Delek US Holdings Inc (DK) 2021 Q2 法說會逐字稿

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

I would now like to turn the conference over to Blake Fernandez, Senior Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings Second Quarter 2021 Financial Results.

Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Reuven Spiegel, EVP and CFO; and Louis Labella, EVP and President of Refining; 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 the 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 second quarter release.

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

With that, I will turn the call over to Reuven.

Thank you, Blake. On an adjusted basis for the second quarter of 2021, Delek US reported a net loss of $65.2 million, or a loss of $0.88 per share, compared to a net loss of $121.7 million, or a loss of $1.66 per share, in the prior year period. Our adjusted EBITDA was $2 million in the second quarter compared to a loss of $100 million in the prior year period.

The second paragraph of the press release highlights $25 million of after-tax tailwind, or $0.34 per share, of items included in adjusted results. Page 10 of the release provides a breakdown of inventory hedging impact, and Page 14 provides other inventory impacts in the quarter. Separate from these items, multiple factors impacted operations during the quarter, including residual effects of the first quarter freeze and fire as well as the Colonial Pipeline shutdown. While we cannot know what our EBITDA would have been, these events caused us to experience operational disruptions and incur incremental costs related to property damage that significantly affected our results.

The incremental expenses combined with second quarter-related business interruption insurance claim prepared to date, totaled roughly $40 million to $45 million. We're actively working with insurance carriers on both our property damage and business interruption claims recoveries, which will be recognized in the coming quarters.

On Slide 4, we provide the cash flow waterfall. In the second quarter of 2021, we had positive cash flow of approximately $169 million from continuing operations, which includes a working capital benefit of $227 million.

With that, I will turn it over to Blake.

Thanks, Reuven. Slide 5 highlights our capitalization. We ended the second quarter with $833 million of cash on a consolidated basis and 1.1 -- excuse me, $1.41 billion of net debt. Excluding net debt at Delek Logistics of $927 million, we had net debt of approximately $485 million at June 30, 2021. I would note, during the third quarter, we received a full tax refund of approximately $156 million.

Moving to Slide 6, we provide third quarter guidance for modeling. Third quarter operating costs are forecasted to be in the range of $145 million to $155 million.

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

Thanks, Blake. During the second quarter, our total refining system crude oil throughput was approximately 267,000 barrels per day. This was impacted by turnaround activities and the fire at El Dorado, lingering freeze impacts at Big Springs, Krotz Springs and El Dorado and the curtailment at Krotz Springs due to Colonial Pipeline outage.

In the third quarter of 2021, we expected crude oil throughput to average between 280,000 to 290,000 barrels per day, or approximately 94% utilization at the midpoint. We are currently back to normal operations at all 4 of our refineries and have no major planned downtime for the remainder of the year.

On Slide 7, capital expenditures during the second quarter were $66 million, reflecting turnaround activities and fire-related repairs at El Dorado. The 2021 capital plan is expected to be $175 million to $185 million, including turnarounds and net of estimated insurance proceeds.

Next, I will turn the call over to Uzi.

Thanks, Louis, and good morning, everybody. Multiple factors impacted operations in the first half of the year and between insurance claims and tax refunds, we expect meaningful cash benefits over the coming quarters. At the same time, we are actively pursuing small refinery exemptions. Our company has a long history of being granted SREs, and this would go a long way in positively impacting the economics of our facilities.

Moving to operations. We are pleased to resume a growth in the retail segment with 2 new-to-industry stores in the planning phase. New stores to market will complement our existing branded portfolio, which have been resilient throughout the pandemic. Finally, logistics performance recovered from depressed levels in the first quarter, and we expect that business to remain stable for the balance of the year. DKL continued its long history of distribution growth with 33 consecutive increases.

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

(Operator Instructions) Our first question comes from Manav Gupta with Credit Suisse.

Uzi, I had a question on SREs. If you look at the history, you did get them for as many as 3 refineries. I think 2 of your refineries are definitely eligible. There is a Supreme Court ruling out supporting the SREs. So I'm just trying to understand how confident are you or your opinion, how strong a legal case you have that Krotz and El Dorado should get the SREs? And if you could help us a little bit quantify given where the current rent price is? If you do end up getting it, what's the benefit to you?

Yes. I'll let -- good morning, Manav. I'll let Todd answer the quantifying thing. I'm just going to give you some color around what we think and the low confidence level that we have here.

So over the last years or past years, we applied 7x for each one of the refineries. Out of the 7x, Krotz got it 6x, El Dorado got it 5x and Tyler got it 4x. So our -- and that was including Trump era and, of course, Obama era. So we think that we are entitled to the grant. We are actively pursuing and have discussions with the administration around the situation here.

Now you probably ask yourself what the time line is. So I'm going to give you a little color around that because it's pretty clear what they need to do unless they change the law. The time to turn in the 2019 RINs is by the end of November this year. So they need to make a decision over the next couple of months, unless they change the ruling, which I don't expect it to happen. The time to turn in the 2020 RINs is January of next year, i.e., 5 months from now. And the time to turn 2021 is by the end of March 2022. So over the next 6 to 7 months, there is time to turn 3 years, 2019, 2020 and 2021.

With that being said, you have some maneuvering, not the EPA, but companies when to turn and want to turn in terms of rent which it's technical and there's no need for us to get into it right now. Now you asked about the amount. So remember, we are talking about 3 years here. Todd will cover that. But in general, we're talking about hundreds of hundreds of millions of dollars in today's prices.

Todd, go ahead.

Yes. Sure, Manav. If you go and you look at some of our public filings from 2019 and 2020 and look under the production line item that we list for on-road fuels and use that with, let's call it, a rounded number of $1.50 a RIN, you can come up with a number that's somewhere north of $300 million per year, and that's with 3 plants. Yes. And if you do the same for 2020, you get the same thing.

The only other thing I would point out, I know in your question, you mentioned the fact that you believe we'd only ever been granted 3 waivers. In fact, there have been 3 years where we've actually been granted waivers for all 3 of the plants. So I just wanted to point that out as well.

Okay. No, that's fair. Seems like a meaningful amount, pretty big. Just the second question is during the quarter, a lot of onetimes fire this and that and looks like you're pursuing some insurance claims. Again, if you could give us some time line on that, your level of confidence, what's going on with these insurance claims, which could be an additional $40 million, $45 million.

Well, first, don't assume $40 million to $45 million. We actually think that it's more than that because there was some damage in the first quarter. We didn't quantify it for the first quarter, but in our mind, it should be -- well, we think it is more than $40 million to $45 million. We're, obviously, not in discussions with the insurance companies. I'm going to tell you that some of the process we're already getting them as we speak in the third quarter.

So the claims themselves are in the process of being approved by the carriers. The fact that we got money or we're getting money means that they approve these claims. And we expect this to happen over the next couple of quarters, but some of the process are in -- already in the third quarter.

So I don't want you to think that it's $40 million to $45 million. You can probably see what happened and calculate the normalcy in the first quarter and come to a number as well. But it is a higher number than $40 million to $45 million. $40 million to $45 million is only second quarter. And we feel confident that we will start -- or actually, we already did getting process around these claims.

Uzi, my very quick last question is, it looks like you are still -- you want to grow the retail business, you have new stores coming in. I think in the past years that these could potentially double your earnings. So I know there was an attempt for you to sell your retail business, and you've always said, I'm open to it, but I won't do it in a hasty manner when the right time is here. So I just want to know if anything has changed on that front.

Manav, you see the cash flow. We ended the quarter with $830 million SREs. We are in active discussion with the administration around getting some of the exemptions, the insurance process are coming in. There's no need to do that unless it fits the business more. And at this point, having retail fits our biz more, obviously, if an offer comes and it makes sense for the shareholders, we'll sell it. But at this point, I see a very low chance of selling it just because of how comfortable we are with the cash position.

The next question is from Roger Read with Wells Fargo.

I guess I'd like to maybe follow back up on the SRE thing because there's a lot of moving pieces here, Uzi and team. First off, we don't have an RVO for 2021. Secondly, when SREs have been granted, we've typically seen the price of a rainfall, right? There's a supply-demand aspect to it.

So as you step back, Uzi, and look, I know the time line you gave for when the RINs are due, but the whole program has been pretty mismanaged almost from the get-go. What would be the right way to think about it from a -- I think, you've given us the high, but kind of really how you would sort of game plan this out over the next, say, 6 to 9 months?

Roger, I'm -- we have a company to manage here. It doesn't mean that we -- all the RINs at this point. So we didn't turn the RINs just yet. Do we have a liability on the books? Absolutely. It's in the P&L. But we can maneuver with the physical RINs. As I mentioned earlier to Manav, we can -- you have some rules that you can actually maneuver with that. So I'm not going to disclose the strategy here around how to -- how we manage the program. But you're absolutely correct on one side that if all these waivers will be granted, prices of RINs will come down.

I'm just going to remind you that we did not turn the RINs just yet. So the liability is sitting on the books at the price -- at the current price right now. So the P&L will be impacted at the current price as it sits right now.

Now cash flow, we will see how to -- we are not going to disclose it today. Cash flow, we'll see how we're going to move around it. Now do I think that RINs will stay about $50? No, not really. Are they going back to $0.10? I don't think that the administration will grant the -- will grant 30 waivers. I don't think that the majors will get them. I think only small guys like us have a good chance of getting them, actually a very good chance of getting them. So I don't expect RINs prices to go back to $0.10. Do I think that they'll go down of $1.50? Absolutely.

Now you mentioned the RVO. RVO is unrelated to the time that you need to turn 2019, 2020. You're talking about only 2021. And if you remember, during the pandemic, they pushed the time to turn the 2019, 2020 to November and January. Unless they do it again, the deadline is coming regardless of the RVO. And I was a little technical here, but I hope it was clear enough.

No, I appreciate the clarity. I'm just trying to understand all the implications. Let's drop that one for now.

If you look operationally, obviously, the industry has had a tough last 4 to 6 quarters. And we think about Delek and a lot of the inland refiners, it's all about crude diffs. Just curious with some of the pipelines that you're involved in the start-up of Webster to -- excuse me, Wink to Webster, how you're seeing the diff situation? And is there anything you've been able to do in terms of changing your crude streams such as to take advantage of any localized crude diff advantages?

Yes, Roger, it's Todd. Over the last couple of months, we've actually seen a bit of a deterioration in the crude differential situation. Midland was previously trading at a kind of $0.50, $0.60 premium relative to TI. That's come off and is now trading negative relative to TI. LL has also seen a relatively large move from up in the $2 range to down around the $0.50 range. So I think those things are positive.

At the same time, we're always constantly looking at optimizing our crude slate. We're looking at blending opportunities in Cushing. We're looking at various other grades that might become available as balances shift around in the mid-Continent. And I think we're ideally positioned, given our footprint and our partnership with DKL to continue to do that.

And Roger, I would just quickly add. We know through our gathering business in the Permian, the nominations should ramp up toward fourth quarter, certainly into the beginning of next year. So to the extent the prevailing commodity prices is where it is. I think there's a chance of production could start to accelerate a bit and that maybe provide a little bit of a tailwind. I don't think we're going back to double digits by any means, but that may help a little bit.

The next question is from Ryan Todd with Simmons Energy.

Maybe one on M&A. There's been a pretty significant amount of recent activity over the last 12 months, including among some of your peers within the refining space. And just wanted to get your view on what the environment is in the market, bid-ask spreads, your interest in adding scale and whether scale is likely to become an increasingly defining competitive trade amongst the group.

Good morning, Ryan. Well, obviously, we all saw what the deal that HFC just got with the Sinclair. I thought that it made sense, I don't know much about the numbers. But according to, what -- strategically it makes sense for these small companies to come together. I do think that Delek is part of being that group of small refiners that need to continue to think of how to get bigger.

I think that this, obviously, it needs to be the right opportunity, and we are very patient, especially in light of the fact that we expect some of the SREs to be granted because we really think that we're entitled to several of them. So if this is the case, then the situation of both El Dorado and Krotz is dramatically different compared to what it is today just because of the fact that all 4 refineries will be in good position to continue to operate. And that, for itself, will help maybe looking at other opportunities.

I don't think that long term, 5, 7, 10 years from now, these small refineries or these small companies, Delek included, should be -- should continue to be as small. Scale is very important. And I'll leave it to that.

There's nothing imminent right now. I don't want you to think that we are talking to -- that there's anything imminent. But just I think that like hardly thought that they were too small, and they made the right strategic move. I think other companies will do the same thing.

Okay. That's helpful. And then maybe a question on your throughput target for the third quarter, a pretty high level of throughput there, obviously, a little maintenance in the second half of the year for you guys. But I think it's maybe the highest range that we've seen since 2018 from you, obviously, a different refining operating environment that we see right now.

Can you talk a little bit about how you're thinking about utilization rates versus margins right now as the industry is still kind of walking that fine line on the recovery here?

Yes, Ryan. This is Louis. Yes, we're looking at like 92% to 96% utilization going into Q3. I'm happy to say that we're all back to normal after the freeze, the turnaround, the fire event. So it's really stabilizing and showing what the refineries can do and optimize. And to be able to truly optimize, you've got to run and run stable. So that's our outlook going into Q3.

Great. And the margin environment is -- I guess, in your regional markets is supportive of those types of rates?

Yes. I'm going to repeat what I just said, Ryan. The door is open for SREs. And we need to think how to run the refineries assuming that we get SREs or don't get SREs and that's the risk that we need to think about, and we weigh on a daily basis, on a weekly basis. Because if you add $1.50 to Krotz, you need to run it wide open. Now obviously, these are the things that we need to consider as part of our program.

The next question is from Theresa Chen with Barclays.

Uzi, maybe if we can just revisit this SRE situation and just put a bow around it. Just boiling it all down, when I think about your upward bound of the $300 million per year using the $1.50 per RIN price, does that mean that you have roughly 200 million RINs between Krotz, El Do and Tyler between 2019 and 2020? RINs you have on hand as we sell into the market since the deadline to turn those in have not come up.

Theresa, you asked several questions. First, let's stick to the numbers. Todd, because you have the numbers in front of you, just stick to the numbers, and then I'll give an explanation about how we go about it.

Yes. Absolutely, Theresa. So you are correct in a roughly $200 million RIN number for that calculation that we're doing.

We want to be clear, it's not $200 million, it's 200 million RINs per year between the 3 of them, 200 million RINs per year for 3 refineries.

Got it. And so...

Okay. So now you ask how you go about it. Obviously, we own many RINs because we didn't want to be exposed in case the Supreme Court comes with something different. But now that we know that they did, and according to the history we had with the SREs and some discussions we had with the administration, we are looking at it as a whole program, how to balance between turning them in or not holding them. We -- obviously, the liability is sitting on the books.

The P&L is already not assuming -- the P&L is not assuming any SREs, and it reflects the $1.50 or $1.50 RINs today. That's the P&L. That's what you see in terms of the EBITDA. But now we need to manage the cash around it, and we need to manage the situation because there's some uncertainty about different things.

With that being said, as I said, the deadline is coming. It is not 3 years from today that somebody can make a decision. And we turned the 2019 applications 2 years ago. And recently, we turned the 2020 and in the near future, we'll turn 2021 applications. So we -- and the deadline for turning the RINs, as I said, for 2019 is November, 2020 is January of 2022 and 2021, March of 2022 as well.

So for me, the type of decision is coming, and that's what investors are trusting us to do to balance between these applications, the waivers themselves went to 10 RINs, how many RINs to keep and how to manage that risk versus the reward. I'll leave it to that because I don't want to get too technical here.

Got it. And just thinking about the rationale for why Krotz and El Dorado were able to receive the SREs even during the last Democratic administration, can you talk about the drivers of that? Is it lack of lending capability? Any puts and takes as to why you think that this is pretty for sure?

Well, there are actually almost 10 criterias, if you will. And again, I read the applications myself several times. Just -- I'll just go by different CAG is the most important one. First, all these refiners are in small communities that the impact on them is pretty big. Second quarter, as we all know, is a pipeline refinery and El Dorado for the most part is the pipeline refinery. So both of them are suffering, there are no opportunity to blend, for the most part, any gasoline.

The third part is that we -- the acceptance of ethanol in these areas is according to the rules and probably some others that if you want, you can go to the EPA website and they say all the criterias. But -- and then they score it. And we know already that some of it was score -- or some of them were scored in the past by the DOE. So I -- and especially in light of the 2019 -- I'm sorry, the 2019 situation, 2 years ago; and 2020 because of the pandemic; and '21 because of the pandemic, then we think the situation got even worse whereas what it used to be in the past.

The next question is from Phil Gresh with JPMorgan.

Sorry. User error. Can you hear me, Uzi?

Phil, good morning.

I'll try that again. Renewable diesel, I guess, I know it's not your project per se. I'm just curious how you think about what mile markers would matter for you in terms of the investment opportunity. How are you thinking about this? Is this a 6- to 12-month opportunity? Or is it still wait and see?

Phil, it's Blake. I'll take it. I mean really, the reality is it's a 90-day free look once the facility is operational. Going on the Global Clean Energy time line, it's supposed to be an early '22 type of time frame that we're dealing with. And so we're really just kind of moving pattern, wait and see at this point. And once we have the opportunity to get in there and make a decision, that's kind of when we would do it. So nothing has really changed on that front a lot, but that's kind of the time line we're on.

Okay. Got it. Second question, just around DKL, Uzi. The value of your ownership in DKL appears to exceed the value where DK is trading at this point. So I guess how do you -- you've talked a lot about various cash opportunities between SREs, tax refund, business interruption proceeds, a lot of things coming in the door. If you get some of that cash in the door, is buying back in DKL a consideration? Are there too many tax ramifications? Do you think it's an area of value unlock or no?

Well, so first, Phil, you touched, and Reuven mentioned that, we touched the situation with the tax refund. We actually guided already during the third quarter. So it's in the books as we speak. So as you said, if the plan goes -- or if it goes according to our plan, there's a tremendous amount of cash coming our way. That actually doesn't change much our thought process about DKL because we continue to think that DKL is an engine that we want to grow.

Now we are not in the business of owning 80%, but we're not also in the business of paying 9% return. So at this point, we're just comfortable where we are. If the situation continues, that we will continue to pay 9%, then we probably need to look at it very carefully in the future and to say strategically what we want to do with it. Regardless, 80% is not the right number. It's either we need to bring it in or to sell down some units, and we'll see according to the changes in the market over the next 2 to 3 quarters, what to do with it.

Got it. And in terms of the growth potential, I guess, you'd be in the right environment, you be more inclined to grow and potentially do further dropdowns if the valuation made sense?

That is correct.

The next question is from Paul Sankey with Sankey Resources.

Uzi, Paul Sankey here with Sankey Resources. Uzi, I'm trying to make some sense of the near term as a low-grade question. So if we look at Q3, we've got the tax refund. How are things going? I mean, obviously, there was very specific weather issues in Q2 and the rest. Are we now at a situation where everything is running well and margins are looking good, which are what seems to be the case as far as margins go on those grades?

Well, so as Louis mentioned, we are -- first, Paul, great to hear from you. And again, good luck with your new endeavor.

Thank you, sir.

Second, as Louis mentioned, we are running pretty much wide open, 280,000 to 290,000 barrels, so 92%, 93%, 94% utilization. It makes sense to run these barrels. It will make sense even more when we get some answers around SREs. And -- but for the most part, we're running as normal.

So essentially, the tolerance thing is holding you back on how much you're running just to avoid the incremental cost. And if you could continue, I might be way out of date here, but I always remember Krotz was a jet fuel type refinery. But are you more or less exposed to the weakness in jet or the lack of demand that we still see or is that improving to if we just go to the underlying story?

Yes, Paul, it's Todd. We've really done a great job in conjunction with the folks that Louis has at the plant in optimizing the product make around the downturn in jet fuel. So we've really minimized what we have. We have a knob that we can turn pretty much instantaneously to get back in the jet business. And in fact, we are seeing demand come back in that localized market. Our contracts are not as exposed as you might believe to, I'm assuming what you're referring to is just the outright Gulf Coast dip. So we're actively watching that, and we'll continue to optimize the system. And as jet demand returns, we'll continue to increase that if it makes economic sense.

Understood. And then, Uzi, if we could do a strategic one, and I think you've addressed a big part of this with the answer to Phil. But it's very striking that Greek government debt yields are negative, and debt is very cheap. And you mentioned DKL, for example, has pretty high cost of equity. And the world is kind of confusing with rates falling when we thought they would be rising, et cetera, et cetera. You're the kind of guy that can actually take quite rapid advantage of these shifts that we see and make a -- take a view perhaps against consensus on where things are heading. So I just wanted an update on how you see this crazy world and how that affects your view the best way forward for Delek.

Well, I'm not sure -- and first, thanks for the compliment. I'm not sure I'm smart enough to think how the world will behave. However, I do think that the world is a little tired of the pandemic, and people will find reasons why to go back to some kind of normalcy. If this is the case, then we'll see inflation going up, and then rates will go up with it. I think that we just took advantage of locking in a note on DKL until 2028.

And I do think that there is a risk of inflation and risk of high rise -- or rising interest rates. If, of course, the printing continues like usual everywhere and the amount of money that is chasing return is just crazy. And eventually, that will catch up with us, the amount of money that is being moved around. Just one person's opinion.

So I mean basically, strategically, you've taken advantage of low rates, but essentially everything you're trying to do remains more or less. I mean I guess, for example, historically, you've run as little debt as possible. I just wondered if maybe it would be an idea to run a higher debt in this environment while you can take advantage of that. But...

I think, Paul, SREs is a big portion of the strategy here. The -- I think that the market underestimates what the amount of cash that SREs can bring to a company like Delek. And if this is the case, then our situation, our cash situation, which we have now at $30 million, and that's before the tax refund and the insurance. And of course, SREs, the strategy may change rapidly for Delek over the next 1 to 2 quarters with the potential cash coming in.

And does that imply that you think there will be a resolution on it? I mean I know it's just impossible and if I may add, but do you think there'll be a resolution to this nonsense within any kind of a reasonable time frame? What would you say?

I don't know much about the policy because I think this is at the highest level within the White House. But I think that the SRE situation and the fact that Supreme Court said specifically that companies are entitled to get SREs, I think, the administration will grant some waivers. Just this is a pure guess, my guess. And I think that we are very much top of the line over there in getting these SREs.

The next question is from Matthew Blair with Tudor, Pickering, Holt.

The $40 million to $45 million from operational disruptions in the fire and the freeze, could you talk about exactly where that flowed through your financial statement?

Matthew, it's Blake. It's kind of spread throughout all the refineries. We haven't quantified specifically. But I will tell you, of that, about $10 million is operating cost-related and the rest would be business interruption, which, I guess, you could argue through margin and throughput. So $10 million of it's in operating costs. And just as an aside, while you're on the topic, we outlined in the second paragraph, the wholesale contract fee, which was about $8 million. That's in the operating cost of the Corporate and Other segment, in case that's helpful to you as well.

And then, Uzi, on your modeling, are El Dorado and Krotz cash flow positive in a mid-cycle environment, if they do not get SREs?

Can you repeat the question, Matt?

Sure. Do you think that El Dorado and Krotz Springs are cash flow positive if they do not get SREs? Are they dependent on SREs to be cash flow positive, to your question here?

I understand the question. Well, it depends on the day. Obviously, if RINs are $1.70, then it's -- when they are $1.64 right now. They are marginally cash flowing, but they are not rocking and rolling. If RINs would go back to $0.20, $0.30 even in today's cracks -- I'm sorry, today's cracks are very, very good. If they go to $0.20, $0.30, then you're talking about hundreds of millions of dollars EBITDA without the SREs. So these 2 refineries are -- and that's the reason they were granted these waivers in the past because the program was initiated and designed to deal with the refineries like El Dorado and Krotz. I didn't run DLK -- I haven't looked at it in the last 2, 3 days, but the fact that we're running them 280,000, 290,000 means that we are in the green here.

The next question is from Neil Mehta with Goldman Sachs.

So 2 quick questions for me. First on Wink to Webster, can we just talk about where we stand from a construction standpoint? And the related question around that is, just talk about how you see the pipeline situation in the Permian. And we're clearly in a position of pipeline under supply in 2018, 2019. But we've seen a all of these big pipes coming online that's even away at the differential. How do you work through that excess pipeline capacity beyond just production growth? Do you think the Permian will rationalize supply pipeline to enable better utilization?

Okay. So I'm going to refresh your memory, Neil. I know that you remember that better than I do, but I'll say just because I enjoy talking to -- listening to myself. So Wink to Webster is supposed to come online fourth quarter. I think there is a delay of 2, 3 weeks. But in general, we are in line with this coming online before the end of the year this year.

Obviously, as we said, it's a fully subscribed pipeline, I think, 95% with the workup shipper of another 5%. That, obviously, will bring the situation in the Permian to overbuild of pipelines. I think that companies that are not fully subscribed and run half empty, if you will, pipelines, we'll start thinking what to do with these pipelines, especially in light of the fact that natural gas is in shortage around the Permian -- natural gas pipelines is in shortage.

I think there will be a rationalization of our pipes. And the market always -- we always think that the market doesn't have a way out. And finally, we are a supplier. And by the end of the day, we are surprised with how the markets react to different things. Do I think that differentials will go back to minus 5% anytime soon? No. But probably, we are -- over the next 2, 3 years, something will happen with several of these pipelines, and we'll get back to normalize the differentials.

And then, Uzi, remind us what do you think the incremental EBITDA associated with Wink to Webster is for Delek. And how good should we feel about the economics? Are they locked in? Or is there any variability in the way we should think about that?

Neil, it's Blake. I'll take it. So from the last part of your question, I mean, it's take or pay, right? So there shouldn't be a tremendous amount of variability. We haven't disclosed specific EBITDA, but I think I can help you do some arithmetic.

If you just kind of think about our net investment somewhere in the $360 million range, in order to sanction a project in the midstream, we need a 15% rate of return. So you can apply that math. And the only other piece of the equation, I should mention to you, we've said publicly is we did do project financing, and the interest expense associated with that is roughly $10 million or so per year. So whatever math you come up with on the EBITDA, you technically may want to take $10 million off for interest expense. So...

The Next question is from Doug Leggate with Bank of America.

Uzi, you've walked through a lot of the moving parts on what could happen. I'm just curious, we, obviously, have a new administration. They haven't been rushing to offer SREs despite the Supreme Court ruling. So I'm just curious, have you given any consideration to the possibility that RINs -- or the SRES are not granted? In which case, what are the major capital requirements across the system that might prompt a more strategic decision? Or does that won't enter into the equation as it relates to potentially closing one or more of these smaller assets?

First, Doug, good morning and happy to have you back. Really, we missed you. So thanks for joining the call. You asked a great question. What if you don't get the SREs? So obviously, the liabilities and the RINs are on our books right now. So it's not that we are sitting here not doing anything. We are taking care of -- by the end of the day, companies like us need to manage most -- mostly our cash, that's what you see on the balance sheet. We're managing our cash very carefully. We got all that cash coming in. Eventually, the market will change. And the demand will come back.

I don't -- I said it all along, I think you and I spoke about even when I said that '21 won't be a great year. I think '22 is going to be an awesome year. And we just look at it and work through the situation. Shutting down any of these refineries at this point is not on the table. I think that SREs, you mentioned that the deadline -- there is a deadline to that. For 2019, it has been on their desk for 2 years.

And Doug, if I could just chime in. I think maybe -- to your specific question, as you well know, turnaround activity typically is a capital event that drives a lot of these closures. And we have just finished turnarounds at both Krotz and El Dorado. So that's behind us at this point.

Okay. So you guys are running or not. That's what I was looking for. I didn't go anywhere, Uzi, I'm not sure where I've been, but still here.

Anyway my follow-up is your point on the return to maybe a better year in 2022. So to kind of cut through all the moving parts of the Wink to Webster and what's going on with DKL and all the other business pieces you've talked about. What would you frame for us perhaps as your view of the mid-cycle EBITDA capacity of the portfolio you have today? Just so we can kind of benchmark what we think fair value of our portfolio could look like. So on the mid-cycle conditions, however you define that, what do you think the mid-cycle earnings part and cash flow part of the portfolio is today? I'll leave it to there.

I'll let Blake do that because he does the modeling day in, day out, and it's above my pay grade. So Blake, go ahead.

Doug, I'll try and piecemeal it together for you. And maybe at the end of the day, you can apply some sensitivity on your end. But think about logistics. It's a pretty ratable business. Let's just be conservative, and call that $250 million a year of EBITDA. The retail business has proven very resilient even through the pandemic. We say it's about $50 million. So collectively there, you got $300 million of EBITDA that's from very stable businesses.

And then that takes you to the refining piece of it, which, as you know, is very volatile and has been a drag on the overall portfolio. We've said publicly, we think $9 or $10 on Gulf Coast, 5-3-2 crack assuming normalized RIN environment, not where we are now, would be about a breakeven level. So for every dollar per barrel, it's about $75 million of annual EBITDA. And if you look historically, that mid-cycle has been $15 or $16.

So technically speaking, if we can move from a net RIN environment today of about $9 or $10 up toward $15, you're looking $400 million, $500 million from refining. So that on top of $300 million, I mean, you get to some lofty numbers. But obviously, that's not the environment we're in with the RIN environment where we are today. So hopefully, that's helpful.

It's really helpful. Neither do we expect this to continue. Just for clarity, Blake, what are you assuming as the TI-Brent spread in there?

Well, that's a WTI-based crack. So at the end of the day, it's just kind of a normalized, call it -- we're not -- Doug, we're not looking for a big expansion in the spread. So call it $2, $3.

The next question is from Paul Cheng with Scotiabank.

Mr. Cheng, we couldn't wait for you to show up.

Several questions. Can you remind me in the past when you received the SRE, did you get the full SRE in all the trend? Or some of them, there is a partial SRE?

No. When you get a waiver, it's a full waiver.

So you get the full waiver. Because I mean that in some cases, some refinery that they get maybe 1/4 of the waiver in the RVO and some get 50%. So I just want -- I just don't remember whether you get 100% in your facility.

We did.

Okay. Great. And for the $40 million, $45 million, Blake, saying that does not include any of the property damage, there's all BI?

Paul, there's an element in there of both. So...

Do you have a breakdown between the BI and the property damage?

Yes. And again, this is just the 2Q component, but $30 million is BI, $10 million is property damage.

Now Paul, remember, we mentioned that earlier, and I'm sure you heard it, but I would say it again. That's only Q2, there's some damage for Q1 that is not in the $40 million to $45 million.

No, I understand. I was just trying to understand on a going-forward basis, if we use the second quarter as a base because BI, in theory, that once you fix it, then it should come back, right? So with the same market condition, what we should add back as a Phase 9.

Just curious that I understand for the last 2 quarters, whether it's the winter storm or the Colonial Pipeline outage, that's nothing you can do. So with liability that gets suffer on that. But in general, what -- when you're looking at your portfolio, I mean, excluding those 2 incidents, are you happy with your overall reliability of your operations? And if not, what the initiatives that you guys are taking?

Well, the bad guy used to be El Dorado. El Dorado is now after turnaround and after fixing a lot of units in El Dorado. So El Dorado, knock on wood, is running very well over the last couple of months. We have over there a new plant manager that is doing tremendous work. We'll see. We don't want to declare victory just yet, but we're hoping to see El Dorado continue to perform the way it is. Obviously, RINs at $1.60 are weighing on both El Dorado and Krotz, but we believe that $1.50 is not sustainable regardless of how the administration will go about it. And we'll see how it's going to be dealt.

And just curious that do you guys participate in the Solomon survey? And if you do, how El Dorado and Krotz being -- how they rank on the unit profitability and the reliability in that survey? Were they in the middle of the pack in the second quartile or in the fourth quartile? Any kind of number you can share on the inside?

Well, we usually don't share Solomon study. We are -- we do get that for each refinery. Actually, if you remember, Solomon is doing it every 2 years, every other year, we're actually doing it with them every year because we get -- we want to get there. I'm just going to tell you that you can look at the utilization at El Dorado over the last 2 years before the turnaround, and it wasn't great. So the results weren't great. Krotz actually is performing operationally pretty good.

Two final questions. One, just curious if there's any insight you can share about on the Southwest mark demand and also that you guys have a big gathering system. What do you hear from your customer of their operating plan, particularly on the piping operator? And do you get some data that the activity level is going to moving aggressively higher or there is more gradual pace? So that's first.

And then the final question. I think in the last, say, 6 to 12 months, you start to talking, you may not want to make any further acquisitions in the refining side. Do you think that after settlement, that maybe just the one you will be more focusing on? And -- but you -- in the answer of the earlier question, you're also talking about how to improve the economy of scale. So from that standpoint, is that still include refining as a potential area of acquisition or that refining is not something that you want to expand further?

Okay. Let me take each one of them. First of all, E&P, as you know, are still disciplined. The product demand in our areas, it is down. Margins are very strong, but the gallons, especially of diesel in the Southwestern region, it is down. And as you know, we gather from a lot of producers. So for the most part, it is flat. We don't see the growth just yet. You know it. You heard from every E&P company that they will be disciplined, and they want to be free cash flowing.

So for me, that's just an evidence on that. We do see other companies coming in. We signed several new producers to the gathering over the last couple of quarters, I would say, that Todd and his team did an outstanding job in getting that done.

In terms of the M&A -- and I said it in the past that we want to make sure that the energy transformation -- we want to understand what energy transformation means before we move on any other aspect. So that's the reason we thought that we should probably sit on the sideline and wait to see where things are going.

With that being said, regardless of where energy transformation is, I think, companies by the size of Delek should be bigger, not in the near future. There's nothing imminent right now, but going forward, I thought that what HFC did with both acquisitions was outstanding to get bigger. And I think there was more to come from the market. And I'm not being specific about Delek, I was very clear that there's nothing that I'm aware of that is imminent.

Right. But that's including refining, right? So in other words, that when you say getting bigger, it's including also getting bigger in refining?

If refining is the part of energy future, yes.

Next question is from Jason Gabelman with Cowen.

I wanted to ask first on OpEx and SG&A costs. I know last year, you were talking about, I think, an $80 million reduction from 2020 levels. If I look at 2020, it was about $800 million OpEx and SG&A. That's about where the annualized run rate is guided to for 3Q.

So can you just discuss what's going on there in terms of those reductions? Do you still expect those to come through?

Jason, it's Blake. I'll take it. So there's been a lot of moving pieces since we gave original guidance, part of which is operational in terms of fire, freeze, et cetera. Keep in mind, too, when we give the guidance for '21, the original guidance contemplated that Krotz was not running and that has since restarted.

So I think the last public commentary we gave is that we thought on an underlying quarterly run rate, it would be about $139 million to $140 million. And what I would just tell you, you can see the 3Q guidance is a bit above that, somewhere about $150 million. There's 2 things to point out in there. One, we have some onetime work that's going to occur in the third quarter, some unplanned -- I'm sorry, not unplanned, but it's some work at KSR, Krotz Springs and boiler repair at Big Spring. So that's $5 million that will come off into 4Q.

So I think without giving hard guidance on 4Q, I think, $145 million, it should be the range. And the only other thing to point out that's in there that's leading to some upward pressure is natural gas prices, and the sensitivity on that annually is about $20 million per dollar per Mcf. So we have seen an upward pressure in natural gas, and that's adding about $5 million to the 3Q guidance.

So a lot of numbers. I hope that answers your question.

Yes, that's really helpful. And just 2 other quick ones for me. Firstly, can you just discuss the puts and takes on working capital being a benefit in 3Q? And if that's going to reverse? And then lastly, just on the Global Clean Energy Fuels project, I know you're limited in what you can say, but as I understand, there's some priority given the creditors in terms of cash flow before Delek would receive any material cash from that project. So I guess the question is, if you do invest in that project, when do you expect that to be a material cash contributor to Delek?

Jason, it's Blake. I'll take the second part of the question, and then Reuven can answer your working capital question. So we haven't disclosed an outlook. Obviously, we're not in the project. But conceptually, I think, you're describing it correct. We said all along that there are multiple layers of interest expense, mezzanine financing, whatever arrangements Global Clean Energy has. The way I would characterize it is that we have an option to participate in 33% of the project's free cash flow. So in other words, once all of those obligations are satisfied, we would take our share of the free cash flow. So I think that answers your question.

Yes. And let me complete the part about the working capital question. So the increased crude prices caused corresponding increase in accounts payable and inventory and supply offtake. However, we still need to settle some expenses related to the El Dorado turnaround and other expenses, along with some RINs obligations. So it will unwind in the third quarter and some of the positive working capital. This was in the second.

This concludes our question-and-answer session. I would like to turn the conference back over to Uzi Yemin for any closing remarks.

Yes, that was a long one. I've done many of these calls, that was probably one of the longest. So I appreciate everybody's interest on the call. I appreciate the confidence that investors have in us. I'd like to thank my colleagues around the table. I'd like to thank our Board of Directors for their continued support and trust in us. But mainly, I'd like to thank each one of the employees of this great company and that couldn't be what it is without them.

Thank you, and 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.