Delek US Holdings (NYSE:DK), during its third quarter earnings call, reported a strong performance across all segments, achieving record total throughput in refining and logistics. The company's CEO, Avigal Soreq, expressed confidence in exceeding a quarterly EBITDA run rate of $100 million by the end of 2021. Delek US Holdings (NYSE:DK) posted a Q3 net income of $129 million and an adjusted EBITDA of $345 million.
Key takeaways from the call include:
- The Tyler and El Dorado plants have seen significant improvements, with an increased product mix and yield. The company is optimistic about the potential of the El Dorado plant and its assets.
- The supply and marketing segment faced lower asphalt and wholesale marketing results due to rising oil prices.
- The company has reduced its net debt by $476 million this year and increased its dividend for the fifth consecutive time.
- Delek US Holdings is evaluating various options to unlock value, prioritizing liquidity preservation and growth opportunities.
- The company has a disciplined approach to capital deployment and expects a lower capital expenditure in 2024 compared to 2023.
- The company mentioned a reduction in inventory due to changes in inventory management processes, a move that is expected to be permanent.
- Improvements were noted in Big Spring refining margin capture, driven by fundamental changes and better reliability.
- The company is committed to disciplined capital deployment, maintaining dividend payments, and is open to allocating capital for buybacks.
The call revealed Delek US Holdings' focus on safe and reliable operations, shareholder-friendly practices, cost reduction, and unlocking value from its business. Soreq also discussed the company's approach to risk reduction, using derivatives to hedge outside the natural inventory range and maintain profitability.
The company's strategic plan to deconsolidate debt from DKL remains a goal, though no specific timeline was provided. Soreq concluded the call expressing optimism for future reports and gratitude to participants.
InvestingPro Insights
In light of Delek US Holdings' promising Q3 performance, it's worth considering additional insights from InvestingPro. The company operates with a significant debt burden, a fact that is somewhat mitigated by management's aggressive share buyback strategy. However, analysts have revised their earnings downwards for the upcoming period and anticipate a sales decline in the current year. Despite this, the company's revenue growth, while slowing, remains positive at 8.59% over the last twelve months as of Q2 2023.
On the data front, Delek US Holdings has a market cap of 1690M USD and a P/E ratio of 26.52. The company's revenue for the last twelve months as of Q2 2023 stands at 17.92B USD. The gross profit margin is relatively low at 4.86%, reflecting the company's weak gross profit margins.
These insights provide a more comprehensive picture of Delek US Holdings' financial position. For more in-depth analysis and additional InvestingPro Tips, consider exploring the InvestingPro platform. As of now, there are 10 additional tips available for Delek US Holdings on the platform.
Full transcript - DK Q3 2023:
Operator: Good day, and welcome to the Delek US Third Quarter earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Rosy Zuklic, Vice President of Investor Relations. Please go ahead.
Rosy Zuklic: Good morning and welcome to the Delek US third quarter earnings conference call. Participants on today's call will include Avigal Soreq, President and CEO; Joseph Israel, EVP, Operations; Reuven Spiegel, EVP and Chief Financial Officer; Mark Hobbs, EVP, Corporate Development. Today's presentation material can be found on the Investor Relations section of the Delek US website. Slide two contains our safe harbor statement, regarding forward-looking statements. We'll be making forward-looking statements during today's call. These statements risk involve risks and uncertainties that may cause actual results to differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks.
Avigal Soreq: Thank you, Rosy. Good morning and thank you for us -- for joining us today. We delivered strong third quarter results. All segments performed well. Our team remains focused and drove improvements across our businesses. I thank each member of our Delek team for their contribution. From a macro perspective, during the quarter, we saw a significant volatility in the markets. Gasoline crack weakened, diesel crack CAC remained strong, driven by inventory levels continued at five-year lows. Given our higher distillate production relative to our peers, we're at a competitive advantage. The refining segment ran well. We achieved a record total throughput during the quarter. Joseph will provide more details on our refinery operations in his remarks. In logistics, we are investing in continued growth of our business. We benefited from our favorable permit location, which led to another record quarter. Given our strong portfolio performance, we are confident in DKL's ability to exceed $100 million in quarterly EBITDA run rate by the fourth quarter of this year. Moving to slide four, reflecting on my first year as CEO of Delek. We have much to be proud of. When I return to Delek, I outlined my focus areas, safe and reliable operations, being shareholder-friendly and having strong balance sheet, unlocking the sum of the part value and improving the efficiency of our cost structure. We are very focused on these objectives. Our dedication to seek each one of them to completion has not wavered. We have made progress in all of them. On the operations side, we enhanced our team with experienced talent. Together, we streamlined the structure and process toward our operation. This has led to a strong safety results. We achieved a total record throughput in our refining system. Earlier in the year, we successfully completed the Tyler turn out with their recordables on time and on budget. Post turnaround, the refinery is performing at higher yield and most importantly, record capture rates. On financial and shareholder returns. Over the past year, our logistics business achieved record EBITDA quarters. In Q3, retail achieved its highest EBITDA since COVID. We continue to be shareholder-friendly. 2 October, we repurchased $85 million of shares and including the latest increase raised the dividend five x in a row. We improved our financial position by using our strong cash flow to reduce our net debt by $476 million during the year. On a strategic point of view, our $100 million cost reduction effort are well underway, and we are seeing early results. On unlocking value from top of the part, we have a clear strategy, and we are well on our way to meet our objectives. As you can see, we have been consistent. This resulted in tangible progress. Importantly, the achievements I just outlined position us well for the mid-cycle market environment, both from an operation and financial standpoint. In closing, we are pleased with our strong quarter. We will continue to drive further improvements and unlock value from our business. Now I would like to turn the call over to Joseph, who will provide additional detail on our operations.
Joseph Israel: Thank you, Avigal. Moving to slide 5. In the third quarter, our team processed a record high 306,000 barrels per day of total throughput. The focus on people, process and equipment helps us to build a solid organization to support safe and reliable operations. In the third quarter, the combination of favorable market conditions and strong operations performance led to $286 million of adjusted EBITDA contribution by the refining segment. In Tyler, total throughput in the third quarter was approximately 76,000 barrels per day. Production margin in the quarter was $23.66 per barrel reflecting improved reliability, yield recovery and a strong capture rate of 73%. Operating expenses were $4.74 per barrel including elevated utility cost at approximately at $0.50 per barrel due to high demand for electricity in the state of Texas late in the summer. In the fourth quarter, the estimated total throughput in Tyler is in the 73,000 to 76,000 barrels per day range. In El Dorado, total throughput in the quarter was approximately 84,000 barrels per day. Our production margin was $12.57 per barrel. Operating expenses were $4.36 per barrel. Estimated throughput for the quarter or the fourth quarter is in the 81,000 to 84,000 barrels per day range. In Big Spring, total throughput for the quarter was approximately 65,000 barrels per day, driven by maintenance work, but still well within our guidance range. Our production margin was $15.92 per barrel including an estimated unfavorable $3.50 per barrel impact from the maintenance activities. Operating expenses in Big Spring were $1.37 per barrel, including approximately $0.80 per barrel of the unplanned activities and an additional $0.70 per barrel related to the elevated utility cost. In October, we completed a planned outage to replace a reformer catalyst and a couple of reactors. As a result, the estimated fourth quarter throughput in Big Spring is in the 61,000 to 64,000 barrels per day range. We are very excited with our progress in Big Spring refinery. We have the right leadership team in place and we are pushing operational excellence to the next level. In the third quarter, we already improved throughput, capture and OpEx compared with the second quarter. And going forward, we are planning for the following improvements at the controllable level. Throughput up, approximately 5,000 barrels per day from our yield to-date 66,500 barrels per day performance level. Capture, up 15% to 20% from our year-to-date 52.6% level. We are expecting to realize 65% of the improvement in 2024 and the remaining 35% in 2025. In Krotz Springs, total throughput was approximately 81,000 barrels per day. Our production margin was $12.45 per barrel and operating expenses were $5 per barrel. Planned throughput in the fourth quarter is in the 77,000 to 81,000 barrels per day range. In the third quarter, wholesale and asphalt marketing added about $35 million for the refining segment earnings compared with $80 million in the second quarter. This results are outside of our reported margins at each of the refineries and their associated capture rates. Wholesale marketing contributed about $20 million, down from approximately $60 million in the second quarter, and asphalt marketing contributed approximately $15 million compared with about $20 million in the second quarter. Contribution of both businesses was impacted by rising oil price, but more importantly, allowed us to pull inventory even with record high throughput of our refining system. The resilient demand in our niche markets and the access to rack blending are a significant strength of our integrated downstream business model. With regards to the fourth quarter, our refining system plant throughput is in the 292,000 to 305,000 barrels per day range. We are well positioned to capture strong distillate margin environment with our 42% distillate yield capability. As a reminder, no major turnaround is planned until the fourth quarter of 2024 in Krotz Springs. In PKL, the team delivered another record quarter under operational excellence focus and growth. I will now turn the call over to Rosy, for the financial variance.
Rosy Zuklic: Thanks, Joseph. Starting on Slide 6. For the third quarter of 2023, Delek US had a net income of $129 million or $1.97 per share. Adjusted net income was $132 million or $2.02 per share and adjusted EBITDA was $345 million. Cash flow from operations was $433 million. On Slide 7, we provide a waterfall of our adjusted EBITDA by segment, from the second quarter to the third quarter of 2023. The increase was primarily from improved results in refining, driven by higher throughput in Krotz in the third quarter. Logistics had a record quarter at nearly $97 million and Retail had another strong quarter with EBITDA of $16 million. Corporate segment costs increased compared with last quarter, largely due to bonus accruals. Moving to Slide 8 to discuss cash flow. We built $80 million in cash during the quarter, ending the third quarter with a balance of $902 million. The $433 million in cash flow from operations reflects the strong performance of the quarter. Included in this amount is $177 million in favorable working capital. This was largely from improved inventory management. Investing activities of $59 million is mainly for capital expenditures. Financing activities of $294 million primarily reflects paydown of debt and return to shareholders. This includes $176 million of debt repayment, $25 million in buybacks, $15 million in dividends and $10 million in distribution payments. On Slide 9, we show capital expenditures. Year-to-date, total company, we have spent $302 million. We estimate the full year CapEx to be in the range of $380 million to $390 million before any reimbursement. We expect to receive approximately $20 million of insurance proceeds, growth CapEx partially funded by producers as well as other reimbursements. Including this, net capital expenditures for the year, is in the range of $360 million to $370 million. Net debt is broken out between Delek and Delek Logistics (NYSE:DKL) on Slide 10. During the quarter, we built $80 million of cash and paid down $176 million of debt, ending the quarter with a net cash position. Slide 11 covers outlook items for the fourth quarter of 2023. In addition to the throughput guidance Joseph provided, we expect operating expenses to be between $210 million and $220 million, G&A to be between $65 million and $70 million, D&A to be between $90 million and $95 million, and net interest expense to be between $80 million and $85 million. We will now open the line for questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Manav Gupta with UBS. Please go ahead.
Manav Gupta: Hey guys. First of all, congrats big improvement from both Tyler and El Dorado. So help us understand what were the factors helping you out over there? And then as it relates to Big Spring was it just a turnaround, and we shouldn't be worried that when you actually start running hard in 4Q, some of the issues you saw would be behind you, so if you could talk about those things?
Avigal Soreq: Hey, Manav, it's Avigal. Thank you for the question. And yes, you're right. We see a big improvement both places and that we can address for a few areas on Tyler lot of work that's being done over the turnaround, we see the fruit of it, both on the product mix and the yield. Obviously, we are very fortunate with the Tyler market over there. We see the city growing and our ability to deploy a product just great. So that's a very solid market. In El Dorado, to be honest, El Dorado is a great asset with capabilities, hydrogen plant, reformer and other great assets that we are just starting to tap into what we can make out of it, and we are very optimistic about that as well. I think that Joseph touched a little bit on Big Spring in his prepared remarks, but the allow Joseph to finish the answer.
Joseph Israel: Yes. Thank you. We are very excited with our progress. So when you look at Tyler, our 45% distillate yield is a big plus, especially end of the third quarter going to this quarter and for the future curve side. Obviously, the lower the oil price and a better margin environment also supported our capture, both in Tyler and El Dorado. With regards to Big Spring, we are very, very happy with the progress here. We have the right management team. We feel that things are under control as we implement best practice. And we are very confident to share with you our plans in Big Spring is increasing throughput and expecting a much higher capture rate. And to answer your question, we are not worried about the turnaround being about two years from now. We feel good about the mechanical integrity and our ability to operate it at the higher bar. So excited.
Manav Gupta: Perfect. My quick follow-up here is, as it relates to supply, marketing and other, which was formally your trading and supply. A big swing quarter-over-quarter. I know behind the scenes, Rosy has been working very hard in trying to expand the street what are the metrics that drive that performance. But if you could help us understand some of the reasons there was such a big swing in this segment quarter-over-quarter.
Avigal Soreq: Yes. Thanks, Manav. And obviously, in that line, there would be a bit more volatility than other lines. And but Joseph, I know that you have a lot of passion around it, why don't you give a more wider view
Joseph Israel: Okay. So we provided information about the asphalt and wholesale marketing results. Asphalt made $15 million in wholesale marketing made $20 million. Both are lower than previous quarter results due to oil price increase. And you know that lag in pricing provide always a headwind for this type of businesses. The other component in supply and marketing results is the inventory management and the derivatives to really mitigate a risk.
Manav Gupta: Thanks guys. Congrats on a good quarter and good to see a pay down of debt. Thank you.
Avigal Soreq: We appreciate it, Fandav. Have a good evening.
Operator: Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Neil Mehta: Yeah, thank you. And hope everybody's family is doing okay back home, Havagal in particular.
Avigal Soreq: Thank you for the warm welcome. Appreciate it. Thank you.
Neil Mehta: Awesome. Hey, Soreq, again, a very good quarter there at Tyler. We just love your perspective on the markets right now. We see this big dislocation in cracks between gasoline and distillate and how does this play out as we move into 2024? How much of the weakness in gasoline is just seasonal? As we're trading winter grade versus something more structural and then do you see the distillate side of the equation normalizing, given the weakness in gasoline through yield switch? So just talk us through the product markets and how they evolved as we set up into 2024.
Avigal Soreq: Yeah. And I would love to do that. Obviously, ULSD as you can all see is in the five year low in terms of inventories that determine the majority of the crack. The way we see it on the distillate, obviously we don't really know what the winter in Europe is going to yield, but that's another upside if it's going to yield for a colder winter. On the gasoline side, obviously we've seen, and we said that in the prepared remarks, we've seen a weakness. Some of that, as you mentioned, is seasonal and some of that -- I think most of it is seasonal. We believe that the demand for gasoline is solid. Our markets are pretty much resilient for demand. You can see another testimony that we were able to deploy our -- to reduce inventory, while other companies had a problem to deploy products. So that's another testimony to our market resilience. And this is more micro than macro, but that's another something to note. The demand in the US as we see it is still very solid. And I think the market they're going to correct itself. I think that we see more supply going off the market, as I mentioned a few times during COVID versus the change in demand. So overall, we think it's the right place to be.
Neil Mehta: Thanks guys. The follow-up is just on how we're thinking about unlocking some of the parts' value. You, Avigal, spent a bunch of time talking about this as you stepped in, you know, how do you transfer some of the value that fits that DKL and accrued to the DK at the parent level? Talk about the different strategies that you're approaching this with? And what ending are you in terms of actually unlocking that value?
Avigal Soreq: Yeah. So Neil, you know that I said many times, and that's our commitment. We're going to make it happen. We're going to make the right thing happen for both shareholders. And we didn't change our mind or went in other direction that's going to happen. I will start and then I know Mark wants to have a lot of energy on that and wants to say a few words about that as well. But please remember that while we are still working on that very hard, we came up with a cost reduction, which is a great thing for mid-cycle if it presents itself. The Safe and Reliability Initiative yields in a higher throughput and we obviously, have a inventory reduction in order to enhance the balance sheet. And I'm very proud of Reuven and his team being able to be at the net zero debt on the DK level. Saying all of that, some of the parts and allowing the value to build – the DK to build the Delek side is going to happen. And maybe, Mark, do you want to say a few words around that.
Mark Hobbs: Yes, sure. Thanks, Avigal, and thanks, Neil, for the question. As I've mentioned on prior calls and discussions that we've had specifically, we've evaluated a myriad of options and alternatives that are available to us. And we have strong conviction around the actions we need to take and what we would like to achieve through some of the parts. And as Avigal mentioned in his prepared remarks, we're working very hard towards those objectives. I don't want to say anything specific, and I would love to be more specific around timing. But at this point in time, we don't have anything that we feel that we can tell you other than our focus is on preserving our ability to perform well through the cycle or through all the steps that Avigal and others on the call have mentioned. And the other thing that we're really focused on is in anything we do preserving significant amount of liquidity across our business so that we can take advantage of accretive growth opportunities that we truly believe are in front of us going forward. But I would just finish with just saying, look, we are committed to extracting value across our businesses where we see opportunities to do so.
Neil Mehta: Thanks, Mark.
Operator: Our next question comes from Ryan Todd with Piper Sandler. Please go ahead.
Ryan Todd: Thanks. Maybe a question on CapEx for you, as we look into 2024. I know that you had said that from a maintenance point of view, you don't have another major turnaround until crops in the fourth quarter of next year. Can you maybe talk about how you would think about some of the moving pieces on capital as we look into 2024 and how we should think about a run rate there in the next year?
Avigal Soreq: Yes, Ryan, thanks for the question. And Ryan, we are very disciplined about capital deployment. We've demonstrated over and over, both on the shareholder and debt, so that's the puzzle we are working on this every day all day. Regarding 2024, specific to your question, I don't want to be ahead of myself. We are still finalizing our brand for 2023 for 2024. But directionally, we are looking on a lower number than 2023.
Ryan Todd: Okay. Perfect. Thanks. And then maybe just a follow-up on your comments. Obviously, you're in a zero net debt balance sheet position there at Delek on an unconsolidated basis. How should we think about your priorities here? You've been paying down debt. You've been buying back some shares. Is there further work on the balance sheet that you want to do? Or should we expect a shift towards an increase in share of cash flow directed towards shareholder returns or maybe high level, how are you thinking about that as we think about the coming quarters?
Avigal Soreq: Yes, absolutely, Ryan. And I will provide more kind of overview about the way we think about capital allocation. So first of all, we increased dividend five times in a row, as you can see. And our intent is to be able to maintain dividend towards cycle. So that's pretty clear we said that many times. Regarding debt and the return to shareholder, we took a very balanced approach between the two. Obviously, when we have opportunity to give back to investor, we were not shy, we were aggressive to that, and that's going to be the approach going forward. But we have a balanced approach, and we're still going to do that -- executing in some of the parts. It's a top priority. We're going to do that, and that's going to play a big role in that equation as well. So stay tuned.
Q – Ryan Todd: Thank you.
Operator: Our next question comes from Doug Leggate with Bank of America. Please go ahead.
Q – Doug Leggate: Hi, guys. Thanks for having you on also – offer—also offer my thoughts for you guys and what Neil said earlier. I'd like to hit a housekeeping point first, if I may, which is I think Rosy mentioned the working capital move in the quarter. And I think you said better inventory management was about affected ? Is -- is that -- will that reverse? Or are we now looking at our Permian -- a permanent downward reset in working capital?
Avigal Soreq: Hey, Doug. Good morning. I’ll let Reuven talk about working capital just a little bit.
Reuven Spiegel: Hi, Doug, so the short answer is it will not revert itself. The longer answer is that we have been working on a zero-based budget initiatives that included a few components. One of them was the cost reduction initiative and the other one was also changing our process about how we manage inventory. That process change was tested, and that's why we did not execute on it until this quarter. But after it was tested, we executed on it or the new process this quarter, and that helped us to reduce inventory by roughly 2.5 million barrels. Now there will be some fluctuations going forward, but we're not going to revert back to the old levels of inventory.
Q – Doug Leggate: So we can treat that additional cash flow then as permanent.
Reuven Spiegel: Most of it, yes.
Q – Doug Leggate: Okay. Thank you. My follow-up is really on the reliability improvements. And I'm wondering, I mean, obviously, one of the key things we think about is what the free cash flow capacity of the portfolio looks like at mid-cycle. And the key input to that is obviously operating cost and capital, sustaining capital costs. So I'm wondering if you can just give us some guidepost on both of those things to achieve the higher reliability what does it mean for OpEx? What does it mean for sustaining capital?
Avigal Soreq: So Doug, I will start, and I will let Reuven or Joseph chime in. On the OpEx side, you remember that when the margins were at all-time high pretty much, we started the program that cost reduction. In the beginning, no one really understood what we are -- why we are doing what we are doing. But we wanted to be to have a long runway in order to do it right. We didn't want to rush into that. And that's obviously going to improve our cost base, both on the OpEx and the G&A on a relative basis versus what we start. Obviously, going to -- always going to have a fluctuation in OpEx and GA-based upon performance and based upon electricity power and et cetera, like Joseph outlined. But that over time, make us or making us very much ready for the mid-cycle that might present itself. That's on the -- Joseph, any you want to add on that?
Joseph Israel: I will only add by reminding everyone that previous earnings call, we discussed the $1 per barrel of additional OpEx in Big Spring just for the second half of this year. So it will include the 4Q to really address integrity, reliability opportunities that are giving us those fruits. So not much more than that and really nothing on the CapEx side that we need to accomplish to get all the benefits that we discussed earlier.
Avigal Soreq: So that gives you the more overview Doug, on the P&L initiative, we started ahead of time. Obviously, the balance sheet, as Reuven said is the working capital in some of the parts. So for us, we were ahead of the game, preparing ourselves and not waited for the clock to turn.
Q – Doug Leggate: Great stuff. Thanks so much, and Joseph looking forward to seeing you next week.
Joseph Israel: Great. Good to see you.
Operator: Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.
Matthew Blair: Hey, good morning. Joseph, you outlined expected improvements in Big Spring refining margin capture. Could you talk a little bit about what's driving that? Does that involve any commercial efforts to perhaps increase your exposure to Arizona? Or is this more on the refining side in terms of liability and yield improvement?
Joseph Israel: Matthew, at this point, it's really fundamentals. And this is the low-hanging fruits, no rocket science there, and this is the beauty of it. By putting the right leadership team out there and really implementing the best practice and the fundamentals on the process side, on the refining side, will improve reliability, and as you know, with better reliability comes the capture and the OpEx side, what you are talking about is really my Phase 2 and 3, when it comes to commercial and good selection and logistics and other opportunities, it will really start with fun.
Matthew Blair: Looking forward to it. And then on the wholesale and asphalt contribution, I believe it was $35 million in the third quarter versus $80 million in the second quarter. What is like a normalized either quarter or year for this business?
Joseph Israel: Yeah. We've provided guidance, I think, in the previous quarter when we opened up that supply and marketing line for you guys to model, so asphalt is season, as you know, first and fourth quarter is about $5 million contribution in average, not including oil price changes. And then in the second and third quarter during the season it’s going to be more like $20 million per quarter. Wholesale is more stable. It's going to be between $20 million to $40 million a quarter.
Matthew Blair: Sounds good. Thank you.
Joseph Israel: Thank you, Michael.
Reuven Spiegel: Thank you.
Operator: Our next question comes from Paul Cheng with Scotiabank. Please go ahead.
Paul Cheng: Hey guys, good morning.
Joseph Israel: Good morning.
Paul Cheng: First, I just want to add my best switches for everyone and their family in Israel and hope everyone is good and okay.
Joseph Israel: Thank you, Paul. I appreciate it.
Paul Cheng: I have a quick question that, Reuven that in the third quarter, is there any meaningful impact from the benefit of mark-to-market on the RVO due to the much lower wind prices?
Reuven Spiegel: No.
Paul Cheng: And that maybe this is for Joseph. In the fourth quarter, we have – in the gasoline market, we have – from a margin standpoint some opposing forces, the butane branding and the mine asset branding economy are extremely good. On the other hand, that the gasoline crack's sell is poor. So when we combine that how your gasoline yields in the fourth quarter versus the third quarter is going to look like? Historically, I think the industries probably see a couple of percent increase sequentially, but given the dynamic we see that what is your operating plan currently is suggesting?
Reuven Spiegel: So you're absolutely right. So the butane is growing our favor, but the crack is going the other way. Also, the RVO is a tailwind other than headwinds for us. So big picture, gasoline crack spreads still low versus what we've seen last year, but it's not off the charts on a FY three, two basis cost versus historical in Q4. So we remain very optimistic about the future. I don't know, Joseph, if you have anything to add to that?
Joseph Israel: Yeah. Just to wrap it up. So other than Krotz Springs, which is producing light products to the Colonial pipeline, really the rest of our system is rack sales based and this would provide us the access to blending and gives us the opportunity versus our average peer to participate in this opportunity. So we are definitely looking on different things in the fourth quarter. On butane blending, like you say, and then the sour heavy spreads will motivate us to look at the lower cost grades on the crude side as we're going into it and take the advantage from it.
Paul Cheng: Joseph, do you expect the fourth quarter gasoline yield going to be higher than the third quarter?
Joseph Israel: I don't think so. We are a distillate mode. And we will probably be as close as we can to 42%.
Paul Cheng: Okay. So even with the more building branding and not that you're not expecting the yield going to be higher?
Joseph Israel: I agree. It's not going to be enough unless there is a significant change in gasoline distillate economics later in the quarter, which -- how to believe.
Paul Cheng: Okay. A final one for me, one that you sort of fixed up Big Spring, what's the longer-term normal refinery run that we should expect on an annual basis for your system and also what is the cash operating cost under let's call it, say, $4 Henry Hub any kind of guidance that you can give us? And what is the sustaining CapEx for the company going to look like?
Joseph Israel: Yeah, I'll start with the Big Spring throughput. So in our plan, we're basically going back to where Big Spring was in the past. We're not trying to reinvent the wheels. Unfortunately, most of it again is low-hanging fruit. So we give very precise estimates how we were looking at things. So 66.5% is the year to-date throughput. We spoke about adding 5,000 barrels per day. And I'm talking about calendar type of throughput I'm not talking about peak. So you're looking at 71, low-70s, really on the ongoing as a new team. And we're talking about starting really in 2024, 2025. So this is not something for the long run. It's really coming and with the 71, we are still leaving the normal 4%, 5% downtime for potential surprises, right? So we're going to run it in the normal industry utilization rate. Can you please repeat your rehab?
Paul Cheng: Yes, I'm just looking at not even just on Brick Spring, but your total system for facility =-- that what is a normal average and nice one way we can assume? And then also under that status, if we assume Henry Hub around $4 what will be a normalized annual cash operating cost in your refining system? And what is the sustaining CapEx we can assume for your refining system?
Avigal Soreq: Our quarter -- our OpEx was $5.48 per barrel for the system. And this happened with still issues in Big Spring. We spoke about the several things that affected us EUR 0.80 for the unplanned maintenance, $0.7 for the elevated utility cost and the dollar we gave for reliability. What I'm trying to say, Big Spring is probably more like $550 million going forward. The 8.37. So you're looking at overall OpEx for the system under $5 per barrel. And we think that this is -- will happen even with the long term and we have pricing for natural gas and energy costs.
Paul Cheng: Okay. How about sustaining CapEx?
Avigal Soreq: Obviously, it's a bigger question because there is with turnaround and sometimes without turnaround, it's the question is the scope of the turnaround. So I don't think it's going to -- we are going to do a good service by just giving you a number without context. So going back to my earlier comment about the capital. Our commitment is to be very disciplined with capital deployment. Like we demonstrate and that's what we're going to do. But it's very hard to say to pin to a number
Paul Cheng: Okay. Yeah. Understand. Thank you
Avigal Soreq: Thank you.
Operator: Our next question comes from Roger Read with Wells Fargo. Please go ahead.
Roger Read: Yes. Thanks. Good morning. Apologies for joining a little late. So if I'm asking question that's been asked, please let me know. But maybe digging a little deeper into Big Spring and juxtapose that with the performance at Tyler this quarter, Joseph, I know you were brought in to kind of improve operations, is there a takeaway from what we see at Tyler coming out of the turnaround versus what you'd like to do at Big Spring in the coming, let's call it, months, quarters, years until its next scheduled turnaround.
Avigal Soreq: Roger, with your permission, I will start and then Joseph will add some comments around it. a is a good way to see how good operations become after turnaround in terms of both MTBF and also capture and that's something that we obviously can take from one turnaround to another and improve as long as the time goes by. Joseph has a lot of energy at Big Spring and maybe you want to add around that Big Spring. I think we spoke about it,
Joseph Israel: In time of I think the turnaround scope was excellent. It was right. And beyond just maintenance, the team improved the vacuum tower bottoms and allow the better quality of Regio going to the FCC, providing us with better yields and catalyst replacement on the reform was exactly what we needed and we see the results. The rest for the system and mainly for Big Spring is just all about the fundamentals and it's about the focus on the right things and -- it's the culture and it's the right people in the right place that we're leading and the processes and the procedures. These are not costly type of investments. But the efforts are bringing us fruits and allowing us to commit on a much better performance, especially in Big Spring going forward.
Roger Read: Okay. And then just as a follow-up, curious with Krotz Springs in terms of its product yield, I know it's historically had a little less of a clean diesel yield relative to its total distillate yield. Any changes there or anything you're seeing in terms of how that product is being able to move into the market?
Avigal Soreq: Generally speaking, KSR is a refinery that basically is on the colonial. So, that's the deployment, that's the distribution channel we have. We had some improvements we did, but nothing that was a meaningful discussion. We're obviously seeing the fruits of our hard labor and the great commitment over there to a great operation and a great safety record and a great yield. So, we are very pleased with KSR, and we see the improvement over time. So, more to come.
Joseph Israel: Yes. The one thing to remember about Krotz Spring, even though it's a high sulfur diesel, you're still in the Gulf Coast area, and you have plenty of customers that they see a lot of value in this product in different uses. And the other thing, the crude unit configuration is very special with almost 20,000 barrels per day of jet fuel in the codon it. All-in-all, distillate yield in Krotz Spring is in the high 30s, which will allow them to compete long-term
Roger Read: Okay. Thank you,
Avigal Soreq: Thank you.
Operator: Our next question is from John Royall with JPMorgan. Please go ahead.
John Royall: Hi, good morning. Thanks for taking my question. So, my first one is to follow up on the capital allocation question. You're sitting today at parent net debt, which you've spoken about, which is a great spot to be in. I'm wondering how capital allocation could be impacted by a lower crack environment? And if you're willing to lever up a little from here, should the environment deteriorate just in the interest of keeping capital returns at a strong pace.
Avigal Soreq: So, John, thank you for the question. We're going to remain disciplined. Obviously, there is -- once we feel -- first of all, we want to maintain dividend towards the cycle, that's one thing we need to check the box. If we believe that the allocation capital to buy back, we will not be able to -- we will not be shy to do so like we did in the past, we'll do that again. And we're obviously looking at the opportunity that presented themselves in the market. So we have all the toolbox to deploy on the right opportunity and keeping good return to shareholder is a very high priority for us.
John Royall: Great. Thanks Avigal. And then last quarter, you had mentioned just very broadly, you had some very high returning and presumably relatively quick hit projects in refining that you may think about for next year. And I think you touched on it again on this call. And can you maybe just give us some color around what those projects are and just expand on those opportunities a little?
Avigal Soreq: Yes. So we -- again, we don't want to get ahead of ourselves and to give exactly because we didn't finish the planning process around it and improving them with our Board of Directors. But we definitely have some very encouraging project on the table, and we'll disclose them once we can. But again, number one thing about capital is disciplined, right, disciplined and return to shareholders. So we're maintaining very disciplined about the way we deploy capital and want to go ahead good to out of our shareholders. Joseph, you want to add on that?
Joseph Israel: Yes. I will just say that they are all low cycle return type of projects that fund themselves in less than 24 months. They are all about liquid yield recovery and this type of project you will expect us to look very closely.
John Royall: Great. Thank you very much.
Avigal Soreq: Thank you, John.
Operator: Our next question comes from Jason Gabelman with Cowen. Please go ahead.
Jason Gabelman: Yes. Hey. Good morning. I just wanted to extend my thoughts and hope everyone's families are safe. I wanted to ask first about the supply and marketing line item. And I know you provided some incremental guidance around that new line item last quarter to help us forecast something that was perhaps more ratable. It's been a bit volatile last quarter to this quarter and not necessarily in line with what was forecast. And I'm wondering how much of that is just around trading. And it seems like I think 2Q was a stronger trading quarter in that line and 3Q was weaker. So should we expect to see that in this new line item where the trading impacts kind of offset quarter-to-quarter and the underlying results trend in line with what you've guided to? And I have a follow-up. Thanks.
Avigal Soreq: Yes. Thank you for the question and thank you for the warm words. First of all, we all understand that wars changed the world of marketing and not trading because of the reason. We are looking on that as a risk reduction tool and not adding risk to the table. So we need to remember that. Obviously, when oil prices goes up, there is a bit of a volatility to reduce risk and take this off the table. And as Joseph mentioned a few times on the call, wholesale has a volatility and especially asphalt with the prices goes up. So we are looking on that line, how to reduce risk and how to deploy product and how to get as long a sustainable income as much as we possibly can. It's going to be more volatile than pure capture it, as you can imagine. But we are not deploying just a huge trading position into the market. We are trying to see how we can reduce risk.
Jason Gabelman: Okay. And to be clear, it's not necessarily that the derivative impacts in one quarter will tend to reverse in the subsequent quarter because that's what seemed to happen in 2Q to 3Q?
Avigal Soreq: Right. So when we talk derivatives, we talk about hedging what is outside of the natural inventory range, right? Above or under. When we haven't been reliable like in the third quarter in Big Spring, we spoke about the outages and the fact that we are fixing it the future will be much better there. What happens is when you build inventories and oil price is going up, we are having very good dynamics on the cost of goods side, right? We are making money on the physical side. The hedging go there to keep you on the crack of the day. This is what we are asked to do by our investors. And these are the type of derivatives.
Jason Gabelman: Okay.
Avigal Soreq: And also its makes sense to you, right?
Jason Gabelman: Yes. All right. Yes. That's really helpful color. And my follow-up is -- sorry, I'm going to go back to the strategic unlock of value. If I look on your slide, you say you have a clear strategy or on plan to meet our objectives. When I think about what your objectives were when you put the strategic unlocked forward. It was primarily around deconsolidating DKL's debt. Is that still the objective as we shut it one year later? And when you say you're on plan, it's been a year since you laid out kind of the plan and -- just wondering, it implies perhaps there is some time line that you have in mind. So I just -- I'm going to push again to see if you can elaborate on what you're thinking in terms of time line. Thanks.
Avigal Soreq: Yes. So you're absolutely correct. That's the goal, and we're going to achieve it. I'm not going to commit to a time. Committing to a time impact the deal and you don't want me to do that. You want me to make the right deal on the right timing and to bring value to shareholders. There is no -- we are not just going to rush for a deal, but we are decisive. So our state of mind is not wavered, and we're going to make it, and we're going to make it right.
Jason Gabelman: Yes. Okay. Understood. I wasn't asking quite to commit to a time as much as it says your own plan, which implies there is some internal time line that you have in mind? And just I was wondering if that was a fair read. But I'll leave it there. Thanks.
Avigal Soreq: Thank you. Appreciate it.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Avigal Soreq for any closing remarks.
Avigal Soreq: Yes, Sara, thank you for leading us today. I want to thank my colleagues around the table here for a great quarter, to our Board of Directors and for most our employees, an investor for being with us. And we'll go back next quarter and report again. Thank you so much. Have a good day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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