PBF Energy Inc (PBF) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the PBF Energy First Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note, today's call may be recorded. (Operator Instructions) It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.

Thank you, Erica. Good morning, and welcome to today's call. With me today are Tom Nimbley, our CEO; Erik Young, our CFO; and several other members of our management team. A copy of today's earnings release, including supplemental, financial and operating information, is available on our website.

Before getting started, I'd like to direct your attention to the forward-looking statement disclaimer contained in today's press release. In summary, it outlines the statements contained in the press release and on this call that express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we described in our filings with the SEC.

As noted in our press release, we will be using certain non-GAAP measures while describing PBF's operating performance and financial results, as we believe these metrics are useful. For reconciliations of non-GAAP measures to appropriate GAAP figure, please refer to the supplemental tables provided in today's press release.

I will now turn the call over to Erik Young.

Thanks, Colin. As a result of changing hydrocarbon prices during the first quarter of 2017, we generated a noncash lower-of-cost-or-market, or LCM, after-tax adjustment of approximately $16 million, which decreased our reported operating income. The remainder of our comments today will exclude this special item.

PBF reported income from operations of approximately $16.7 million and an adjusted fully converted net loss of $22.7 million or $0.20 per share on a fully exchanged, fully diluted basis. For the quarter, G&A expenses were $43.8 million, depreciation and amortization expense was $60.9 million and interest expense was approximately $37.2 million.

PBF's reported effective tax rate for the quarter was approximately 38%. For modeling purposes, you should continue to assume a normalized rate of 40%. Our normalized RINs expense for the first quarter totaled $65 million, which is lower than the prior quarter. Our normalized Q1 expense reflects the overall decline in RINs prices and reduced PBF product volumes resulting in a lower aggregate obligation.

Our first quarter realized RINs expense was approximately $45 million, which reflects actual timing of purchases. Despite the reduced compliance cost in the quarter, our view on RINs has not changed. The flaws in the system remain and we expect regulatory reform.

Refining and corporate CapEx for the first quarter was approximately $170 million, which includes investments in the turnarounds at Chalmette, Delaware City and Torrance, as well as for the strategic project in Chalmette to restart the reformer and associated hydrotreating units.

At this point, I'd like to update our consolidated 2017 CapEx guidance. We expect that refining and corporate CapEx for 2017 will continue to be in the $575 million to $600 million range. We are updating our 2017 CapEx for PBF Logistics to $110 million to $120 million to reflect the recent transactions.

With respect to the balance sheet, we ended the quarter with liquidity of approximately $1.2 billion and a net debt-to-capitalization ratio of 38%.

Finally, we are pleased to announce that our board has approved a quarterly dividend of $0.30 per share. Also of note today, PBF Logistics announced its 10th consecutive quarterly distribution increase to $0.46 per common unit.

I'll now turn the call over to Tom.

Thank you, Erik, and good morning, everyone. We accomplished a significant amount in the first quarter of 2017 and that work continues into the second quarter. We continue to focus on the safe and reliable operations of our refineries. And as was mentioned in this morning's press release, we invested over $170 million in our assets with over 2/3 of that in turnarounds. We successfully completed the first turnaround under PBF's ownership at our Chalmette refinery during the first half of the quarter. We refurbished the crude unit -- one of the crude units, which had not been fully turned around in over 14 years. We made a number of improvements which should increase reliability and also made preparations for the restart of the idle reformer and hydrotreating units.

The turnaround took place during the first 2 months of the quarter and was completed on time, on budget and with excellent safety results. The team at Chalmette performed well and the refinery's post-turnaround performance reflects their work. Since the crude unit restart, Chalmette has run over 175,000 barrels per day. And its operating expenses have been approximately $5.35 per barrel, significantly lower than the first quarter average and more in line with our longer-term objectives.

The work to complete the restart of the reformer continues. The project is on pace to commence start-up by the end of the second quarter and is currently projected to be under budget. As a reminder, with these units online, we expect to see improved yields in margins with an estimated annualized margin uplift of $70 million.

Additionally, the construction of the new crude tank at Chalmette is well underway, and we expect it to be in service by late fall. PBF Logistics is funding 100% of the project and net of storage fees paid to PBFX, we expect to generate an additional $20 million in margin to direct demurrage cost savings and increase efficiency at our docks allowing for increased product exports and additional crude flexibility.

In April, Delaware City successfully completed its FCC-related equipment turnaround, on time and on budget and again with excellence safety performance. The FCC was restreamed last week and all other units will be online by the end of this week. As with Chalmette, we expect to see improved reliability and operational improvements coming out of the turnaround on the East Coast.

Our financial results for the quarter reflect the substantial turnaround work completed as well as some unplanned downtime in both Toledo and Torrance. While we experienced some headwinds, we also saw improved product realizations in all of our regions. Gasoline demand was seasonally weak, but we saw a positive distillate demand and margin improvements for chemicals and certain low-value products such as asphalt.

We still have some work ahead of us with the ongoing turnaround of several units at Torrance, including the hydrocracker, crude and coking units. The work on the hydrocracker is well underway, and we expect to have the unit back in service by the end of May. The crude and coker turnaround will begin next week and that work should be complete by the end of June.

As with Chalmette, once we complete the work in Torrance, we expect to see improved reliability and operating performance. In terms of the broader market conditions, we are monitoring inventory levels and are cautiously optimistic that consumer demand and continued strong domestic economic activity will support cracks, particularly the distillate crack, going into the summer.

In the first quarter, there was a significant amount of refining system maintenance, and we are seeing overall system utilizations increase, which, if it continues, could exacerbate already high inventory levels. However, we feel that the U.S. refining system is highly competitive in the global products market and is poised to gain addition market share in the export markets. We see the combination of continuing strong demand in South and Latin America for both gasoline and distillates, supporting production by clearing the domestic product markets.

We are positioning our assets to be successful in any market. Our commercial team continues to focus on improving margins at all of our refineries by expanding into local product markets and maintaining significant feedstock flexibility. We continue to focus on cost control, particularly in Chalmette and Torrance, and in time we expect to bring our operating costs in line with our regional peers. While it is too early to declare complete success, Chalmette's performance in March is indicative of its potential and we will continue to bring our overall system operating cost down.

We continue to see significant opportunities in 2017. We are investing in our assets and our teams to improve reliability and reduce costs. While RINs remains a burden, the drop in prices over the last 4 months has benefited PBF, and we do expect that we will soon receive further clarity on the program going forward.

Today, we have 4 refineries running well with Torrance about halfway through their turnaround work. Cracks remain healthy for clean products, and we are seeing strength in the petrochemical, lubes and asphalt markets. We look forward to the second half of the year, when we expect to have all 5 refineries operating with a clear path, all of our major turnarounds will be behind us, and we have several margin improvement projects that will be coming online.

Operator, we've completed our opening remarks, and we would be pleased to take any questions.

(Operator Instructions) And your first question comes from Paul Sankey with Wolfe Research.

Tom, no better man than you to ask about PADD 1 gasoline. It seems like the general seasonal trade that we would normally anticipate at this time of year is a bit different. And obviously PADD 1 would be the ultimate answer, but I'm talking really about gasoline in general here. Can you just give your latest observations on what we're seeing is somehow -- in what seems to be a bit of new era for refining?

Thanks, Paul. I'll make a general comment. Obviously, inventories of gasoline, essentially flat year-over-year. Demand is flat to down slightly. It's a little early to say whether that is going to continue or change some. We're just getting into complete swing over into the low RVP season. So we're clearly looking at that very closely. The thing that I think perhaps everybody on -- all the analysts on the line were looking at, and we were looking at is coming out of the maintenance season -- heavy maintenance, runs getting over 17 million barrels a day. That's the figure that we're going to watch. I will say this, as we swing over to our lightest weight in the country simply because we're getting light production and obviously some of the moves being made by OPEC is tightening up the differentials, as you see utilization and runs go up, there is also a corollary impact that comes with that, is you will not get the same yield on gasoline on the incremental run, because the light barrel will not fit correctly into the downstream units beyond the crude units, and in fact has some quality issues in getting it into the gasoline pool, particularly in summertime gasoline season. So while we have a -- actually PADD 1 inventories, I think are actually a little bit lower year-over-year, but generally we're looking at gasoline. As I said earlier in my remarks, we're cautiously optimistic on distillate having some legs, because of GDP growth worldwide and the increase in drilling. We're watching gasoline closely.

Yes, the run levels have been quite staggering across the U.S. system.

Yes. Now a couple of things there is, when you have the amount of maintenance and you'll hear us say it in a moment, we started up Chalmette as crude unit after the turnaround. We were running that crude unit about 60,000 barrels a day. Some of that was economic, but some of it was because the limitations on the unit ever since we bought the place. We put it through its paces after we started up and we ran over 100,000 barrels a day. The first time that unit has run over 100,000 barrels a day since 2006. Now expand that over the amount of equipment that was shut down, when you clean out all these pipes, all these pieces of equipment and you bring them on, they can run, and it will slowly back off a little bit. So it's not completely surprising to me that we got up to that level. Some of the flashers and splitters coming online benefit that. But I would repeat when we look at this, I'm going to be very intrigued is if the U.S. refining industry continues to swing as they likely will to a lighter slate, what the collateral impact is in blending gasoline and putting in -- obviously, you're going lose a little bit of distillate. So time will tell.

Yes, Tom. And just, so economics are PBF-specific, I think there is a big focus on -- obviously on Torrance. Can you just give us your very latest on how you feel about the operations there?

Okay. Thank you. Simple answer is I feel better. I said we wouldn't -- it's too early to declare victory at Chalmette and it's way too early to declare victory in Torrance. But we have told you before that we -- this is the #1 priority for this corporation, the safe and reliable operation of this facility. We've had an enormous effort put in place to buttress resources in Torrance both from inside and outside the company, inside from other sites. And that appears to have been paying dividends. As I said, it's early in the game. We did have the pump fire early in the quarter. But Torrance actually ran quite well after that. We actually did quite well in running in the month of March, even though we were starting to shut down some equipment. So we feel we're on the right track. That's -- I don't want to declare victory. This is a process going to take some time. But with the infusion of people and I have said this before to you folks, Torrance is not a steel issue. It's a people issue. It's a systems issue to a certain extent, and that's what we're focusing on. And the good people of Torrance are responding. So we're, as I said, cautiously optimistic and clearly we've seen some progress.

And we'll take our next question from Ed Westlake at Crédit Suisse.

I guess, just continuing on the Torrance theme, the commercial was another aspect of the improvements, I guess, both on the crude side and then product. Maybe an update in terms of the efforts you've made there quarter-to-date? I appreciate it's not running now, but...

Yes, that's -- you just gave the answer to your own question to a certain extent, Ed. But as we said before, we have -- we're very excited about what we believe is going to be higher commercial contribution than we certainly thought going into the acquisition. And we've already captured some of that. We're moving gasoline 10,000 barrels a day or so into Vegas, which is a market that Exxon didn't play in. Obviously, we're getting good netbacks on that. And we're clearing a barrel out of L.A. We're doing the same thing in trying to move more jet fuel into LAX. We got plans underway to expand that. We're in the resid business with Iraq in Torrance. And we've effectively, with no capital, figured out how just with the power of the existing kit to debottleneck the distillate capability of that machine by maybe 10,000, 12,000 barrels a day if the market is there. All of those efforts -- and there are more including crude optionality, we brought in a number of different crudes. But frankly, to speak the obvious, we've been hampered on how much of that we can capture by the operating problems that we've had in the facility. And now that we're in the turnaround, we're not going to be able to capture all of that until we get the units back. But there is no doubt that we have more potential in capturing a higher commercial marketing, if you will, uplift than what we had measured and modeled.

And then maybe this is just my memory, but any updates on the power situation for the refinery?

Yes, I'm going to turn now -- we have the President of the Western Region here and he's a very, very conversant in that.

Thanks, Ed. As I spoke last quarter, there have been a number of things we've already completed with Southern California Edison that have really improved reliability and really increased the coordination between the 2 companies. It's been a good relationship. We continue to pressure them along with support from the city and the AQMD to keep them attentive to what works well for Torrance. So they've made a number of upgrades on the system that we currently utilize to feed the refinery. They've changed work practices. They communicate and coordinate with us much better. So it's given us much better reliability since the September, October outages, and that's working very well. We are continuing to move forward on the new infrastructure project. The engineering work is going per schedule. We have already begun the permitting process on that project with the City of Torrance. We expect that to continue as I have reported in prior quarters and look forward to bringing that online over the coming years. That capital is just going to be spread across the annual capital budget for the refinery in the coming years.

We'll go next to Phil Gresh with JPMorgan.

I will continue one more on Torrance first. Just wanted to get your thoughts on the OpEx side. If I think about your guidance for the second half of the year on runs, it would imply you're going to run over 100% and I know that OpEx is also clearly a big part of trying to achieve your long-term EBITDA target. So as we look towards the second half of the year coming out of the turnarounds, do you have a view on where those costs can add?

So we said, we're targeting $50 million of annualized operating costs expenses at both Chalmette and Torrance, and we're underway. We're a little bit behind probably on Torrance, and it's simply because of the operator problems that we did have. And now we're focused completely on executing these turnarounds without incident, on-time, on budget and getting the units back online. Now, Phil, when you go beyond that, I absolutely expect that you're to -- we're going to see significant progress in 2 fronts, these units -- the Chalmette unit wasn't turned around in 14 years. I think this one is 10. And when you run units that long, you can run -- you're going to run into some problems, and we would expect that with the units cleaned up and turned around and basically have a new car, or your car tuned up, it's going to run better and a corollary with that is good throughput and good -- better OpEx performance. The second thing I'll say, there are a number of things that have been identified already by the team out there that will reduce OpEx, period. But those steps are going to be implemented after we get the refinery up and running, so it's a second half play. But we are still confident that we're going to be able to get that OpEx down.

Okay. Second question is on Toledo. You put up a really good margin improvement on a realized basis relative to your indicators. I was wondering what drove that improvement. Obviously as we move through March and now we're starting to see some increases in Syncrude costs and I'm wondering about the sustainability of this margin improvement? And if you can just give a little more color there?

Yes. Some of it is clearly due to petrochemicals. We've had a good traction in petrochemicals. The whole country has. And we are seeing an uplift and a benefit on that. Toledo, the rest of it really revolves around, as you suggest, the cost of the feedstock, crude, et cetera. We had reasonable cost of crude. We did get impacted and are being impacted, as we speak, from the upgrade or down time, but we blunted that because I will say that as we said, it wasn't maybe as crystal clear as it should be. But the key to PBF has always been, in our mind, having enormous feedstock flexibility and being able to substitute. And one of the things that it's commercial -- our commercial organization did with the refinery is when Syncrude prices blew out there, we did -- we couldn't cut -- totally substitute Syncrude, but we did a fair amount of substitution, brought in other local crudes and other crudes that they were able to procure which will blunt that. But frankly, we'll probably have a little -- a month here where we're going to have some high-cost crude here. Syncrude obviously is back down to -- I mean, look what it was this morning, but a couple of dollars or $1.50 over Ti. So that will be short term and I suspect Toledo is going to perform very well. We did have very good cracks for a period of time. And not coincidently perhaps, right after the upgrader went down and CS got into $89 under Ti and Syncrude blew out over Ti, you can't run that and make money unless you happen to have decent cracks and the cracks respond. It came off the last couple-- since last week like everything did because of, I think, everybody getting a little jittery on those runs numbers.

Sure. And my last question is just for Erik, just on the working capital headwinds it appears we saw in the quarter and how you see that progressing through the year? And secondarily, should we anticipate any cash coming back to PBF parent for the rest of this year from any drops? How are you thinking about that?

We did have a decent working capital use during the course of the quarter, and that -- the bulk of that I think is primarily driven by just an increase in inventory. Some of that is going to be seasonal and then the other portion is going to be driven by just our turnaround activity, whether it's building inventories as we prepare to take units down or building intermediate inventories. So once we're through the remainder of this cycle, we'd like to see some of that -- a portion of that capital come back to us. A lot of that will also be dependent upon where hydrocarbon prices are during the second half of the year. In terms of dropdowns, again we really haven't provided guidance on actual timing around dropdowns. What would say is PBF Logistics has been very active during in the first quarter of 2017. So based on where our ultimate long-term goals are, we feel like we're completely in line of those. We did have an increase in distribution again this quarter, representing our 10th consecutive distribution increase. And we've also said, it's very logical that assets to be dropped down are probably coming out of our West Coast and Gulf Coast assets before anything else. We did drop the 50% interest in Torrance Valley pipeline during the second half of 2016. And again, we're not going to actually pinpoint timing, but we're constantly evaluating dropdowns and getting these assets ready to go into the MLP.

Our next question will come from Roger Read with Wells Fargo.

I guess, coming back to the -- well, let's just call it the lower OpEx, reliability, et cetera. What's the longer-term goal at Chalmette? It seems to me kind of a -- we've discussed before on these calls getting under $4 a barrel OpEx, kind of a more consistent Gulf Coast cash cost. Is that reasonable? And is there a time line for achieving that?

Yes, it's certainly is reasonable. We benchmark against our competitors. We have a fairly complicated refinery in -- complex refinery in Chalmette, but there is no reason that we can't get the OpEx down to $4 or sub-$4. When we get reformer up, and frankly some of that is going to be devised though, right. We're running probably 200,000 barrels a day of inputs through Chalmette right now. We're running 175,000 of crude or so, and then we've got with all the cats and dogs that we put in there, including butane, it's a pretty high number. But as with Torrance, the Chalmette folks have identified a number of specific steps to get that operating cost down. That's a contract with -- the refineries have with headquarters. When we put our budget together and then they commit to operating costs expenses, we consider it to be contract. So we expect to be able to deliver on that.

Okay. And while I know this might be a little premature as you're getting through these turnarounds and focused on improving Torrance's operation, acquisition still seems to be a core part of your business focus. What should we think about you doing differently as you look at the next level of acquisitions, just that you're more comfortable from a due diligence side on the operational potential of the unit you might acquire?

I think the overall strategy that we've enunciated before hasn't changed, although there is a little bit of a twist, and you just hit on it. The strategy, of course, is going to continue to grow. We want to go to MLP, but we want to grow through acquisition in a refining space. We're going to concentrate that in North America and we're not going into Mexico. So we would consider an opportunity in Canada if it was -- if it met the model. And certainly, we would focus on, as we said before, inside the Lower 48, PADD 3 and PADD 5 and that's simply because we prefer to have more than 1 refinery in the regions we run. You could say, "Well, you could also get PADD 2," but that might be a little bit -- the bid ask, we believe, might be a little bit wide. So that remains the base strategy. We don't have anything right now that we're working on in detail or anything like that. But we certainly want to continue to pursue that. But you made an interesting point. I said it has to fit the model of Chalmette, and frankly, all 5 refineries that we purchased fit a model that we subscribe to. Chalmette and Torrance, we bought at a very good price, we believe, and we're going to have to demonstrate the good value we get from it. However, they were -- we got them for the prices because they were fixer-uppers. That's the bottom line, and we knew that going in. I would rather buy a refinery that had a little bit of better track record on how they ran because as the system gets bigger, you stretch yourself in doing what we're doing a little bit in Chalmette and Torrance. As I said, I think we're not declaring success, but we've made great progress in Chalmette, and we are on the right direction in Torrance. But we like to have something that is more of a known commodity as long as we can meet the financial metrics on it.

Our next question will come from Doug Leggate from Bank of America.

Tom, I'm sorry, I can't get -- the pronunciation is so hysterical. So can we talk about the cash burn and the outlook for the year? How do you see cash flow and balances? Obviously, you have reiterated -- you put a dividend up again this quarter. But you did this to your equity in December and obviously you've kind of burned through a fair amount of cash in the first quarter. How do you see the outlook for the balance of the year?

I'm going to let Erik to take the bulk of the question, but as he said, he mentioned, when you do these turnarounds lots of things happen. We probably -- what, built $200 -- north of $200 million of working capital in the first quarter as we had. First, we had a couple of upsets, but as you get ready for the turnarounds, for example, in Torrance, we have no choice. We got to take the crude from Exxon, whether or not the plant is running or not. We don't want to sell the crude, because we'd lose money on it. So we're storing it. And then we're going to run it down and that cash is going to come back. So it's a short -- we believe -- it's a short-term impact that shows itself pretty clearly in these first quarter results because of the amount of inventories, including intermediates we built. With that, Erik?

Yes. I think, Doug, ultimately we built between $235 million and $240 million of inventory during the quarter. That is not going to come back immediately during the second quarter, because again, Torrance is in the midst of turnaround and we're still going to be working a portion of that inventory down. But ultimately, we will have CapEx that we'll need to spend during the second quarter. We did say upfront that the first half of this year is going to be CapEx-heavy. Once we get through this turnaround or the remainder of the turnarounds in Torrance, we ultimately are going to see a portion of the inventory balances start to move down and ultimately we'll see at the same time the CapEx burn during the second half of the year will be considerably lighter than what we're going to see during the first half. So from a cash perspective, I think we -- it's never fun to build that much inventory, but it's part of the business. And we're also subject to fluctuations in hydrocarbon prices. So a lot can swing very quickly in this business. We've seen it swinging back the other way over the course of a quarter as well. So I think right now, ultimately we truly focus on cash. That, at the end of the day, is the most important thing for us. So it's something that everyone here has their eye on. And ultimately, we feel comfortable about what we're doing now. This has all been part of our plan as we entered into 2017.

That's really helpful. Can you -- Erik, can you quantify the working capital build in the quarter or...

Overall, we had a net working capital change of about $200 million, and of that, roughly $240 million came from inventory. So we used $200 million of working capital.

We'll go next to Brad Heffern from RBC Capital.

Just following on Doug's question, I guess, kind of what was underlying the first part of it. I'm curious about the dividend. Obviously, I think you guys have a different strategy than a lot of your peers as it relates to cash returns. And so I'm wondering how sustainable you see it at this point? And how important you think it is to the shareholders?

Yes. Well we think it is important to the shareholders and I speak as a reasonably large shareholder, so it's reasonably important to me. And we think that the -- we absolutely expect to be able to continue to pay the dividend. That being said, Erik said it absolutely correctly, cash is king. And if for some reason we don't operate or we have other problems that impact us, we always with our board discuss other financial measures that we might need in a contingency basis and clearly continuing to pay the dividend is one of them. But our view is that we will have the wherewithal to pay it. It's important strategically for us to pay it, reward and give back to our shareholders. It's a nice yield. So we would expect that to be the case.

Okay. And then I was hoping we could dig into the Chalmette performance a little bit more. Obviously, it was a pretty substantial margin increase sequentially when the cracks aren't really up very much. So was part of that related to when the downtime fell during the quarter? Is it the petchem impact that you talked about before? Or is it just running better? What were the combination factors that caused that big increase in margin?

All of those plus Chalmette has the lowest cost of crude in our system or has recently. And if it runs well, it's going to be able to generate reasonably good EBITDA because of all of those reasons. And frankly, we've got a running well right now we're pretty excited about -- or pleased. Excited is probably an overstatement. But pleased with the way it ran, because it does show what the power of the machine is, but it was -- chemicals was strong, relatively good clean product yields, operating cost improved, but a big piece of Chalmette's profitability, the largest piece, is probably the crudes that it can run. It runs some really tough stuff, heavy stuff and that really contributed to first quarter.

We'll go next to Blake Fernandez from Scotia Howard Weil.

Tom, I think you may have covered this at the end of your prepared remarks, but I just wanted to confirm, once you get pass the Torrance downtime, are there any kind of material or notable downtime activity for the second half of the year?

Really, no material or significant. We're going to have cats and dogs. We'll take out a hydrotreater to change out the catalyst. But there is nothing on the horizon now after we complete Torrance until 2018. And to Erik's point, to say that our CapEx was front-end loaded in the first half of the year is a complete understatement. So we're going to drop off a cliff if we run right in terms of the investment in the refineries over the second half of the year. And then the whole point there is to run properly, put some money back in the cash register, build up the balances and then if we have an acquisition opportunity, we'll be in good shape to do that. And frankly, we've got a fair amount of self-help projects, lower-cost projects that we've identified that -- completely on a back burner because we don't have the resources to work on them while we're doing all this big work. We would start to look at that for next year.

Okay, great. The second question speaking of M&A, this may be a little bit of a one-off. But one of your peers has recently kind of strategically focused on the specialty lubes business and kind of base oil production and kind of carving that out as a separate segment. And in a slide deck where they're kind of giving the landscape of peers, PBF is on there with just over, I think it's 10,000 barrels a day of kind of base oil production. I didn't know if that's something that you guys would maybe consider trying to expand or carving out separate reporting on at some point.

I'll ask Erik to add to the second part of that. I think the answer is probably no, not certainly right now. But look, we would look at a lube opportunity. In fact, we looked at a lube opportunity that the competitor that you talked about actually executed, but we just didn't think that -- we thought we had better uses of our capital, to be honest, but time will tell on that. But you're right. I mean, one of the reasons PBF had -- I wouldn't say we had a good quarter. We didn't, because we lost money. So you can't say you had a good quarter. But the Paulsboro refinery is a strong refinery. And it may be right now, our strongest refinery until we fix Torrance and Chalmette completely. And a good portion of that is due to asphalt and lubes. So we would look to expand lubes and do some things even inside the refinery or outside if the right opportunity came along. But the second part of the question.

But in terms of segmentation, Blake, no, I don't think at this point we have any plans to break out our specialties business on the lube side.

(Operator Instructions) And we'll go next to the line of Chi Chow from Tudor, Pickering and Holt.

Tom, I think you've touched on this a number of times in the call here. But with your system weighted towards running medium and heavy crudes, how are you thinking about the current environment where the diffs on those types of barrels have really narrowed to what looks to be breakeven type levels?

It's a good question and a little complicated to answer from PBF. First of all, like I said, our system was built pretty much on making sure we got knobs to turn to go and make adjustments based on any economic environment that exists. And to put that into context, if you look at our system of, call it, 880,000 barrels a day of total crude, Toledo is 170,000 and that's 100% light sweet. We've demonstrated we run over 100,000 barrels a day of Bakken and light crudes in Delaware. We can run 40-or-so in Paulsboro on the non-lube unit. So now you're up to 320,000 and Chalmette could probably do another 100,000. So 420,000 on an 880,000. So maybe a little south of 50%. But if you really take Torrance out of the equation, because Torrance is a heavy crude machine, and if you look at -- that comes out, we're probably 2/3. We have that capability running 2/3 light sweet crude. Will we run that? I seriously doubt it, unless margins really come in and I don't expect it to do so. Because, frankly, because of asphalt and the coking capability and the fact that we have been able to get some crudes, not necessarily crudes that we were running because of OPEC cutting back and certainly have been an impact there and we're all seeing it. But we have still been able to source some crudes that make economic sense even in this environment. And so we'll do a combination of substituting this crude unit that we just turned around in Chalmette. One of the things we did during the turnaround is not to get technical, but we figured out -- they put in facilities, overhead coolant to allow us run more light crude on that crude unit. So we'll look to run HLS or Mars or LLS, and those economics are probably going to be good today. And the rest of the system, we're substituting some crudes that aren't the ones that we ran before, but do have good economics. If that disappears, we'll lighten up.

I guess, what's the longer-term outlook you have on specifically the heavier differentials? Is this the short-term impact, you think? Or is it something more structural...

My longer-term outlook is to declare victory and that is premised on -- this is a short-term impact. First of all, narrow light heavy spreads lead to wider light heavy spreads. The United States, particularly refining system is built to run pretty much medium and heavy crude and is not going to be able to -- as I said earlier, alluded to, it's not that easy to do, switch everything over to a light crude. But the reason I said is to declare victory is look, it's middle of 2017 and if this MARPOL thing goes and you get to -- it's supposed to be January 1, 2020, that the entire marine bunker fuel fleet, product line is going to get turned on its head. And if indeed it happens, it's going to be done in a way that impacts the ability to put resid from a heavy crude refinery or medium crude refinery that doesn't have a coker in the fuel well. So look, this is going to come back. We're very comfortable, as I said, that we've got the optionality to go either way. But my own view is we're going to see a widening back out of the light heavy spreads, OPEC is probably going to extend to 6 months, but they're not going to keep that crude in the ground forever, and we would expect to see this thing reverse like it always does.

Okay. Maybe one final question here back on Torrance. Any updates on the hydrochloric acid issue? And should investors be worried about this issue long-term line? Why or why not?

We've made -- I'm going to give this to Jeff in a moment. I think we made serious strides. And it goes parallel to all of these issues tend to get tempered down if we do our job and run the refinery. That's why we're focused so hard on not bringing attention to ourselves and that goes to just overall plus the MHF issue. But Jeff, why don't you continue?

Yes. And this really is not just a Torrance issue, it's an issue we joined with Valero on and get support from both our industry and the chemicals industry. There was a bill in Sacramento as there was last year addressing the use of hydrofluoric acid refineries. That bill did not get out of committee. And so it's not going to get voted on this year, pretty similar to the path that was filed last year. We've also had success at the local level with City Council and others supporting the continued use of HFS as a catalyst at both Torrance and Wilmington. There is an AQMD rule-making process that goes on, but there is no proposed rule at this point and everybody is fully engaged in that rule-making process to ensure we reach a good outcome.

We'll go next to the line of Paul Cheng with Barclays.

I think the first question is probably for Erik. Erik, for Chalmette for the quarter that you make $42 million in EBITDA, is there a number that you can share what is a margin roughly that -- how much it represents? And also when you talk about the RIN cost of $45 million, is that impacted in any shape or form by either a carryover out of RIN from last year, which is a higher cost? Or that -- did you pro rata up to whatever is the pro rata RIN obligation or you have any liability left?

Yes. Let's go in reverse order to that. I'm going to ask you to repeat the first question. On the second topic related to RIN, yes, ultimately you're going to have some timing impacts quarter-to-quarter. We did see that in terms of timing of purchase of RINs; that's why we wanted to highlight that our net RIN expense what flows through P&L was $43 million for the company. But on a normalized basis, we think that it was $65 million. And related to Chalmette, if you wouldn't mind, just what specifically did you want to understand?

No. Just I mean, with the first quarter $42 million in EBITDA because that you've been in turnaround, so March is probably the full quarter and I suspect that represent the bulk of your EBITDA contribution. So just wondering if there's something that you can share, how much is the EBITDA contribution in March from Chalmette?

Yes. Difficult for us to really break down on the monthly basis what we do. But ultimately yes, directionally March was a good performer for us during the course of the quarter, because we were in turnaround during the first 2 months.

And that for Tom, the second question is that for Torrance, when I looking at, at least in our benchmark indicator for California, sequentially, margin gone up by about $2 per barrel, and your realized margin is about flat from the fourth quarter. So somehow along the way either operating issue or other reasons. And also then, I mean, RIN cost is much lower. So somehow that your margin realization didn't capture that. I didn't realize that we have had much of the operating upset relative to the fourth quarter that were resulted. Can you try to help me trying to bridge the differences here?

Yes, I think the bulk of it might be some on crude cost. I don't know for sure, but I'd have to go back and look at it. But the pump fire that we had early on in the first quarter that resulted in the shutdown of the entire crude unit for a period of time and the vacuum portion of the crude unit for a longer period of time and of course Torrance runs a heavy crude slate so its backing unit is very important. And I believe the LPO for Torrance was $60 million in the first quarter. So that blunted our capability of getting a higher cap rate obviously. So that continues to be the story. We have to not have those events. And the only point I would make is like Chalmette, we started turnaround -- turned the corner a little bit and with this turnaround we hope to improve on that. I think Jeff wants to add a comment.

Yes. Paul, look, I would just point out, our logistic organization and commercial organizations in California have done just a great job. We've opened up 3 truck racks to bring trucked crude into the refinery, and we get great differentials on that trucked crude. As Tom alluded to earlier, we've shown a great deal flexibility on bringing waterborne crudes into Torrance. So we are really well positioned coming out of this turnaround, commercially on not only feedstocks but then with the wholesale marketing and other inroads we've made on product margins as well. So I think when we come out of the turnarounds and we're operating well, you're going to see much better performance on those fronts.

We'll take our final question from Faisel Khan from Citigroup.

Couple of questions on the crude flexibility. So have you guys looked into or you to look at securing crude from the Permian tanker up to the Northeast? Does that crude sort of fit well into your Northeast system?

Really, right now, we haven't looked at it. We've taken Permian up on a Jones Act vessel. If we could get a waiver on the Jones Act, then it would be kind of a different story. We can source crudes in. Frankly, we would probably bring in crudes from West Africa and land it on a foreign flag vessel if we wanted to sweeten up at a price that is competitive or maybe even better than Permian. We'll look at everything. Now I think we're well positioned in Chalmette on the sweet side, because we're sitting there and we've got lots of volume that we can run. So it really becomes like what are we going to do on the East Coast if we want to start lightening up the East Coast. But we don't expect to be running a significant amount of Permian.

Okay. And then next, I just want to clarify your comments. You said you're not aggressively looking to invest or increase your market share in Mexico. Is that what you said or are you sort of targeting...?

No, we didn't say that. Basically, we said we weren't going to buy -- I said, I wasn't -- we weren't going to buy a refinery in Mexico because we -- they wouldn't sell it. So when I said -- what I said there is look, we're interested in expanding North America and you can rule out Mexico from a refining space standpoint. To the contrary, Mexico is obviously a great market for the United States to access and heavy big oil company or independent and some of the bigger oil company is doing it. We intend and have in the past do it. One that -- we've done it out of California in a small way and we intend to hopefully see or pursue opportunities there. But we definitely have a strategic objective of getting this crude tank in place in Chalmette by beginning of the fourth quarter. It's a big tank, 650,000 barrels. It has a lot of corollary benefits on demurrage. But one of the big things is trying to double the export capability out of Chalmette to Mexico and Latin America. We'll see what happens in Latin America. But Latin America is -- certainly in the second quarter, it looks like it's going to bring in maybe 100,000 barrels a day more year-over-year, because of continuing problems. So that's clearly a strategic area that we're focusing on.

Okay. On the LPO, you said $60 million for Torrance, what is it for the total...

I think the total company was $100 million, absolutely unacceptable.

And I'd like to turn the call back over to Mr. Tom Nimbley for closing remarks.

Well, thank you very much for attending today's call. I look forward to talking to you again after the second quarter and hopefully with continued improvement and significant improvement in our results. Everybody, have a good day.

We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.