PBF Energy Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Welcome to the PBF Energy First Quarter 2015 Earnings Conference Call and Webcast. [Operator Instructions]. It's now my pleasure to turn the floor over to Erik Young, Chief Financial Officer. Sir, you may begin.

[Erik Young:]

Thank you. Good morning everyone and welcome to our first-quarter earnings call. On the call with me today are Tom O'Malley, our Executive Chairman; Tom Nimbley, our CEO and other members of our Management team. A copy of today's earnings release, including supplemental financial and operating information, is available on our website, PBFenergy.com. Before we get started, I would like to direct your attention to the forward-looking statement disclaimer contained in today's press release. In summary, it outlines the statements contained in the press release and on this call that express the company's or Management's expectations or predictions of the future are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we described in our filings with the SEC. As also noted in our press release, we will be using several non-GAAP measures while describing PBF's operating performance and financial results, as we believe these metrics are useful, but they are non-GAAP figures and should be taken as such. It is important to note that we will emphasize adjusted, fully converted earnings information and results excluding special items. Our GAAP net income or GAAP EPS figures reflect the percentage interest in PBF Energy company LLC owned by PBF Energy, Inc. which averaged approximately 94% during the first quarter. We think adjusted fully converted net income and EPS are more meaningful metrics to you and they represent 100% of the operations on an after-tax basis. Before discussing our results, I'd like to take a moment to review the non-cash lower cost to market or LCM, inventory adjustment that we recognized in the quarter. This GAAP adjustment is driven by the accounting requirement to carry inventory on our balance sheet at the lower of cost or market prices. As we mentioned on our previous earnings call, we assess our inventory for the potential of an LCM adjustment on a quarterly basis and future movements, either up or down, of hydrocarbon prices could have a non-cash positive or negative impact to our reported earnings. During the first quarter of 2015, average hydrocarbon prices increased slightly and for PBF this generated a $12.7-million after-tax non-cash inventory adjustment. For the purposes of today's call, the comments we make in regard to our results will exclude the impact of the non-cash LCM inventory adjustment. With that, I'll move on to discussing our first-quarter results. Today we reported first-quarter operating income, excluding LCM, of $151.2 million and adjusted, fully converted net income for the first quarter of $79.2 million or $0.87 per share on a fully exchanged, fully diluted basis. This compares to operating income of $260.2 million and adjusted fully converted net income of $140.7 million or $1.44 per share for the first quarter of 2014. Excluding LCM, adjusted EBITDA for the quarter was $201.9 million, as compared to adjusted EBITDA of $294.8 million for the year-ago quarter. The East Coast continued to be a strong contributor, generating almost 50% of the refining profitability. Toledo's performance has begun to show the benefits from the FCC improvement that were made in the fourth-quarter turnaround. We generated solid results for the quarter, despite a challenging operating environment through the extreme winter. Crude differentials were tight to start the year, but improved over the course of the quarter. At times, rail economics were unfavorable as a result of the narrow differentials. While a challenge, we were able to use our feed stock flexibility to pursue more economic water-borne barrels for the East Coast. Product margins remain resilient for our East Coast system, as New York harbor jet and ULSD traded at a $3-per-barrel premium to heating oil. Additionally, we continued to realize a margin-capture benefit on our lower-valued products as a result of the decline in crude prices from 2014 levels. We had approximately $36.8 million of rent expenses in the first quarter. As with others in our industry, we're awaiting the final rule-making from the EPA for the year behind us, the current year and 2016 obligations. For the first quarter, G&A expenses were $36 million, as compared to $36.6 million a year ago. Depreciation and amortization expense was $47.7 million, versus $33.2 million in 2014. The increase is related to a number of assets that were placed in service during 2014. First-quarter interest expense was $22.2 million, compared to $25.3 million last year. PBF's effective tax rate for the quarter was slightly below our normal effective run rate of 40%. Going forward for modeling purposes, you should continue to assume a normalized effective tax rate of approximately 40%. At the end of March, our consolidated cash balance was approximately $684.4 million, including marketable securities. PBF ended the quarter with liquidity of just under $1 billion. Excluding the impact of LCM, our net-debt-to-cap ratio was 25%. For the quarter, refining and corporate CapEx was approximately $36 million and we had approximately $12 million of net expenditures related to rail cars. For modeling our full-year operations, we expect refinery throughput volumes should fall within the following ranges, the East Coast should average between 310,000 and 330,000 barrels per day. The Mid-continent should average between 150,000 and 160,000 barrels per day. For the second quarter of 2015, the refinery throughput volumes for the Mid-continent should average between 150,000 and 160,000 barrels per day. The East Coast should average between 310,000 and 330,000 barrels per day. We continue to expect our operating costs for the year to range between $4.50 and $4.75 per barrel. G&A expenses should be in the $100-million to $120-million range. Depreciation and amortization should be in the $180-million to $190-million range. Interest expense should be approximately $100 million for the year. For 2015 we expect CapEx, including turnarounds but net of rail cars purchases, to be approximately $175 million to $200 million. Regarding our share repurchase program, since inception we have repurchased a total of 5.8 million shares at an average price of approximately $24.75. We have roughly half or approximately $155 million, of the current repurchase authorization remaining. The rate of repurchase has slowed in the first quarter as we conserve cash in light of the changing market conditions and uncertain demands on liquidity. Going forward, we will continue to evaluate repurchases with other strategic opportunities. Our Board has approved a quarterly dividend of $0.30 per share payable on May 27 to shareholders of record as of May 11 as of May 11, 2015. At this time, PBF's dividend policy remains unchanged. Before turning the call over to Tom Nimbley, I'd like to comment on a couple of other notable items. PBF Energy has initiated the process of a further potential drop-down by submitting a proposal to the PBF Logistics Conflicts Committee for the potential acquisition of the Delaware City products pipeline and truck rack. We estimate these assets could generate approximately $14.3 million or annual EBITDA. The PBF Logistics Conflicts Committee is engaged in the review and we're unable to comment further at this time. Also of note, today PBF Logistics LP announced a distribution increase to $0.35 per unit which puts us into the first year of the IDR splits. As a reminder, PBF Energy owns 52.1% of the units of PBF Logistics LP and 100% of the general partner and incentive distribution rights. Since the IPO, PBF Logistics has increased distributions by over 16% and PBF has received more than $600 million in net cash proceeds through transactions with PBF Logistics, including the IPO. This figure excludes any potential proceeds from the currently contemplated transaction. Furthermore, as part of our ongoing effort to increase the value of PBF Logistics, we have identified additional assets which we believe could increase the backlog of MLP-qualifying EBITDA at PBF Energy to approximately $200 million. As we approach the first anniversary of the PBF Logistics IPO, we're excited about its continued growth trajectory and the resulting increase in value of PBF Energy's stake in the partnership. I'm now going to turn the call over to Tom Nimbley for his comments.

[Tom Nimbley:]

Thank you, Erik and good morning, everybody. The market continues to deliver plenty of excitement and the first quarter was no exception. The work we've done on the East Coast to integrate the operations of Delaware City and Paulsboro, coupled with the organic projects we have put in service, continue to establish the East Coast as a solid earnings contributor for the company. As Erik mentioned, the East Coast contributed almost half of the EBITDA for the quarter. Toledo operations improved following the turn-around in the fourth quarter of last year and a minor crude-unit issue early in the first order. As we mentioned on our last earnings call, we spent about $75 million on improvement projects during the turn-around at Toledo. Since start-up, we have been evaluating the performance of the cat-cracking unit in Toledo. Based on what we have seen so far, we expect to meet or exceed our previous margin-improvement expectations for this portion of the investment. Also during the Toledo turn-around, we installed tie-ins for the completion of the chemical expansion project which we expect to put in service early in the third quarter of this year. After completion of this project, we expect to see an increase in chemicals yields, specifically benzene, toluene and xylene at Toledo which should improve margins by approximately $17 million on an annualized basis. The previously announced hydrogen plant project at our Delaware City refinery is progressing through the permitting phase. Based on current plans, we expect that this unit would be in service by the middle of 2017. This project is expected to be funded by a third party and when complete, would add approximately $70 million to $90 million of incremental margin to the East Coast system. In 2015, we're also beginning work on our tier-3 compliance project which I should point out is stay-in-business CapEx. We expect that our total tier-3 spending will be less than $100 million to bring our system into compliance with the new standards on time in 2017. While we're executing these projects, we're always looking for ways to add to our margin. Concurrent with the ongoing work to lower gasoline sulfur, we have identified an opportunity to increase our chemicals yield at Paulsboro which should provide us with some incremental margin. Returning to the first-quarter operations, the rapid decline in hydrocarbon prices during the fourth quarter continued to have an impact as we moved into the first quarter and markets continued to adjust to the lower-priced hydrocarbon environment. WTI averaged approximately $48 a barrel in the first quarter, versus only $74 a barrel in 4Q 2014. Similarly, Brent averaged approximately $54 a barrel during the quarter versus $77 during the fourth quarter of last year. With this backdrop, PBF's East Coast continued to benefit from lower feedstock cost relative to 2014 which increased our margin capture across the bottom of the barrel. PBF also benefited in the first quarter from the continued lag in pricing in the asphalt market, a traditionally lower-margin business. We have increased our asphalt production to capture as much of this temporary benefit as we can. As we achieve some measure of stability in the crude markets, this beneficial price lag should revert to historical price and product differentials and in fact could reverse if feed stocks go up. During the quarter, total throughput for our overall system was about 468,000 barrels a day, with the Mid-continent averaging approximately 142,000 barrels a day and the East Coast system 326,000 barrels a day. For the quarter, operating costs on a system-wide basis averaged $5.54 per barrel and were essentially the same on a unit basis in both the Mid-continent and the East Coast. The Toledo refinery completed its first quarter of operations following the turn-around. We're beginning to benefit from the operational improvements we created, as a result of the capital we have re-invested in Toledo. The Mid-continent 4-3-1 crack spread averaged $15.45 per barrel, an increase to the 2014 fourth-quarter average of $11.44. Our margin at Toledo was $14.36 per barrel for the first quarter, versus $8.70 in the fourth quarter which of course was negatively impacted by the turn-around. Despite the strong quarterly average margin environment, this was an evolving picture over the course of the quarter. In January the 4-3-1 averaged only $6.87 which was a significant head wind, but improved as we moved through the quarter. Margins in Toledo were also impacted by the $4-a-barrel increase in syn crude cost relative to TI versus the prior quarter. On the East Coast, the Brent 2-1-1 crack spread averaged $15.76 per barrel, up from the fourth-quarter average of $11.87 and seasonally strong, as Erik mentioned, on solid distillate margins. The refining margin for our East Coast system was $8.92 per barrel, versus a margin of $13.19 in the fourth quarter. Our margin on the East Coast continued to benefit from the low flat price environment, but did face head winds in feedstock differentials. While on average differentials remained flat to slightly improved versus the fourth quarter, the head winds arose as those differentials fluctuated within the quarter. In January, the Bakken Brent differential was only $6.29, versus the first quarter of almost $11. Similarly, the WCS Brent differential for January was only $13.63, well below the $17.60 a barrel average for the quarter average. With our transportation cost at roughly $11 or $18 a barrel, depending upon whether it's Bakken or WCS, respectively, it is difficult to make a profit on rail barrels in this type of environment. Having said that, this is why we do not solely depend on the rail barrels for our profitability on the East Coast. When the rail barrels prove to be uneconomic, we use our sourcing flexibility to change direction and look for more economic water-borne barrels. The water-borne [indiscernible] based barrels we ran during the quarter was some of our most profitable barrels. The complexity, sophistication and sulfur-handling capability of our East Coast refineries provides us with the capability to run any type of barrel, from heavy sour to light sweet. This flexibility in sourcing the most economic crude regardless of the crude quality separates us from the rest of pad one and provides us with significantly more optionality. In the first quarter, some of the North American barrels were out of the money and we focused opportunities in a medium-sour water-borne market, an option that others in the pad simply did not have. As you would expect, if rail economics are less favorable than water-borne opportunities, then we're likely reducing our rail deliveries into those prices become more economic. For the quarter we processed approximately 76,000 barrels a day of light domestic crude oil and about 49,000, almost 50,000 barrels a day of heavy crudes from Canada at Delaware City. We do believe that this is cyclical and as markets adjust to the changes in supply or logistics issues, that both the rail-delivered crudes and the water-borne crudes will be profitable, probably at different times. We will continue to use our sourcing flexibility to ensure that all facilities are being supplied with the most economic feedstocks available. Overall, we're pleased with the earnings contribution of all assets this quarter. Again, I would like to point out that the East Coast continues to pull its share of the weight. The performance on the East Coast shows at least over the past several quarters that the improvements we have made to the system are working and can deliver positive results in turbulent market conditions. Lastly, we have accomplished quite a lot internally with the capital we have re-invested in the business, the operational improvements and efficiencies which have improved our margins and made our operations more resilient. We understand these are things we should be doing as was responsible managers and stewards of the business and we also understand that the one area we have yet to deliver is on the asset acquisition front. It is our attention to grow the company through acquisitions and we're confident that in time we will be successful on our terms. I would like to now turn the call over to our Executive Chairman, Tom O'Malley.

[Tom O'Malley:]

Thank you very much, Tom. Just a couple comments with regard to the first quarter, my first comment was it really was a heroic effort, both on the East Coast and in Toledo, to keep the refineries running given the weather situation we had. We had ice all over the place. The danger of slips and falls was incredible. The danger of incidents in the refineries was something we had to pay a great deal of attention to. The people who work in the refinery did a really good job. Throughput was lower than we would have expected. That really was, given the weather situation - you really had to be careful. While I'm a little bit disappointed in the financial results, I'm happy we didn't have any serious incidents from a broad operating base in the refineries. Secondly, there was some mention earlier about RINs expense and that was about $36 million. If you looked at it over the full year, you would say RINs expense is going to cost about $150 million. The RINs situation is one of the truly goofy things that we're living under. It's something that if I was to draw a simile for you, I would say well, you know what your 2014 income tax rules were, you knew that certainly before the end of 2014. We're four months into 2015 and the government has told us they'll let us know what the rules are at the end of this year. That will be retroactive. The whole thing is screwy. We of course talked to our representatives in Washington, but generally they seem to be more interested in running for office and giving speeches then doing anything about this. The overall RIMs cost across the United States - we call it RIMS, I just call it a tax - is about $5 billion. That's a tax on the American consumer, a tax on each and every one of us. With regard to forward operations in the company, we gave you our volume metrics. Cracks seem to be better so far during this quarter. In both Toledo and on the East Coast, we're getting a real demand pull. We certainly continue to export significant volumes of oil products from the United States. It looks good, at least as far as we can see. With regard to the overall market and differentials which are extremely important to us, we saw a draw out of Cushing in the past week's statistics. That would seem to indicate Cushing is more or less filled up. That's going to put pressure on differentials as that oil moves down to the Gulf Coast and we did see a build on it. I think you're going to see all the differentials come under pressure. That, once again, would lead to a wider Brent WTI differential. Tom made the point at the end of his presentation that we're always interested in acquisitions. Indeed we're and we pursue every one that is out there. Over time, I believe we're going to succeed, but one never knows. On that point, I'd be pleased to take any questions you may have.

[Operator:]

[Operator Instructions]. We can take our first question from Paul Sankey with Wolfe Research. Please go ahead.

[Paul Sankey:]

Mr. O’Malley, I just wanted you to expand a little bit without wanting to be negative on the fact that you were disappointed, I think you said disappointed somewhat in the financial results. Without going further, could you just be more specific?

[Tom O'Malley*:]

Frankly always kind of projected in my own mind what we're going to be able to accomplish. In this quarter, if I look at it, it would have been a lot happier if I saw a dollar a share in earnings. Of course we saw a higher operating* cost during the quarter and that was largely a function of really trying to be extremely careful on what we're doing. The conditions that we were operating in over fairly long periods of time were extraordinary. All of you that live on the East Coast certainly know that we had a horrible winter unless you're a great skier or ice skater. But that really drove the results, so sure the disappointment was there. I'm a large shareholder in the company. I always want to see the best results we can possibly achieve but on the other side of the coin, the company's ethic is always operate safely, operate carefully, if we have to cut back on volume metrics and let's do so. Discharging ships, discharging railcars, everything was more difficult. We had to bring more people to bear on virtually every element of our operation. So it's was tough quarter. I'm really happy to say that starting late in the quarter and certainly running now, operations are a lot smoother, we’re doing a lot better and hopefully that will be reflected in the results.

[Tom Nimbley*:]

Paul, this is Tom Nimbley, I just would add a little bit to that. We do track loss profit opportunity as a normal governance measure. And we did have some operating problems during the quarter which were basically driven by the weather conditions that both in Toledo right around the beginning of the year where we had to take down one of the crew units and Paulsboro had some problems associated with [freeze ups] [ph] etcetera probably cost us $25 million of EBITDA, maybe a little north of that. That we have to figure out how to not have a happen even in these extraordinary or difficult weather conditions, it's a challenge for us going forward.*

[Paul Sankey:]

It sounds like you’re mostly disappointed in the weather above all, but the follow-up would be given - the risk of the export ban on crude being lifted seems high, I was wondering given what you said about rail economics, what will be the potential cost if rail economics just move to be structurally uneconomic for you guys, would there be some sort of write down* or ongoing costs associated with that? Thank you very much.

[Tom O'Malley:]

Taking rail out of the system means we would have to absorb some reasonable cost. I would ask Erik to quantify that.*

[Erik Young:]

I think overall the cost of the rail if we're assuming in a complete draconian scenario the rail isn't moving at all, we would have to offload our rail cars, we would continue to have the investment in the PBF Logistics rail infrastructure on a net basis that's probably a call it $30 million - $35 million a year cost to the parent company for PBF Logistics on rail offload in Delaware.

[Operator:]

And we can take our next question from Evan Calio with Morgan Stanley.

[Evan Calio:]

Just a follow-up on Paul's question, I mean I know there is disagreement on whether* the amendment will even be proposed or some set of views to avoid poison bill [indiscernible] any passage on the Iran Sanctions bill yet, kind of [get off the soap box] for Utah. What are your views on Washington's awareness of the Jones Act and impact on North East refining and need to address both pieces of legislation in tandem, if at all?

[Tom O'Malley:]

First of all, the company's stated policy as part of a group of refiners is that we don't have a level playing field, we don't have a free market. In crude oil, we have the Jones Act which from a quantifiable point of view if you move on foreign flag tankers from the U.S. Gulf Coast to the U.S. East Coast in essence it already moves to Canada, it's about $2 a barrel; if you use a Jones Act, it's about $7 a barrel, $5 a barrel simply makes it impossible for us to move domestic crude up to the U.S. East Coast. The only reason that the E&P industry wants to have freedom to exploit crude oil is that they would get a higher price for the crude oil which in turn would raise the price of crude oil in the United States and would be a detriment* to the American consumer because gasoline prices would go up, diesel prices would go up, jet fuel prices* would go up, everything would go up because crude oil represents the vast majority of costs in all of those products. I don't see the political will existing in the United States at this point in time and indeed any time prior to the presidential election to in essence rescind* the export restrictions on crude oil. I don't think anything is going to happen until after the next presidential election. At that point, one then has to prognosticate who gets elected. At this moment in time, I have no idea about that but certainly, going forward it's a battle that's going to be fought. There is going to be a continued drumbeat from the E&P industry to permit exports and there are certainly a very broad coalition which basically says, hey, wait a second, that's a bad idea. The Energy and Security Act of 2007 which basically created all these screwball regulations that have turned into RINs and created a playing field where you're supposed to make fuels out of virtually anything, particularly things that we –eat* ethanol, corn and beef. Well, do we still have a security issue if the country feels we don't have a security issue? Let's do away with those mandatory numbers, do away with the Jones Act and then we would be fine with exports. That's our position, our answer where we're going and what we talk to our representatives about.

[Evan Calio:]

I agree on the will issue, on the will point. My second question you raised your MLP* EBITDA from 120# to 200. Can you discuss any details here, is this a higher earnings potential within existing midstream assets, or are you ring fencing other former refining assets, maybe I missed that, any update more generally on kind of dropdown pace without - what's currently being discussed?

[Tom O'Malley:]

Erik, why don’t you take that?

[Erik Young:]

The increase in overall qualifying income at the parent company level, we have gone out and actually looked at fuels distribution, some chemicals and some lubricants production there. So some of that is marketing businesses combined with actual infrastructure that exists at the different plants. Those were things we weren't comfortable quantifying when we went out with the IPO last year. Since that time, we've done a lot of background work in-house and feel fairly comfortable that the $200 million is something that is money good and I would just reiterate we told folks on the last logistics call that we're targeting 15%** distribution growth. We think this increase in backlog bolsters that 15%* distribution growth. The announcement on the potential deal related to the Delaware City products pipeline and truck racks*, we think is representative of the focus on PBF Logistics.

[Operator:]

And we will take our next question from Roger Read with Wells Fargo. Please go ahead.

[Roger Read:]

I guess I would like to come back around and talk a little bit about the flexibility of the water borne versus rail. Can you help us understand especially given the volatility, how quickly you can switch between water and the rail opportunity, and is it two weeks, four weeks, six weeks?

[Tom O'Malley:]

Let me take that and Tom can jump in. We have - generally if you look at the way we operate, we have established the types of crude that we're going to take in about 45 days in advance. So if you assume this is May 1, really the month of May is pretty well set and certainly half of June is pretty well set. We can adjust within that framework so we could divert rail delivered crudes to other people on the U.S. East Coast that might have a shortfall or might want to take in more if we see an opportunity to bring in and imported cargo and we have done that on various occasions. So when we look at it, we can make the decision today, but that decision generally has an impact 30 to 45 days out. So we know pretty much what our rail program is for the balance of this quarter, we know what our water borne program is for the balance of this quarter. But again we can make adjustments at the margin within that time period.

[Tom O'Malley:]

I will just add, Roger, it's important - if look at the East Coast, there is 330,000 barrel a day, 320 on crude it's out of our system. Remember, Paulsboro, we base load 100,000 barrels a day of [indiscernible] crude which is water borne crude. So what we're talking about is typically if we have good railroad economics we're going to run 45,000 or 50,000 barrels a day of heavy Canadian in Delaware and we're going to run 100,000 barrels a day of Bakken.* As those rail economics deteriorate and as Tom said we continue to [indiscernible] but it will take 30 - 45 days to make the switch, those of the knobs we are turning. We’re going to run mostly 70,000 to 75,000** barrels a day of crude by rail into the East Coast in the second quarter. We saw that coming so we downsized how much we were running. We started that in the first quarter and we’re continuing that in the second quarter as long as these economics remain.

[Roger Read:]

The other question I had, on the balance sheet, you've built up a fairly significant amount of cash here. Debt doesn't need to be re-paid anytime soon. I recognize the acquisition opportunities are always out there. Can you help us think about what the right amount of debt is and if an acquisition doesn't come along, do you accelerate share repurchases? Do we look at a higher dividend? Thinking about general return of capital to shareholders versus the other options?

[Tom O'Malley:]

Let me take that and Erik can jump in as he likes. We had that exact discussion at our Board meeting which took place a couple days ago - what is the appropriate amount of cash and what is the appropriate amount of debt that the company should have. It certainly looks like we're going to experience a fairly significant cash build within the company, more cash than we need, certainly, to cover the operations of the existing company. We of course always want to be in a position to make an acquisition. I think the clear message from our Board and from Management is be conservative, but let's recognize we either have to grow or we have to continue to return cash to the shareholders. We did a pretty good job last year, bought in about 5 million-odd shares within the company, got our share countdown to little more than 90 million shares outstanding. Certainly if we continue to build cash, you'll see us buy in some more shares and you will see us consider an increase in the dividend. But I will say on the dividend front, I believe we still are the highest on a percentage basis, in terms of dividend payment to our shareholders in our industry sector. Again, I would come at you as a very large shareholder in the company I want to see the shareholders taken care of.

[Erik Young:]

I would also comment that Roger you want to break down that cash balance really into two pieces, at PBF and PBF Logistics excluding marketable securities, there's about $450 million of cash at the end of March. We're at a similar level today. There's an incremental $235 million of securities that are there as a result of the IPO structure at PBF Logistics. On a normalized basis, a lot depends on where hydrocarbon prices are from a flat-price perspective. But it's probably safe to assume you're going to keep between $300 million and $500 million of cash on the balance sheets and make sure you have enough liquidity and flexibility with fluctuations in the market. We're currently at 25% on a net debt to cap basis. We think that's probably low. We have done a very good job of de-levering the business, really, since we got started. I think going forward, you'll see that ratio probably fluctuate depending on what we're doing from the acquisition side of things, between probably 20% and 40%. I think between 30%, 35% is your normalized long-term run rate net debt to cap target.

[Operator:]

And we will take our next question from Ed Westlake with Credit Suisse. Please go ahead.

[Ed Westlake:]

A couple questions, obviously, I think this Friday we're going to get an update on rail regulations. I think the speeds are fine, but obviously new rail cars. Are you hearing anything on that, in terms of your ability to execute the rail purchases?

[Tom O'Malley:]

Just quickly, we were the first refining company come out to use only the modern rail cars, those built I believe since about 2010. They, in all the regulations, are being given more time to make whatever changes are going to be suggested. With regard to the speed, we continually make the point that we can supply whatever equipment is mandated in terms of rolling stock. But it really is up to the railroads to keep these trains on the railroad tracks. The accidents that have occurred, have occurred because of derailments. Derailments are in the hands of the rail company. There's no point in our trying to pretend that we can keep the cars on the tracks. We are not running them. On a speed basis, we think that great care should be taken. We're not concerned if it takes another two or three days to get the rail cars to us. We're not concerned if the speed limits are dropped in various areas. If this was inside a refinery, we would simply be keeping the railroad cars on rail tracks. I certainly don't mind if what I'm saying is repeated to those companies that in essence provide our services. It's a message we continually give. The focus should be on that. The focus should be on the condition on the track, speeds that they run, et cetera. That's where the problem has been. You could build a rail car with another 16th of an inch steel thickness. You could insulate that rail car. You could change the valves. The railroads, honestly, have to keep the cars on the tracks. That's the only way we can safely operate.

[Tom Nimbley:]

This is Tom Nimbley. In addition to that, I think absolutely what Tom said is what we have been advertising in the ASPM. Their API has been preaching that, as well. You're simply not going to avoid these things unless you keep the rails - the cars on the rail. That being said, Canada and DOT are going to get together and shake hands on Friday, it appears or perhaps as early as Friday - we were expecting May 12 or earlier - and come out with a new set of rules. The key will be both Canada and DOT had in their original proposals staged retrofitting requirements. Those staged retrofitting requirements dealt appropriately with old DOT 111 cars first, then unjacketed CPC 1232. As long as they stay with something similar to the time frame that they give to retrofit, there will be - it will not certainly be a material impact on PBF. As Tom said, our cars are already CPC 1232 and it would be pushed out - the retrofitting requirements would be much lower, because the cars are already jacketed in many cases and the time frame - you'll get cars that will come off lease and replacing the cars that were already rebuilt to fit this service.

[Ed Westlake:]

Would you guys put out a statement once you see the rules and how to interpret them, we'll give you a call. It may be helpful.

[Tom O'Malley:]

Why don't we wait until we see what they come out with. Certainly, we will communicate with our shareholders what we think about that. We are supportive, candidly, of anything that improves safety in this transportation system, whether it costs us a bit of money, time, effort etcetera. If it makes things safer, we support it.

[Ed Westlake:]

A quick follow-on then, ASCI spreads have come in. Obviously they were quite wide back in February when there was a lot of oil around and refining maintenance. As refiners pick up they've come in, but maybe some comments on how you see the water-borne market at the moment?

[Tom O'Malley:]

I tell you, the thing - you have to watch the election. Let's think for a moment about why the various people, including the Saudis, seem to be unhappy with United States government's - or at least the administration's position in - the settlement with Iran. I guess there were a lot of reasons. But one of the reasons certainly is that Iran is very capable of producing additional quantities of crude oil. Most of you are not old enough to remember, but we used to import quite a lot of an Iranian crude, particularly to the U.S. East Coast. Gash Laran and Argitrari [ph] used to come in here. Frankly, I used to sell it here when I was with Flagro. Iran is going into quickly ramp up on sales - certainly be able to ramp up by more than 1 million barrels a day, in my opinion, within 12 months. I bet you they're working on it right now. That additional oil is going to come to the market. It's oil that we can process with no difficulty. Whether the United States takes Iranian oil may be another question. Certainly Iraq, given all its problems and there are massive problems in Iraq, it's still growing a bit in terms of its ability to produce oil. Again, Iraqi crude oil is something we can run rather easily. I mentioned in my opening remarks that we think Cushing has more or less filled up and that oil is now flowing into Cushing and then flowing downstream from Cushing to the Gulf Coast. That's going to start putting pressure on Gulf Coast pricing. As it does that, you see a situation where you have ASCI-priced crudes, you have cheaper crude coming down by pipeline. I think ASCI's probably going to have to stay pretty wide to maintain its volume in our market place. I for one see a little bit widening of differentials. I also think we probably - absent some really Looney Tunes situation out in the Arabian Gulf which can also be called the Persian Gulf, depending on which side of it you're sitting on - I think we're getting pretty toppy here on the crude oil price. I'm not going to be surprised to see some pressure on that and see that come off a bit. We have something - I don't know if all of you noticed, I suppose you did, the U.S. moved an aircraft carrier, the Theodore Roosevelt, over near Yemen, together with its escort ships - in other words, a little fleet of Iranian ships heading toward Yemen, undoubtedly with food, water and other important items that could be used by various people there - and the Iranians turned around and went the other way. I think that really is an indication that they're not going to let anything crazy happen. They want this deal to go through. Indeed, I think it will go through. That would be, from my point of view, a little bit widening of differentials, that ASCI. Also, if you have a view - I always like to have a view. We're probably getting toppy right here in terms of the oil price.

[Operator:]

Thank you. Our next question comes from Jeff Dietert with Simmons. Please go ahead.

[Jeff Dietert:]

You highlighted your flexibility in the press release and earlier on the call. As a follow-up on feedstock flexibility, could you talk about rough areas of maximum and minimum levels of Bakken that you think could be reasonable in the portfolio, as well as maximum and minimum levels for Western Canadian Select and your ASCI-based crudes?

[Tom O'Malley:]

Let me quickly take that, then Tom you jump in. We don't have a - well, we certainly have a maximum on the Bakken side of the equation, probably up around 120,000 barrels a day which I don't think we could do too much more than that. On the minimum side we can go to zero. That's not a - we were at zero for a long time, so it's not a problem for us. We can process all sour crudes and reasonably heavy crudes. Tom, why don't you jump in on the Canadian side with regard to our capability?

[Tom Nimbley:]

Yes, obviously everything is going to be refined. The operating envelope will be defined by economics. If it is economics, as Tom said, I would put the Bakken number more like 130,000 in a maximum case, because if Bakken was clearly distressed in its economic, we'll not only run the 105,000 barrels a day which we have already demonstrated in Delaware, but we'll move 30,000, 35,000 barrels a day by barge over to Paulsboro. On the Canadian side, if that's the most economic crude, we can run 80,000 barrels a day of WCS and in combination with more bitumen into the Delaware City refinery. We don't want any WCS in Paulsboro. As I said earlier, that base load is pretty much solely crude for the lubes and then we play around on the other still. 80,000 barrels a day Canadian. That can go to zero and be replaced by Mayas [ph], the South American crudes we are running, ASCI-based crudes. It is a big deal that the optionality and the flexibility that we have, I believe is serving us well now and should stand the test of time. The fact is if Bakken goes out of the money, then the East Coast, the other refineries in the East Coast have to look at west African crudes, the same type of situation that caused the loss of capacity with Marcuso [ph] and Eagle Point. That was also driven by geopolitical problems with Libya and Qaddafi and everything else. It is a real big advantage for us on the East Coast to be able to run any type of barrel.

[Jeff Dietert:]

If I could follow up, on the ASCI discounts, I know they were really attractive in January, February, March time frame. But even in the April, May OSPs, although they're higher, they're still substantially below the OSPs that were in place in 2014. Are those barrels still very attractive relative to your alternatives?

[Tom O'Malley:]

They're okay. Let's not get into very attractive. We see spot barrels, some sweet, some sour, coming to the market at various times. The other thing I would say to you and I believe down at the CERA conference, I think it BNSF presented. I think one of the commentaries was you know what? We have to compete with the pipelines. Rail rates were - I'm not quite sure exactly how they set them, but there seems to be some flexibility in them. It's my view that given the fact the railroads are to a great degree suffering from the loss of shipment of coal, they certainly have a great deal of capacity. The arrival of crude oil shipments was so to speak the answer to the maiden's prayer. Now suddenly the maiden has become more difficult. The rates that the railroad charges to go to the East Coast probably have to be adjusted if they wish to maintain significant volume metrics over the rail lines. I think they do intend to do that. This is kind of a movable feast. We wouldn't want to tell you exactly where we think ASCI should be. We think ASCI should always be more - should be wider than it is. When we see spot crudes coming in and we are seeing that, it becomes in essence an absolute discount to the brand price, it puts pressure on ASCI.

[Operator:]

And our next question will come from Doug Leggate with Bank of America. Please go ahead.

[Doug Leggate:]

Tom O'Malley, I wonder if I could try a couple. First of all, on the brother macro outlook for the northeast in particular, it seems we're coming out of winter with elevated product inventories and obviously margins remain fairly high. I'm curious if you could provide a prognosis as to how you see things playing out in terms of how imports might play in as refinery utilization kicks higher. I'm wondering how you see the risk profile of robust margins going into the summer? I've got a follow-up.

[Tom O'Malley:]

Look, I don't think I'd be working for these guys if I could really predict everything that would be happening, nor would anybody else on the call. What we see, remember, the U.S. East Coast is self-sufficient in oil products up in a 30% range. It depends at all times on movements up the Colonial pipeline and then to some degree imports, particularly from Western Europe. What we've seen over the past couple months is the ARB [ph] occasionally opening and more often closing in Western Europe. We have a fairly strong Western European product market. I don't know exactly whether the ARB is open today to move gasoline, but I think it's a very close. We have to see imports. We have to see imports on Colonial and we have to see imports from Europe. What the East and - the biggest thing relates to Colonial. What we see there is tremendous demand from the export side from the Gulf Coast. We see very good Gulf Coast margins and that in turn then says your Gulf Coast refiner, well, I've got to have the - I've got to make up the difference in the pipeline tariff to take it up there. We see a robust second quarter. We are just - it would be like predicting GNP and everything associated with it to try and go much beyond there. We think there has been a basic change in the market and the market has become a bit more demand driven, a bit less seasonal. Certainly on gasoline, in terms of miles of driven, the type of automobiles that are being bought here in the United States at the present time, we see a pretty good environment going forward. Predicting beyond the quarter, I don't think so.

[Doug Leggate:]

I guess my follow-up is maybe two quick things. First of all, fairly high-profile disruption in the West Coast. Does it change your appetite any?

[Tom O'Malley:]

No, I mean our - we've had a strong appetite. I think what has changed is the appetite of the people on the West Coast to sell something right away. Sadly, we don't have a West Coast refinery right now. If we did, it would be a happy moment in time. Look, good margins are a double-edged sword. Good margins make us happy because we earn money, thank you very much. But very good margins - and we see very good margins - raise the price of assets that might be available for sale and slow down the process. We have the appetite, but the people in the restaurant right now are not providing the right dishes to us.

[Doug Leggate:]

My final one, if I could squeeze one in, Tom. To take you back to the export a bit. I realize it's very subjective, but the momentum seems certainly to be picking up. Your comment about rising gasoline prices in the event of exports, most of your peers suggest that gasoline price is already priced off Brent. Given the collapse that some people attribute to the rise - in oil prices - to the rise in U.S. production, why would exports push gasoline prices higher, as opposed to the other way around, that gasoline is priced off Brent, anyway? I'll leave it there.

[Tom O'Malley:]

Look, this is largely a philosophical argument. You get into macroeconomics on this thing. It's our belief that the American consumer will pay more for crude oil. In essence, if American refiners pay more for crude oil, the price of gasoline is going to go up. Can you make an argument on the other sid? That's what the E&P industry is trying to do. Their argument has also been we can't process the crude. That is absolutely utter nonsense. We are importing millions of barrels a day of crude oil. We can certainly process the crude. If you look back two years, could we - if somebody would have said, oh well, Delaware and Paulsboro together can run 120,000, 130,000 barrels a day of Bakken, people would have said no, that can't be, but we can. The industry and the rest of the United States can do the same thing. You can always go lighter and sweeter. We can run the crude, certainly. I'd like to take you back in history a little bit. Go back into the late 1970s, early 1980s, when the North Sea was prolific and when European refiners had a $2 to $3 edge, particularly those located in the North Sea area over U.S. refiners, because it cost that much to bring that sweet crude to the United States. Well, that was an economic benefit to Europe. Low oil prices in the United States are an economic benefit to the United States, both to its consumers and to its industrial base. That's a strong opinion we have, but we recognize that others can argue on the opposite side of the coin.

[Operator:]

And our final question will come from Paul Cheng with Barclays. Please go ahead.

[Paul Cheng:]

Tom, in the quarter do you have any hedging or trading gain on loss?

[Tom O'Malley:]

In which quarter?

[Paul Cheng:]

In the first quarter.

[Tom O'Malley:]

When we take a cumulative between Brent TIs that we put on, some cracks that we put on, some ASCI spreads that we put on, et cetera, I believe the cumulative number of - was about $10 million to the negative; but from our point of view, that's de minimus. It's not - we're constantly trying to bring our crude oils back to a Brent base. We buy crude oils on a WTI base at times and really, the market place is Brent, so we have to put on spreads to deal with that. We do some crack spreads when we see them to be in a very attractive range. But again, when you take everything and package it together, it's no huge differential in the company. Erik, I don't know if you want to comment on that?

[Erik Young:]

Tom, that's the right number. It was about $10 million to negative. Paul, that's a pre-tax number.

[Paul Cheng:]

Erik, when you guys buy crude is 100% subject to the CMA to the rule benefit or what that is, only the portion that you buy in domestic?

[Erik Young:]

It really depends on the type of crude we're buying, Paul. We would have to get into a lot of details that we don't tend to get into on these calls. There's a lot more on the domestic side versus the water-borne side.

[Paul Cheng:]

Okay. Can you tell what is in the first quarter that you may be subject to the rule?

[Tom O'Malley:]

Erik, you want to take that?

[Erik Young:]

Sure. I don't have that information right at my fingertips, Paul. We'll circle back with you on that.

[Operator:]

It appears we have no further questions. At this time I'll turn the floor back over to Tom O'Malley for any closing remarks.

[Tom O'Malley:]

My only closing remark is thank you for attending the call and taking an interest in the company. We hope to do better quarter to quarter every quarter. Thanks and have a great day.

[Operator:]

This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.