it's obviously very commercially-sensitive information. But suffice it to say again that we have the kit on the ground between DKL and between refining assets to be able to optimize around those streams. We'll capture 100% of that uplift. And in reality, the natural gas is not really a headwind when you look at that. It's already kind of factored into that based on what we're running today. So incremental uplift, I think, is what you would assume.

I mean can you maybe tell us how much sour you've run at the maximum level or kind of what the ranges that you can do?

Well, it depends on us reversing a couple of pipelines that we own. We have not made that decision. Obviously, if it persists, we will do that. But remember, we are just coming out of the pandemic right now, and the activity in Midland is just now picking up. So give it some time to the sweet barrel to come back to the market. I know that everybody is anxious, let's do it in 6 months or 12 months, but that's not how you run a business.

Our outlook for the production over the long term is that the Permian will continue to produce at high levels. I know that the pandemic put hold into that for the last couple of years. But give us some time, the activity will pick up.

And Jason, just to quickly answer your question on the tax refund. So that was received and booked within working capital. So that is reflected in the cash flow waterfall that's on Page 4.

(Operator Instructions) Our next question comes from Paul Cheng from Scotiabank.

Let me first send my condolence to you and Louis family. So really sorry to hear the news. Uzi, a number of quick question. First, maybe what is your natural gas price sensitivity to the OpEx and also the margin capture rate for every, say, dollar per MCF change on a per barrel basis?

Paul, it's Blake. I'll tackle that. So basically, every dollar per MCF equates to 20 million of annual sensitivity or impact for natural gas. And the corresponding impact to that for us is roughly $0.50 per barrel distillate crack move would essentially offset that. So in this environment where you're seeing escalated gas prices, the distillate crack move we've seen has been more than enough to offset that. So we'll take higher prices on operating costs any day to get a higher margin like we're seeing.

Blake, the 20 million is all-in OpEx. How about in the margin catch-up seems that you consume natural gas for hydrogen or (inaudible) or hydro tripping. So what is the piece for the margin capture?

Paul, it's de minimis. There is a very small amount at El Dorado, and it's frankly not -- it's less than $1 million. So basically, it's all in the OpEx lines.

Very good. Secondly, that can you share with us that what is in the third quarter the RIN mark-to-market gain that you booked? And also that what is the current RVO sitting on the balance sheet at the end of the third quarter, the RVO liability I mean?

For the RINs, we never disclose that. We consider that part of our ongoing business. Obviously, we are not building positions one way or another because that's not our business model. But if we are long or short a little bit here or there, we are not disclosing that to the market. That's for our ongoing business.

Sure. Can you tell me what is the third quarter net RIN expense or credit net of the mark-to-market and your ongoing 2021 expense? What's that number?

Paul, we don't disclose that. We just historically have not given that. So unfortunately, I don't have that data to give to you, man.

All right. Then 2 final questions. First, Uzi, I think your overview about the refining has been changing somewhat over the past several years. I think at one point, you were aiming to increase the refining capacity to get a better economy of scale. And I think in the last several quarter, I think the question you received is you sort of say, oh, maybe that you're not going to focus on that anymore. There's a lot of quite a number of refinery up for sale in the Gulf Coast. So how is your view today? Do you think that you're still interested in expanding the refining capacity through the inorganic NIM or that -- we need that has no longer kind of your strategy?

And then the final question is that with your gathering system, what you heard from your customer in the Permian in terms of the activity level over the next, say, 6 to 12 months, is there any insight you can share?

Yes. Absolutely. I'll take the last -- the second one first because it's easy. We hear from every producer that they are going to increase their activity, every producer to the TI. And on top of that, new producers are signing up for the (inaudible) to come into the system. So the activity is picking up certainly.

I mentioned that on the DKL call that we will -- we think that we will see -- we will get to the -- toward the [MPC] by the second part of next year of 120, which is an increase of 50% versus what we have right now. So that's an easy one.

On the other one, which is a little more -- or a little longer, you asked a great question. And we need to weigh in several factors here. First, the energy transformation; second, the fact that we think that our company is too small. It is too small, but -- and we need to grow it. Third, the fact that we have now -- we are back to free cash flow. Fourth, if we buy a refinery, can we improve the operation and what is the sustainability of that refining in long term in light of what's going on with the -- with ESG? So all these factors are being considered as we look at the future. And we don't -- buying a refinery is not like buying [10 shares] tomorrow in the marketplace. That is a strategic decision that we need to weigh into all -- into our metrics. And we look at that almost on a daily basis to take the next strategic step for our company.

Uzi, if you do find a right candidate that you want to -- you will be willing to acquire, what is the maximum (inaudible) that you will allow DK to go to?

Yes. I don't think that DK should go, on a normalized basis, more than 1.5x. That's ex DKL. So if we look at the net debt for DK is now $500 million -- roughly $500 million, we won't -- I don't think that we should allow this to be more than 1.5x on a normalized basis. Now if there's an acquisition, and then all of a sudden, we deleverage over a year or 2, that's fine. But long term, I don't think that we should be above that 1.5x mid-cycle.

There are no more questions in the queue. This -- I'd like -- this concludes our question-and-answer session. I'd like to turn the conference back over to Uzi Yemin for any closing remarks.

Well, first, Jason, thanks for hosting us this morning. I'd like to thank everybody that participated in the call -- on the call. I'd like to have my colleagues around the table, thanking them for making this company what it is.

Obviously, we all mentioned Louis and his family. Please keep him in your thoughts and prayers. But mostly, I'd like to -- actually, I want to thank investors and Board of Directors, but mostly, I'd like to thank the employees of this company who make it the great company it is. We'll talk to you soon. Have a great day.

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