HFC
#<UNK>, we are kind of scrambling here on the natural gas sensitivity.
I don't have that at my fingertips.
Like 120,000 and then BTU a day, so about every dollar change, call it $25 million.
I guess, what we're trying ---+ the question is, what are you trying to compare to.
Previous ---+ quarter over quarter, <UNK>, I would say that nat-gas was pretty flat, maybe even up just slightly.
So the improvements you'd be seeing likely were going to be through improvements in our efforts to reduce operating costs.
And keep in mind, <UNK>, we do have some nat-gas hedges, so basically it's not a one-for-one basis when you're looking at the spot price on your screen with regards to our OpEx impact.
I think this quarter, the OpEx ---+ obviously there was a fair amount of our lower OpEx was from lower nat-gas.
The rest of it was really split between lower maintenance materials and just other types of projects where we really cut spend.
Bigger picture there, <UNK>: the best thing we can do to get our operating cost down, and we've been making progress here, is to get our reliability up.
That decreases our maintenance expense, obviously.
It gets our [full] barrel numbers lower, which is always a good thing.
And then, as we've laid out in our business improvement plan, we've identified $100 million of OpEx improvements and lately we've identified another $30 million of improvements in addition to that, primarily through better management of contractors and other headcount.
I think the way we think about it is that our CapEx is basically defending the fortress.
So it's our first priority.
We have to maintain our plants.
We have to invest in the compliance projects that are required to stay in business.
So a lot of that is not discretionary and things we have to do.
We can cut back on the margin on some of the opportunity capital and growth capital, but we tend to think that those are better returns to the shareholders than even getting the dividend.
Second is the dividend, but again that's like 1A and 1B between our CapEx and the dividend.
And as <UNK> mentioned earlier, our swing is really on returning cash to the shareholders through the repurchase option.
I think the biggest benefit of lower crude prices and less of an impact on our liquids volume yield.
So as you know, refiners don't produce 100% liquid volume yield.
It's somewhere in the 93% to 98%; maybe sometimes 100% depending on how much hydrogen you add to your products.
So when you take 5% times the crude price, that's really the impact of the liquid volume yield on your margins.
Typically, like you are saying, when the crude price is lower, other secondary product margins are better.
Having said that, we're still seeing weakness this year in asphalt and fuel oil, at least relative to prior quarters and prior years.
So we're not getting the bump there that you would normally see in those secondary product WTI cracks than we have in the past.
Well, there was just a couple things, <UNK>.
First, obviously the biggest was the impairment and goodwill ---+ which, goodwill, you don't get a tax benefit from.
It's not a rate driver.
So what you saw happen was, even though we announced a large loss, and you might've expected even tax rate to be lower, you don't get to count that goodwill portion.
That said, our first quarter tax estimate was expecting better earnings through the first half of the year, which then reversed.
So all of those sort of drilled us towards a lower number.
The only other thing I'd point out is that with HEP being a larger percent of our earnings and HEP being the tax advantage structure, you just saw that rate, as you pointed out, being below what you would have maybe expected ---+ something closer to 35%.
Definitely.
Our turnarounds were in the first and second quarter.
We are going to have a turnaround at the older Woods Cross FCC unit in the fourth quarter, but other than that, we're pretty much done for the year.
We think that the fall turnaround schedule in Mid-Con is going to be pretty heavy, as it typically is.
There's some turnarounds as well in the Rockies, in the third quarter, early fourth quarter.
But I don't think it's anything outside the normal preparation for winter type of turnarounds.
Jon, got anything on there.
This is <UNK> <UNK>, <UNK>.
RIN WTI ---+ I still think we're going to probably see the $2.00 mark for the balance of this year, somewhere in there.
If something happens internationally it could do something, but we don't see anything on the forecast that's going to substantially change that.
On the OpEx side, <UNK>, remember we had our FCC turnaround at Cheyenne in the quarter.
So that on a per barrel crude basis makes those costs look lower because we ran fewer barrels.
And then, even when we came out of turnaround, we had some gas oil inventory to run off.
So that led to lower crude rates even after the turnaround was completed, so again makes the per barrel numbers look higher than it ordinarily would.
But having said that, we have a lot of our opportunity that we have identified to improve our operating cost structure in the Company are in the Rockies, especially at Cheyenne.
We've got the contractor headcount we talked about earlier, and we benchmarked ourselves to peer group and we have opportunities across the board to improve at Cheyenne.
And <UNK>, by my math, just looking here ---+ I mean OpEx calculated from Q2 of 2015 and also Q1 of 2016 was pretty much closer to $60 million versus closer to $50 million for Q2.
So directionally, moving in the right direction we just need to add the barrels now.
So <UNK>, following up on the goodwill impairment as well as the PP&E write-down, you will likely remember ---+ I'm not sure we broke it out by plant ---+ but we had about $309 million worth of goodwill associated with the Cheyenne refinery as a result of the HollyFrontier merger in 2011.
We are required to actually test that for impairment every quarter.
We do a major review every July, and what we found in that review, as you do a discounted cash flow analysis, look at the forward outlook, the operating history, RINs prices, as an example another overhang.
We found that the Cheyenne refinery based on past results and future expectations certainly was impaired for goodwill.
There's been a second step that's required after you've done it to test on an undiscounted basis a look at your existing property, plant and equipment.
Again, looking at those discounted cash flows as we went forward, found that there was an additional $300 million or so write-downs that needed to occur on book value versus enterprise value.
Also taking into account our market capitalization.
So all of that resulted in what was a little more than $600 million of non-cash impairments to the Cheyenne refinery in the quarter.
<UNK>, one other thought on the OpEx question, tying in Woods Cross, that Rockies region number you are probably looking at ---+ we've been carrying the full load of the additional operators and other expenses for the Woods Cross expansion for the whole year, let alone the second quarter.
And again, with us basically studying that unit up in the last month, the second quarter, that's going to contribute to per barrel numbers looking high as well.
I think $7.00 would be a good walking around number.
And <UNK>, that's a combination again of getting the Woods Cross barrels on, because we've had the OpEx associated with that layering in over the past couple of years, and reducing OpEx in general at Cheyenne.
All our assets are core assets.
How's that for a standard reply.
It's a good refinery.
With the hydrogen plant that we've added there, we have the capability to run up to 80% heavy Canadian crude.
The Denver market's a good market.
We've invested in a heavy oil rack that allows us to sell more bottom of the barrel asphalt and gas oil type of products.
So we like the asset.
We just need to get the reliability up at that facility, work on our operating costs, as you've highlighted for us here, and I think it could be a major contributor to HollyFrontier ---+ and no question, the key driver for that facility, though, is the heavy crude.
We don't really mean to suggest that with the projects that we are doing.
Really, looking at projects that can increase our yield, and not necessarily preferentially gasoline versus diesel.
And that ---+ those are the projects, like the FCC modernizations, are basically upgrading coke and gas and LPGs into gasoline and diesel.
I don't think we're smart enough to pick the gasoline and the diesel spread, so we designed for flexibility.
I think in the short to intermediate term, with all the diesel capacity that's been added worldwide, it suggests gasoline is going to be better than diesel.
But again, like I said earlier, we've seen the gasoline to diesel spread flip about four times in the first six months of the year, and when it does we react accordingly by changing our cut lengths and things of that nature to make the right product at the right time.
Good morning, <UNK>.
I would say, historically, it's probably been more of a hardware issue, especially in our utilities area where we've had less than reliable steam and instrument error and systems of that nature.
I think a lot of that is behind us.
We may have some incremental improvements from here, but the vast majority of those utility-related issues are behind us.
I think going forward, more of our issues there are management- and culture-related, but we've just installed a new plant manager as well as a new operations manager earlier this year.
And we're just beginning to see the aircraft carrier turn at Cheyenne.
So we are pleasantly pleased at what the plant has been able to do since it has come out of its FCC turnaround.
The FCC project is performing as we expected, and we're excited by the blooms we're seeing on the roads at Cheyenne.
Both, <UNK>.
You have to ---+ one has to drive the other.
I mean, if you had specific reasons as to why it passed operations, we're going to be different that you can point to, that's one answer.
But the answer is, there is a combination of both that goes into that.
No.
It's not a matter of justification, <UNK>.
And it's not just crude throughput, as an example.
You also have Brent-TI that, as you look backwards 3 to 4 years, you saw something that probably averaged $6.00 or $7.00.
As you look forward, we use something in the $2.00 to $4.00 range.
And so that causes impairment because Brent-TI was a driver of profitability, historically.
<UNK>, I think the major reason for the write-down is just, frankly, the curing value on our books for Cheyenne has been too high ever since the merger.
We've been skirting on the question of whether we should take the write-down even through great margin periods like last year.
So I think we've just decided to bite the bullet and do this, and obviously the weaker margins this year were the catalyst for doing it.
No.
We have been very pleased by the market's ability to absorb the additional production out of Woods Cross.
Granted, it is the summertime, when [solid] demand is stronger than it is obviously in the winter.
Got strong cracks in prices in the Salt Lake and Idaho markets right now.
Up until recently, we've seen strong cracks in the Vegas market as well.
I think it's been in the last week or so that Vegas has gotten weak along with the West Coast.
But overall, we've been very pleased in our ability to place the product at nice margins for Woods Cross and for us.
We fully expect to place that product using the UNEV pipeline.
That was why that pipeline was built ---+ to be a relief valve, if you will, especially in the wintertime.
I think it's the difference between wholesale and retail, <UNK>.
I think much of our discussion today has been wholesale-related.
What we basically sell out of our refineries to asphalt customers.
We are seeing what you're talking about beneficially within our Holly Asphalt division, where we have great margins at [more than] retail level through Holly Asphalt.
But again we're talking ---+ most of our discussion today has been at the ---+ regarding the net-net of asphalt to the refinery producer.
Just remember, our retail business profitability does not layer into our refining results.
You can find the details in the reconciliation.
One last thing I'd offer, <UNK>, as to the write-down question that had an impact timing wise, was our market capitalization.
So down 50% or so from the end of last year, also plays into that equation, sort of when measuring your market valuation and book valuation.
Roughly half.
No.
I would say most of it is in the Magellan system, where we sell the majority of our products.
That's right.
It goes in unblended and then when it comes out at the rack level, that's where we blend.
That's getting a the very core of what the issue is regarding RINs, you know.
Obviously, refiners would love to blend as much of their product as possible.
But unfortunately, our customers are pretty smart guys, and when they see the opportunity to get into the blending business, or to grow their existing blending business, so that they can generate RINs and turn around and sell them back to us, that's getting at the core of this point of obligation we're talking about.
Again, that's the negotiation and friction between the refiner and his customer.
Thanks, everyone, for joining us this morning.
If you have any follow up questions, Craig and I will be available all day.
We look forward to speaking with you in November to share our third quarter results.
Thank you.
