PBF Energy Inc. (PBF) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, everyone, and welcome to the PBF Energy Second Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following management’s prepared remarks. Please note, this conference is being recorded. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.
Colin Murray: Thank you, Laura. Good morning, and welcome to today's call. With me today are Tom Nimbley, our CEO; Matt Lucey, our President; Erik Young, our CFO; and several other members of our management team. A copy of today's earnings release, including supplemental information is available on our website.
Tom Nimbley: Thanks Colin. Good morning, everyone, and thank you for joining our call today. As we expected coming into this year, general market conditions are continuing to improve. Before providing comments on the market, I would like to address last week's decision by the Board of the Bay Area Air Quality Management District to implement stricter particular the emission standards related to fluid catalytic cracking units or SCCs. The Board has set a numerical standard and we have five years to meet it. Importantly, how we meet that standard is entirely up to us. They have not required us to install any specific technology, including a wet gas rubber. As such, we will not have to incur the estimated $800 million that this project would conservatively have cost. What we are doing is progressing a project included in our capital plan for this year that will get us below a 0.02 emissions level, which is a long way towards the 0.01 level established by the recent rule making. After that project is complete, we will have time to test our emissions and identify possible changes that could potentially reduce emissions further. Last week's rulemaking was another step in an ongoing process. We anticipated the outcome. We expect that the rule or parts of the rule will likely face legal challenges in which the California Environmental Quality Act requires a mandatory mediation between all parties. We appreciate the support we received from the building and trade unions, Western States Petroleum Association, and other business partners in our efforts to present alternatives that achieve the mutually desired goal of improving air quality, while continuing to supply our products to one of the largest markets in our country.
Matt Lucey: Thanks, Tom. As Tom mentioned, market conditions are trending in the right direction. Our aggressive efforts to improve PBF's competitive position should help accelerate the company's recovery. In regards to the rulemaking in California and as Tom mentioned and I will say again, big takeaway from the rulemaking is that we will not be required to install a wet gas scrubber that was infeasible from a land, cost and water use perspective.
Erik Young: Thanks Matt. Today PBF reported an adjusted loss of $1.26 per share for the second quarter and adjusted EBITDA of $2.1 million. Important to note, included in the adjusted EBITDA figure is approximately $60 million of net non-cash mark-to-market expense related to environmental credits. Our results include approximately $298 million of RIN expense during the second quarter. Consistent with our prior disclosure this represents a full accrual of our expected RVO for the period plus the mark-to-market adjustment for our carrying value of credits. Consolidated CapEx for the quarter was approximately $79 million, which includes $77 million for refining and corporate CapEx and $2 million for PBF Logistics. For the first half of 2021, capital expenditures totaled approximately $140 million. Consistent with prior guidance, we expect second half 2021 capital expenditures to be approximately $250 million to $300 million. Our financial results continue to improve as the pandemic recovery progresses. We believe the second quarter was an inflection point as we generated positive adjusted operating margin and we continue to believe the combination of an improving market backdrop and a more streamlined cost structure at PBF should continue to generate incremental positive cash flow. Our liquidity position remains consistent with more than $2.6 billion of total liquidity, including approximately $1.4 billion of cash at the end of the second quarter. We continue to prudently manage our balance sheet and financial resources to provide flexibility for the near term. Our full financial statements were released this morning and I would like to take a moment to help navigate one item in particular. In looking at our balance sheet included in our accrued expense footnote, PBF reported accrued renewable energy credit and emissions obligations of approximately $1.1 billion this figure includes roughly $400 million related to our current and future California environmental credit obligations and roughly $700 million related to RINs. Related to our California environmental credit obligations, we expect approximately $250 million of working capital outflows during the fourth quarter should satisfy more than $290 million of the $400 million accrual. Important to note this payment represents the final obligation in a three-year compliance scheme. The $700 million RIN-related accrual consolidates our 2020 and 2021 compliance years.
Operator: In a moment we will open the call for questions. The company request that all callers during their each turn to one question and one follow-up. You may rejoin the queue with additional questions. Our first question comes from the line of Roger Read with Wells Fargo. You may proceed with your question.
Roger Read: Yeah, thank you. Good morning.
Tom Nimbley : Good morning Roger.
Roger Read: Just to come back I think first off on the macro. Erik you made the comment about -- it seems like you hit an inflection point in Q2. And then you talked Tom earlier about crude diffs probably opening up with OPEC+ putting more oil in the market. Third quarter started a little weak, but has really improved in the last couple of weeks. Do you see something that is fundamentally better as we're progressing or would you attribute this to the typical volatility we see in margins? And I recognize there's a whole bunch of things that affect what's going on a daily basis, but I was just curious if things look a little bit better, as you're paying attention to inventories, if you're paying attention to imports and then the guidance you put out in terms of volumes for Q3?
Erik Young: Yeah, Roger, it's a lot there, but you're spot on. We do think it's gradual. I wish it was a little bit faster, but there's clearly improvements in the market from a variety of reasons. We're basically below historical averages on all major claim products a little bit higher on Jet, but not much within the five year band. Certainly, there on gasoline and distillate. Distillate is below the five year average. When we look at the cracks they have been improving. We believe that's associated clearly with demand recovering. And as I said distillate has been holding up all year. And in fact even last year, it held up stronger than anything else as you aware. And in fact is above pre-pandemic levels for this time in 2019, gasoline is just about at that level and demand continues to improve. And that's the key. To be honest, that is absolutely a key in that. If Jet does not improve that will keep the ability for the refiners to run more limited because of the Jet limitations. That being said, the industry is running at 91% utilization. So we have this demand getting back to levels of 2019 and we have over one million barrels a day less capacity than we had in that period of time and that's why utilization even is at 91%. So demand looks like it's recovering. Certainly, the inventories are in control. If you look at the light heavy spreads sweet/sour spreads compare them to the beginning of the year, most of the heavier higher sulfur crudes, Maya Arab Medium, coke all the crudes that have higher sulfur have moved out about $2, a little more than $2 from the beginning of 2021 to now. And as I said when you start bringing on 400,000 barrels a day more crude each month, it's all going to be incrementally basically medium heavy higher sulfur crude which should work to the advantage of high complexity refiners like PBM.
Roger Read: Okay. Thanks for that. And then I know this is not something that gets answered to any one question. But as you think about the RFS and the RINs program there's what you want and there's what might be achievable from a political standpoint, thinking about what has happened with previously with the Obama Administration they did at times tweak the RVO the Trump administration more of the SREs which seems a little tougher solution here politically given some recent legal issues and pushback from the RFA and all. But I was just curious what do you -- what I kind of get it. If you get rid of the program, you're happy, but that's not happening. So what is it you think would be reasonable within the political framework, maybe to see the EPA do between now and year-end? Is it as simple as simply resetting an RVO for 2021 or is the deficit that you highlighted for the RIN bank potentially so large that it has to be step out kind of not a tweak but a rework?
Tom Nimbley: Hey, Roger, I would say a couple of things. One in regards to a solution there are many solutions and there are many easy solutions. But the first thing they need to do is make sure that the scarcity of RINs doesn't exist. So the simplest solution and one that has been talked a lot about is simply single RVO at a level where RINs cannot become so scarce. And it's -- that's something that they could do with a snap of a finger. There's other opportunities they can do to rework the program. And indeed, we're sort of engaged in all fronts with partners, with the representative workforce. I think you alluded to it. There's no question about the Trump Administration completely failed this program. They took away SREs but we're reallocating the volume. So it was sort of a double damning event. They granted E15 year-round labor which was just overturned by the courts. And so I think the ethanol industry is scratching their heads saying "Hey how do we come to a workable solution now that Trump Administration is gone?" So I think there are other aspects of the program they can change but the most simple one is setting an RVO that works for all the stakeholders. And I think they understand that and we just need to get through the political process on that.
Roger Read: Thank you.
Operator: Our next question comes from the line of Phil Gresh with JPMorgan Chase. Phil, proceed with your question.
Phil Gresh: Hey good morning. Erik thank you for all the color around the accrued expenses piece. Just a quick follow-up or two on that. One is, it looks like it's $550 million you're talking about in the second half of the year and that number sounds consistent with the last quarter call, I believe. So I guess should I just infer that in the second quarter I think there was an initial plan to maybe pay some of that in the second quarter was it just pushed to the second half? And then related to that I guess what you're implying is that about $500 million of the RINs is for 2021? Just wanted to confirm that number.
Erik Young: So two quick responses on that. I think folks should assume, if we think about we had an overall expense of almost $300 million during the quarter, we did ultimately spend a little north of $150 million on RINs throughout the course of the second quarter. At the same time, I think we've been fairly vocal. We've been active in the RIN market. And so, ultimately there are incremental purchases that are made to cover certain forms of compliance. And on a go-forward basis, I think the key message is, we today included in the $700 million there's about $400 million that ultimately is fixed/nonfixed price commitments right? So that's a mark-to-market adjustment. It's going to fluctuate. If RINs get cut in half that $400 million goes down by 50%. The $300 million is what's remaining on the books fixed price commitments $200 million of which we've allocated to our 2020 compliance that is our first priority at this point is to ultimately show up at the end of January 2022 with our full RVO turned into the EPA. The remaining capital that we know we have earmarked through the remainder of the year evolves the $250 million of AB32 related compliance credits that we have a repurchase obligation that will ultimately hit in the fourth quarter.
Phil Gresh: Okay. Got it. And I guess could you give us an update Erik on how you think about operating cash levels? I think in the past you've given a $500 million number. I just wanted to see if that's something that would still hold in this current oil price environment?
Erik Young: I think anywhere -- again price of crude oil will be a key determinant in what we feel comfortable carrying from a cash perspective. I think today absent anything that we're dealing with in terms of coming out of the recovery following the pandemic yes, I think $500 million is a more than reasonable number. And quite frankly in a similar historical period we probably operated with between $250 million and $500 million operating cash. So, I think that's a reasonable number though given the current market environment that we have for crude price in and around kind of a $70 $75 barrel number.
Phil Gresh: Okay. Got it. That's very helpful. One last one this would be for Matt. I think last quarter you were hoping perhaps to have a bit more color on renewable diesel on the progress of the project I think by this point. I guess you got the approval this week for the incentives. So how much of that do you think was I guess a factor in the next steps of this process and the willingness to have partners step in versus say other things like feedstock or other issues you're still trying to figure out?
Matt Lucey: It's a big project that has a lot of work streams that are simultaneous obviously working with the state of Louisiana and bringing economic development potentially to that region. We are working that and working all aspects of it not only the engineering coming to final costs, working with potential partner and doing due diligence around the potential partner, as well as them doing the diligence around us in addition to all the engineering work that you have to do on the front end to make sure that your project is going to be a viable as you think. So, we continue working on all fronts, and quite honestly, I would characterize as sort of being right on schedule where we expect it to be. There's no big delays or anything. We're going to have to assess the market and decide to go forward and that should be done in the very near future.
Phil Gresh: Okay. Thank you.
Operator: Our next question comes from the line of Theresa Chen with Barclays. You may proceed with your question.
Theresa Chen: Good morning. Tom, I am curious to hear your view on what's happening in the East Coast currently. At this point, summer driving season is in full force and facilities in that area have rationalized capacity including capacity at one of your own plants. The quarter was noisy due to colonial being shut down for six days and imports and such. Looking past all of that, can you talk about what is happening on a capture front or your expectations going forward on a normalized basis, since there has been capacity rationalized and demand has rebounded and get we are in the midst of working through the volatility of imports from Europe elsewhere and that seems to have subsided at this point with the maintenance issues going on there. But just looking forward, what are your expectations for the East Coast?
Tom Nimbley: I think you're spot on in that there's been a lot of choppiness particularly on the East Coast and that was once you get past the fact that certainly is a lot more mobility in the East Coast as there is in the country. We're seeing that. A lot more cars on the road. People are returning to work. And we do expect as we said that, after -- even after we get past way today and the traditional slowdown in the driving season might be counted by the fact that there will likely be more school buses on the road and more people coming back to work because their children have return hopefully to a more normal life. The big thing on the East Coast and PADD one has clearly been the fact that, there's been such a huge arb between Northwest Europe and the mid and the North America and particularly East Coast. Let's say two weeks ago, we had imports of 1.4 million barrels a day, significantly higher than we had in 2019. So, I think one of the things that we're really looking for and hopeful on is in fact that Europe gets control of the pandemic or make strides and they seem to be doing in that area. And their business environment improves and that is clearly happening. Cracks have moved up in the Med, in Northwest Europe by several dollars a barrel. They're not where they need to be. But certainly, the imports down and last week -- yesterday's numbers were still elevated. But on a go-forward basis, it appears as though, they will be dropping off. That in combination with what we said about continue increasing in demand, we expect the cracks to continue to improve. I will say that, we are pleased with how the East Coast reconfiguration is done specifically in our environment. It does appear to be working as we intended. We effectively took the strengths of two refineries and kept them and eliminated some of the weaknesses and particularly in Paulsboro on the fuel side of the business. So, we -- hopefully, we'll see continued improvement in PADD one and on the East Coast.
Theresa Chen: Thank you. That's great color. And then maybe turning to the West Coast, in light of the commentary that you gave on the Bay Area air quality management districts new standard and the projects and developments under contemplation to potentially meet that, it seems like that in itself is a moving target, given the arbitration process on coming. So just curious, in addition to the reactors that should decrease the particle emissions below the 0.02 level, what other projects are you looking at that can further reduce that?
Tom Nimbley: Let me just back up for a great question talk about the project itself that we are implementing. As Matt said, that was a project that was basically contemplated and negotiated as part of the acquisition itself. And what we're doing is shell has purchased these reactors and these reactors are going to operate at a higher operational severity than the current reactor, so to be able to run at a higher pressure, higher temperature. And the reason we wanted to do this project initially and importantly is that by increasing the pressure on the reactors and the reactors it increases the amount of sulfur, nitrogen, paramatics and metals that you take out of the feed to the cat cracker, which results in a higher yield pattern and a higher volume expansion across the SCC. It improves the quality of the cat fee. As a result it also – the sulfur, nitrogen, metals contribute to particulate matter. So by taking it out in a cat hydro treater you reduced the particulate matter that is being emitted from the cat cracker and that's how we can get down below 0.02. There are myriad ways of trying to make additional changes including feedstock changes, using additives to try to see if you can inject additives to reduce the particulate matter further, operational changes, many things that we have already been contemplating but we want to see what we can get and prove that we can get at least below 0.02, but we think we're going to be able to do better than that with this project and then that will allow us to take the time work with the agency. This is going to be mediated and I remain confident that we're going to get an acceptable outcome on this.
Theresa Chen: Thank you.
Operator: Our next question comes from the line of Doug Leggate with Bank of America. You may proceed with your question.
Doug Leggate: Hey, guys. Tom you gave a fairly thorough view as to how you're going to respond to this issue in the West Coast, but I just wonder if you could kind of sell it out for us. You've got a reasonable amount of near-term flexibility to get below 0.02. What happens, if the action as stated is truly enforced? What does that mean for you guys then in terms of potential additional spend?
Tom Nimbley: Well as I said, we actually think there's not going to be a huge amount or a significaterial amount of additional spend. This project will get us – we say it's going to be below 0.02. We think it's going to be better than that. The agency itself has modeled this reactor improvement and kind of agrees with that but we have to demonstrate that. So we've got to get to project online and see what our new baseline is. If it is where we think, we think that we're going to get very either there maybe not there but very close to there with the operational changes and maybe the use of additives as I said. We're not going to be putting in a very large project. That's clear. But we have to first see what we get from this project and in the negotiation process or the mediation process, which is almost inevitable because some people are going to – maybe even us would litigate this. We have to first see what we can get from the project. And I don't think we're going to wind up being in a bad position on this.
Matt Lucey: Doug, it's important to note, we're replacing 50-year old equipment with these new reactors. And to Tom's point, there's a lot of computer modeling that's going on today. But until the full installation and implementation is concluded, we've got a lot of different knobs that we can turn. Folks need to understand these are very complex machines that we're operating out on the West Coast. And again, we feel confident that we're going to be making some progress. But let's get through the first part of 2022, when again we have a real live baseline and then can start changing different things and testing and going through the process that really needs to be concluded.
Doug Leggate: Well my follow-up is also related to this because obviously, one of your large competitors out there was talking about, they don't maybe have as good a solution as you guys might have and they're talking about north of $1 billion of potential capital. I'm just wondering if you could offer any thoughts as to how you see – not so much how Chevron situation plays out, but how you see the risk or upside to balances, product balances in that market if they don't get their situation result? I'll leave it there.
Tom Nimbley: Yes. We don't know what Chevron is going to do. Right now, the demand -- supply-demand situation, the balance is as you referred to, in California it looks for the immediate next several years, reasonably good. And that's principally because we have Martina is the former Avon refinery, that's already been idled. We have Rodeo, at Santa Maria for Page 66 that's a transition. And frankly, he's already shut down one of the hydrocrackers in Rodeo and turns it into a renewable project. So, there's been a fair amount of capacity that's been taken offline. We see the California market being constructed once -- and demand has come back. It really has come back in the last week's -- yesterday's numbers were strong. So we see the market being constructive. Now, if obviously there were some additional steps taken, either because somebody decided to take equipment offline or one of the ways you can effectively reduce particulate emissions is to reduce rates. So, if that became the case, you would obviously, have some more capacity or throughput be reduced and that would be further constructive to the marketplace.
Doug Leggate: Appreciate you offering those perspectives. Thanks a lot.
Operator: Our next question comes from the line of Paul Cheng with Scotiabank. You may proceed with your question.
Paul Cheng: Hey, guys. Good morning. Good morning, Paul.
Paul Cheng: Tom and Matt, not that it will happen, hopefully not. But, if Elliot got a similar standard as a Bay Area here, yet Torrance have a similar elegant solution as what you see in Matinza or that wet gas scrubber is the only real solution for Torrance?
Tom Nimbley: That's not even been put on the table. Obviously we just Exxon replaced the electrostatic precipitators after the explosion. And we're in compliance. There are no issues. This has not been contemplated in the South Coast. The Bay Area has been working on, we've been working for -- how long with this in the Bay Area?
Erik Young: Four year.
Matt Lucey: Yes, since we took over.
Tom Nimbley: Since we took over. So, that's been a work in progress. The same situation doesn't exist down there. With the new precipitator, we're in full compliance and there's no discussions in this regard at this time.
Paul Cheng: Okay. And just curious that I mean this year your CapEx is about $400 million to $450 million. How long then you can spend just at this level, let's say, over the next several years if the market condition has not moved in the right direction as we hope, or you go even lower that for a couple of years or that this is really the bad minimum?
Tom Nimbley: We're going to respond to the market conditions in our spend. There's no doubt about that, but they will become time that some of the units -- units talking it. And at some point you can defer turnarounds, but you might have to either take a squat. And these are things we're looking at. What do I mean by squat? Instead of doing a 45-day turnaround you might have a piece of equipment that is saying they need some help. We shut that piece of equipment, fix that down, restart the unit, and then run it a little bit longer. But to your question, we've had a low spend. We're continuing to have a low spend. We're continuing to put -- do everything we can to reduce CapEx with some of the best practices we put in place. But this equipment ultimately is going to be needed to first and foremost we have to run a safe reliable environmentally responsible operation. So we will have to maintain -- spend to maintain the units in the correct operable condition. So, we would expect to see some increase in CapEx going forward.
Paul Cheng: Yes. And Tom, I think before the pandemic, at one point what considered sustaining or maintenance CapEx for you guys is about 600 I think or 650. Is that still the reasonable number in normal market conditions?
Tom Nimbley: Actually, -- what would you say that the sustaining CapEx is?
Erik Young: Just sustaining probably close to $500 million.
Tom Nimbley: So you heard that Paul. Sustaining is about $500 million. And then, of course, you've got some -- we might be spending some money on return projects and things of that nature, but that's going to be a function of what the market is.
Paul Cheng: And talking about that I know you're still -- you have sensed the project, but renewable diesel plant that you talked about any preliminary CapEx that you can share?
Tom Nimbley: I'm sorry Paul. CapEx in regards to the project, we have not published or spoken about it just because it's being actively worked. What we can say and what we have said is a project from a capital perspective and quite honestly from an OpEx perspective appears to be a top quartile project. So, when you compare it to the other projects that have been announced, the project looks very, very good. We benefit because we had an idle hydrator, quite frankly that was preserved in a professional manner. And so that gives us a tremendous leg up. And then on the operating cost side with the project, we directly benefit or we would directly benefit from the fact that you have synergies with the refinery. So, all the ancillary sort of services you would need to do if you are a standalone business, we get the benefit of reduced OpEx being connected to the refinery.
Paul Cheng: Two final questions from me is for Erik. Erik I don't know if you can give us some idea a sense that how is the current debt market? What's the opportunity if you need to raise additional debt in the near term? And is it doable? And secondly, I think in the first quarter, you were hoping by now that you will be maybe turning the page and will become positive free cash flow. So, just curious that I mean how that looks and whether you guys from a cash flow standpoint in July with the new breakeven in the cash flow? Thank you.
Erik Young: So, in reverse order, I think we're a bit disappointed with the second quarter because we didn't get to the level in the June time frame that we were really shooting for. Unfortunately, the market didn't deliver the economics that we wanted and the continued pressure from RINs did not allow us to generate enough free cash flow from operations to cover essentially our CapEx and interest. However, it is important to note we have seen a relatively steady recovery overall since the first quarter. So, if we go back over the course of the past 12 months, the refining industry obviously everybody has lost a lot of money. And so the first step for us was getting to positive operating contribution or operating margin. We feel very confident we've gotten there. And now the next step will be what is the incremental operating margin that we ultimately need to generate. And if we think about overall costs, right, we've got roughly $25 million a month in terms of interest if we think about a circa $300 million a year interest burden. And for our guidance that we've provided for the second half of the year, we're going to have $45 million to $50 million a month in overall CapEx. The actual cash itself is relatively lumpy simply because we do have fixed income payments that come not every month. And the CapEx is also not ratable. But if we think about that over kind of the next six months, I think again, what Tom pointed out on the front end from a macro standpoint is what we're seeing today. One of the things that needs to be settled near-term is what is the near-term 2021 RVO, so we can put this RIN issue behind the entire industry and move forward that's going to be a critical point in understanding exactly where this market is going to go. The macro is the macro for us. And so I think we continue to operate in the bonds where we feel comfortable. Our CapEx numbers are increased for the second half of this year that is in anticipation of continued economic recovery coming out of the pandemic. I think on your debt question, to be completely honest with you, we have zero plans to go into any type of debt market and have not spent a lot of time talking to investment bankers or investors around if we had to raise debt what would the price be? I think we pay attention as we've said before to where our fixed income securities trade. Today, we have more than ample liquidity. It's going to fluctuate as commodity prices fluctuate. But overall our key focus internally is maintaining safe reliable operations, to be able to get to the point where we're covering all of our fixed costs across the board. Clearly, the cash expectations that we laid out we have exceeded those through the end of June. A lot of that however is driven by working capital and I think we've tried to be very transparent in terms of how that working capital is ultimately going to flow through the second half of this year so that we remain in compliance with our AB 32 and RIN programs for calendar year 2020.
Paul Cheng: Thank you.
Operator: Our next question comes from the line of Neil Mehta with Goldman Sachs. You may proceed with your question.
Neil Mehta : Yes, thanks so much. Erik I just want to build on that. Obviously, the credit markets are what the credit markets are but the unsecured has been under a lot of pressure. And as if to say that there are liquidity issues of the business but one of the things that was I think incremental in today's release is that you're up to $2.6 billion of liquidity. So can you just put a bow on a lot of the comments that you made over the last 50 minutes of why you feel comfortable about the liquidity position that the company is in and summarize that for us as you look out over the next year?
Erik Young: I think the key piece being we know what our dedicated uses of cash are from a working capital standpoint through the remainder of the year. We provided some CapEx guidance for everyone. We know what our interest burden is. And ultimately, we believe that this industry is going to continue to recover and margins will be there for us to be profitable. If they're not then ultimately there are other steps that the industry overall is going to have to take. And so again I'd just taking a very, very high-level view it is hard to imagine that the refining industry over the course of multiple years will consistently lose money. That has never been the case historically. And every time there has been a recession, there has been a recovery coming out of it. The pandemic was a recession on steroids. And so ultimately a lot of things will need to be addressed over the next 12 months. But directionally what we are seeing in terms of macro recovery, everything is trending in the right direction.
Neil Mehta : And the follow-up here this one might be for Tom, but it just strikes us that the industry in the second quarter was running at an elevated utilization and demand has come back very nicely ex-jet but margins until recently have not followed. Do you think that industry discipline in the refining space is still intact? And ultimately, will the industry let demand run a little ahead of utilization as we go into the shoulder to enable the margins to perform a little better?
Tom Nimbley: Yes. I think certainly that's the key right? We have absolutely the industry is a spectacular job during the pandemic and actually rationalizing capacity and not letting the inventory situation degrade even further because of the destruction in demand. As the -- I think there was a feeling that when we got down to very low case rates and hospitalization rates and mortality rates that perhaps this is indeed and we were opening up the country, okay this is it. We've got no one on a freeway and let's see what happens. But I think two things. One, is in fact the variants. You've got lots of variants. Obviously, we're going through a spiking cases now. Hopefully, the fact that five percentage of the population has been vaccinated it won't result in a huge amount of step change in hospitalizations et cetera. But we have to watch it very closely. And I think the industry will watch it very closely. And in fact, until we get jet demand completely or get close to full recovery there's a governor around this. As I said you cannot run higher than we're running. I think the 91% is about it from a jet limitation and we just watch the inventories. And if the inventory starts building, I've said 1000 times over the last many, many, many years putting -- running to put product in the tank and hold it is a full zero. So we would have to cut back and reduce our production to make sure that we don't let the inventories get away from us which because that would result in obviously, decrease in the cracks.
Neil Mehta : Thanks, Tom.
Operator: Our next question comes from the line of Paul Sankey with Sankey Research. You may proceed with your question.
Paul Sankey: Good morning, everyone. Very specific question Tom, while I've got you as there's been some reports that the shortages of jet fuel around the country. I didn't really understand it given where jet fuel inventory is. I wondered if you had a perspective on that. A follow-up would be on the way crude inventory is acting. It's just interesting that Cushing is coming down the way it is. And I was wondering as regards to the very, very low Saudi imports, whether that was purely a function of price differentials or whether there's actually a limitation on availability of Saudi crude and any other comments on heavy is always interesting from heavy like differentials is always interesting for you guys? Thanks
Tom Nimbley: Okay. I'm going to take the first part, and then maybe a little bit of the second part. And I think, we have Tom O'Connor, our Head of Commercial is on the phone, I'll ask him to weigh in and get some thoughts on the crude situation. It's interesting that, what's going on recently in jet the as everybody is aware a lot of things have happened that of course industries by surprise in the supply chain. So even the airline industry, it appears as though demand – the number of people that are wanting to flow is being restrained by the fact that the airlines don't have enough people to put them in a year. So they've got to get more pilots back. They've kind of held up on that. Similarly, reports on the jet shortages – regional jet shortages are some ways supposedly due to a lack of drivers that are getting jet fuel from wherever they're lifting in on the rack and getting it to the airport. So there's a supply constraint and the government came out this morning and said they were going to intercede and try to see what they're going to be done to help that. And that's being done at the same time recently that we've had these fires on the West Coast and parts of the country. And there's a lot of – there's been a rather significant increase in cargo planes that are being flying around trying to deal with that issue. So you've had an increase in demand associated with that event. At the same time, it appears as though there's a supply chain restriction that is impacting the ability to get the jet fuel from say a refinery to a terminal, but ultimately to an airport. So I think that's what's going on. On the jet side in the crude situation, I've made my comments. Tom, are you on the line?
Tom O'Connor: Yes, I am. Paul, I mean, in regards to that, I mean, throughout the second quarter, as we looked at forward balances basically, I mean, the Cushing market, ultimately had to get to a price where it was basically incentivizing crude to stay domestically. And we've continued to see that in terms you've got the narrow differentials taking in terms of where the Houston market is, because effectively the market got so strong domestically that it basically shut the ARPS to move to different areas and effectively now we're starting to see that softening. While term structure is still quite strong, it is starting to weaken and is balancing in terms of the ARPS are starting to soften the touch in fact that the market's gotten potentially close to where we were talking or the industry would be talking about tank bottoms. And it appears that that initial concerns may be alleviated as we basically have approached peak runs and then we'll be heading into the seasonal decline in terms of also increased turnaround activity in the fourth quarter. So in terms of overall crude avails, I mean, we're starting to certainly see more barrels available sort of I'd say, across the fleet between different areas, particularly in the fuel oil market which is move from very stubborn single-digit differentials in the first half of the year starting to expand a little bit.
Paul Sankey: And based on everything you've just assume that Saudi Middle Eastern oil is basically Saudi Middle East all is basically priced out of the market?
Tom O'Connor: That continues to be the theme. I mean, I think we'll start to see, I mean, also dating back on that right is, we've had obviously a lot of issues to sort out through the month of July in particular as the UAE issues regarding around their baselines have been sorted. So I think, we'll get better clarity of that as we start to move forward and start to see where the volume metrics start to proceed.
Paul Sankey: Brilliant. Thanks. And if I could – sorry, ask a follow-up maybe for Mr. Lucey. The -- is there some – can you highlight any catalyst moments going forward or time frame going forward for when we sort out the stupid RIN thing? Is there something that you're looking for some next series of data points perhaps or are we just going to continue drifting in a vague leave it to Washington kind of mode? Thanks. I'll leave it there.
Matt Lucey: I actually think we're in a window, Paul. There was some paralysis because of the Supreme Court that's now passed a spy and obviously Holly prevailed on that. But as I said, before that sort of becomes a move point onto itself, because still leaves SREs at the discretion of the administration, but you have a window now where first of all there required to put out an RVO and Secretary Regan has been around the country talking about, they feel the need to be transparent and unlike the previous administration put out an RVO on a timely basis. They haven't lived up to that promise yet, but statutorily they're required to do that. And I expect, we always dance around with paralysis in with the politicians. But I will tell you, we've had excellent partnership with the representative workforce that we work with every day. And they are speaking as loudly as they can to the administration, because they understand the threat to their livelihoods. And what it means to them And so next year you get into an election year. And you can create a whole new list of reasons why things get frozen. But I actually think we have a window. And as I said in my comments, I'm hopeful that in the near future, we're going to have more clarity. And in the worst-case scenario, if it all plays out, as I described, and I was sitting with the Governor, reasonably sized date and not too distant past. And I sort of laid this out to and he said, "Well, they're not going to let that happen. Are they and I said, I presume, you're right. And so, the EPA and the administration can move as quickly or as fast as anyone in the world. And -- but I expect that we're going to have a window here in the not-too-distant future where there will be more clarity.
Paul Sankey: Okay. Thanks a lot.
Operator: And your final question comes from the line of Matt Blair with Tudor Pickering Holt. You may proceed with your question.
Matt Blair: Hi. Good morning everyone. You mentioned you're in advanced discussions with partners on the RD project. Would any of these partners provide you with access to advantaged fees, or should we think about this as more like a financial partner?
Matt Lucey: Entering this process, I probably have said, this in the past. We've been focused on partners where we think that they're going to be additive to the project and that can come in multiple ways. Obviously, money is a commodity. That's fungible. But we've been much, much more focused on partnering with someone that can improve the dynamic of the project to make it even more compelling than it already is. So that's where our focus is. I'm not going to get in on specifically what types of partners. But we've been pleased with our discussions in that regard and we continue to progress it everyday.
Matt Blair: And then, this might be a tough question to answer now, but any early thoughts on the geographical markets for the Chalmette RD project? Do you expect to place volumes in the California or do you kind of see it as more like a New York, Canada, Europe end market for you?
Matt Lucey: We are merchant refiners. And as such, and one of the things you learn in refining you want as many options as you possibly can, because the reality is, we don't know where the bell is get a ring, and when it's going to ring. And so you want to have complete optionality that goes for feeds, but also access to product markets. It's one of the reasons that we think Chalmette is uniquely positioned from a location standpoint, not only for sourcing feeds, but optionality to go to California, to go to Western Canada, or go to Europe, or quite frankly anywhere else where it becomes the most attractive product market for that renewable diesel product. So we think Chalmette being -- having access to water, rail and truck. It gives us the greatest amount of flexibility. And we'll be able to deliver very competitively into whatever market presents the highest netback.
Matt Blair: Great. Thank you.
Operator: We have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Tom Nimbley, for closing remarks.
Tom Nimbley: Well, thank you very much for attending the call today. We look forward to meeting with you at the end of the third quarter. And hopefully demonstrate that we have in fact seen the inflection point and turn to corner and have gotten to positive cash flow. Have a great day.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
