PBF Energy Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, everyone and welcome to the PBF Energy Third Quarter 2015 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 questions following management’s prepared remarks. It is now my pleasure to turn the floor over to Colin Murray, Investor Relations. Sir, you may begin.

[Colin Murray:]

Thank you, Steve. Good morning and welcome to our third quarter earnings call. With me today are Tom O’Malley, our Executive Chairman; Tom Nimbley, our CEO; Erik Young, our CFO and several other members of our management team. A copy of today’s earnings release, including supplemental financial and operating information, is available on our website. Before getting started, I 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 measures 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 second quarter. We think adjusted fully converted net income and EPS are meaningful metrics to you because they represent 100% of the operations on an after-tax basis. Before Erik discusses our results, I would like to take a moment to review the non-cash lower of cost to market, or LCM inventory adjustment that we recognized in the quarter. As mentioned on our previous calls, we assess our inventory for the potential of an LCM adjustment on a quarterly basis and future movements, up or down, of hydrocarbon prices could have a non-cash positive or negative impact to our reported earnings. During the third quarter of 2015, average hydrocarbon prices decreased and for PBF, this generated a $124.6 million after-tax non-cash inventory change. For the purpose of today’s call, the comments we make in regard to our results will exclude the impact of the non-cash LCM inventory adjustment. I will now turn the call over to Erik.

[Erik Young:]

Thank you, Colin. Today, we reported third quarter operating income of $298.4 million and adjusted fully converted net income for the third quarter of $169.4 million, or $1.85 per share on a fully exchanged, fully diluted basis. This compares to operating income of $284.1 million and adjusted fully converted net income of $155.6 million, or $1.60 per share for the third quarter of 2014. Adjusted EBITDA for the quarter was $347.6 million as compared to adjusted EBITDA of $351.6 million for the year ago quarter. For the third quarter, G&A expenses were $53.3 million as compared to $34.3 million a year ago. The increase is largely attributable to higher employee expenses and additional acquisition related costs, including staff augmentation. Depreciation and amortization expense was $48.1 million versus $68 million in 2014, which included the one-time $28.5 million charge related to the abandoned hydrocracker project at Delaware City. Third quarter interest expense was $28 million compared to $24.4 million last year. PBF’s effective tax rate for the quarter was approximately 21%, which included a one-time true-up for the year end 2014 tax provision. Our year-to-date effective tax rate is approximately 36% and for modeling purposes, you should continue to assume a normalized rate of 40%. PBF ended the quarter with liquidity of approximately $1.2 billion. Our consolidated cash balance was approximately $707.1 million, including marketable securities and our net debt to cap ratio was 26%. For the quarter, refining and corporate CapEx was approximately $53.4 million, which excludes railcar purchases and sales. For fourth quarter modeling purposes, we expect refinery throughput volumes for the Mid-Continent to average between 150,000 and 160,000 barrels per day and the East Coast should average between 320,000 and 340,000 barrels per day. We expect our operating costs for the year to range between $4.75 per barrel and $5 per barrel. G&A expenses should be in the $155 million to $175 million range, which includes incremental costs related to our acquisitions and employee incentive compensation. Depreciation and amortization should be in the $190 million to $200 million range and interest expense should be approximately $105 million to $115 million for the year. We continue to expect CapEx, including maintenance and turnarounds, but net of railcar purchases to be approximately $200 million, excluding Chalmette. We are still in the process of finalizing our 2016 budget, but our turnaround schedules for Delaware City fluid coker in the spring and for the Paulsboro FCC in the fall of next year. We expect turnaround activity at our other plants to be relatively light in 2016 and we will continue to provide updates as we move into next year. Our Board has approved a quarterly dividend of $0.30 per share payable on November 24 to shareholders of record as of November 9, 2015. Before turning the call over to Tom Nimbley, I would like to comment on a couple of other notable items. First, regarding Chalmette, we are in the final stages and expect the transaction to close on November 1. We are looking forward to welcoming the Chalmette employees to the PBF team and are excited to enter the Gulf Coast market. We will use our existing liquidity to fund the $322 million purchase price and approximately $125 million to $150 million in net working capital for Chalmette. Hydrocarbon prices have declined since we announced the transaction and we will be saving approximately $75 million of inventory related costs versus our acquisition model. As we look ahead to the Torrance closing, I think it’s important to comment on our successful equity offering that we completed earlier this month. PBF Energy raised approximately $344 million in net proceeds from the sale of 11.5 million shares. This has increased our current liquidity to approximately $1.5 billion and represents a significant component of the capital required to fund our growth plans. Also of note, today, PBF Logistics announced the distribution increase to $0.39 per unit. As a reminder, PBF Energy owns 53.7% of the units of PBF Logistics and 100% of the general partner and incentive distribution rights. We are now benefiting from participation in the second level of the IDR splits. I am now going to turn the call over to Tom Nimbley for his comments.

[Tom Nimbley:]

Thank you, Eric and good morning everybody. Toledo and the East Coast combined to deliver another positive quarter for the company. Cracks on the East Coast and Toledo were strong throughout the quarter. Flat prices of crude decreased, which benefited the bottom of the barrel economics and crude differentials widened versus the prior quarter. During the quarter, total throughput for our overall system was about 475,000 barrels a day. For the quarter, operating cost on the system-wide basis averaged $4.57 a barrel, $4.19 a barrel in Toledo, and $4.79 a barrel on the East Coast. The East Coast operating expenses were higher than planned as a result of the lower throughput and increased expenses associated with the FCC outage at Delaware City and the planned maintenance of the crude unit that was originally planned for the fourth quarter, what was advanced into the third quarter when the FCC was shutdown. In the third quarter, Toledo had its best operating quarter ever. Toledo’s record throughput for the quarter resulted in a 10% to 20% yield increase for our high value products versus previous levels and the refinery realized a gross margin of $16.44 per barrel. Toledo’s performance during the quarter is reflective of the major FCC overhaul undertaken last year and the improvements that were installed at that time. We were able to operate the plant safely and reliably during the quarter which allowed us to benefit from the strong market conditions that existed. We expect the improvements to continue as the work for the previously announced chemicals expansion in Toledo was completed in the third quarter. And we expect that to improve margins by approximately $15 million to $20 million on an annualized basis. The refining margin for the East Coast system was $10.98 per barrel as the East Coast benefited from strong cracks as well as favorable pricing for certain individual products such as premium gasoline and asphalt. Asphalt pricing was favorable due to lower flat price environment which also helps for our increased demand. Octane values were extremely strong in the third quarter as demand for high octane gasoline increased with the lower flat price and the industry struggled to absorb increasing amounts of low octane straight run gasoline that is being produced with the increased runs of light sweet domestic crudes. In addition to favorable product differentials we experienced a beneficial widening of certain waterborne crude differentials such as the Brent ASCI differential which improved $2.42 per barrel versus the prior quarter. Similar to the second quarter, rail differentials remained uneconomic and our rail delivered crude volumes were significantly reduced. Our East Coast results for the quarter and for the year-to-date demonstrate that the East Coast system is not dependent on any particular crude for profitability. The rail infrastructure of PBF Logistics is strategically important to PBF, because it is our main access point to North American crude oil. Coupled with waterborne access, we expect that both avenues will lead to profitability for our system at different times depending upon market conditions. It is critical for PBF to have this flexibility. We are generally pleased with the overall performance of our system this quarter and continued to work on enhancing our profitability both organically and through acquisitions. We are working on a number of smaller projects and continue to advance the permitted hydrogen plant product – project at our Delaware City refinery. We continue to expect that this project will be in service towards the later half of 2017 and when complete should add approximately $80 million to $100 million of incremental margin to the East Coast system. Turning to our acquisitions, as Erik mentioned we expect to close Chalmette on November 1 and we expect Chalmette to be a contributor for our earnings in the fourth quarter. On our previous calls when we have discussed the Chalmette acquisition and its potential, we have highlighted several areas where we expect to make margin improvements. These improvements will not occur on day one, but we – they will be stepped into over time and we expect to begin seeing results from our efforts late in the fourth quarter and first quarter of 2016. As we become more familiar with the asset, we will continue our evaluation of additional opportunities to improve margins including the potential of restarting the hydrocracker that shutdown in 2010 and a reformate that is currently idle. The Torrance acquisition is a little further out and we are currently targeting a second quarter 2016 close. As we mentioned before the acquisition will only close once ExxonMobil has proven the refinery to be fully operational. Let me be very clear on this point. PBF will not close on Torrance if we have any doubt about the refinery’s operational status. Pro forma for both acquisitions PBF – the pro forma for both acquisitions, PBF will be the fourth largest independent refiner in North America with a presence in all of the U.S. coastal markets and the robust Mid-Continent market. We will have increased our refining capacity by over 60% and diversified our earnings base by adding the pad three and pad five markets to our footprint. I would like to now turn the call over to our Executive Chairman, Tom O'Malley.

[Tom O’Malley:]

Thank you very much, Tom. I will be very brief. This is probably the first time in quite some time that I can say really good job, well done. We did have the one upset at the Delaware City refinery, but generally we ran extremely well and we are realizing the benefits of changes that we have made. Looking forward, certainly for me I have always been growth oriented continued to be on the acquisition of the Chalmette refinery within a few days should be a real stride forward. And then we follow with Torrance in California a market that we know very, very well. I don’t think we are going to see a lot of other acquisitions over the next six months on our part. We are going to be very busy with these two acquisitions and we are going to focus not just on acquiring and operating these refineries in a safe and reliable way, but also on making sure we have the balance sheet in good order. Thus I don’t think there is going to be any share repurchase over the coming year. We are going to focus on growing the earnings in the company from these acquisitions. On that note, we would be pleased to take whatever questions you have.

[Operator:]

In a moment we will open the call to questions. The company requests that all callers limit their each turn to one question and one follow-up. You may rejoin the queue with additional questions. [Operator Instructions] Our first question comes from Roger Read from Wells Fargo. Your line is open.

[Roger Read:]

Hi, good morning.

[Tom O’Malley:]

Good morning.

[Roger Read:]

And congratulations on the quarter, a good solid quarter. Can you give us a little more clarity maybe as we look at the East Coast in terms of the amount of high octane gasoline you make, kind of what your yield is compared to maybe a broader East Coast to kind of help us quantify the positives of that especially since it looks like in the summer of ’16 we are going to have a similar situation?

[Tom O’Malley:]

Tom.

[Tom Nimbley:]

Yes. We have – we have seen about a 10% increase in actual sales of premium gasoline. In addition, out of our East Coast system we sell reformate, high octane reformate, a very high octane we see that goes into the [indiscernible] market or goes into third-party people who are buying it to blend to add gasoline. So, we have seen an uptick in premium demand that was coupled however with a very large increase in the third quarter particularly in the spread between RBOB and PBOB. You can look at it in the market. It was very high. It’s actually still about $5 a barrel and that’s come off significantly from where it was in the third quarter. And just in context year-to-date the spread between RBOB – New York RBOB and PBOB is about $10 which is rather extraordinary spread for octane and as I said it’s a combination. It is difficult to absorb some of these increased volumes of light straight line that is coming out of the shale revolution if you will because they are relatively low in octane.

[Roger Read:]

And is there – as just a follow-up to that, is there anything that you would expect PBF will be able to do over the next several quarters leading into the summer of ’16 to do anything to increase your octane or capability of making octane or acquiring it?

[Tom Nimbley:]

Yes. Actually very good question, I alluded to the fact that there is a reform or shutdown in Chalmette. It was shutdown along with the hydrocracker and a small coker, back several years ago and what the joint venture we referred to was the new business model. We are looking at those units to see how we can capitalize. And but imagine – and I would say one other Roger the whole industry is also dealing with Tier 3. And the way you pretty much comply with Tier 3 gasoline is you remove the sulfur by increasing the severity on your hydro-treating operations which does get the sulfur out but also destroys octane. So one other things we are going to be looking at and focus really on – there are some on the East Coast because we have spared some spare capacity, but Chalmette we are looking at that reform as a way of buying naptha or running some of the light crudes we might be running at Chalmette and increasing the amount of reformate production that we have out of that facility.

[Roger Read:]

Okay. Well, that’s very helpful. Thank you.

[Operator:]

Our next question is from Evan Calio from Morgan Stanley. Your line is open.

[Evan Calio:]

Yes. Good morning guys. I know you have a transition team in place in Chalmette and closing kind of very shortly, I mean can you comment on your confidence and the achievability of your optimized guidance on the July margin assumptions given recent learnings and any upside or downsides you can talk about from what you’ve learned onsite since the last call?

[Tom O'Malley:]

Tom.

[Tom Nimbley:]

Yes we’ve – we’ve continued to get more and more information, more access and we continue to be generally optimistic, more optimistic that the numbers that we’ve drawn out are achievable and there is a chance that we could exceed them. The condition of some of the idled equipment, now we are not completely in it, but at least on the reports that we’ve had access to, they have been well projected, they are on the nitrogen blanket. So, we don’t think there is going to be real problem, huge problems anyway in installing them up, if indeed, we think they’re economic. And I will tell you, we were pretty sure, we’re going to be able to utilize some of that equipment. As we go in to the base operation, Chalmette had a good year and they better have had a good year, because if you can make money with the market that we’ve had in this year, there is some issue. But as we take it over, we do believe and we’ve already started taking steps on the product side to change where we’re selling some of the products that they come and added that place and also the dispositions on that. And frankly starting to change the crew slight around, one other things that we thought would be a benefit is that Chalmette was obviously been run in certain ways is integrated into the Exxon Mobil Gulf Coast system. We’re going to shift the crews’ late around, as obviously pretty good differentials that exist between Mars [ph] in LLS or HLS in Mars [ph]. And we believe that is going to work certainly in this market low flat-pricing when wide spreads to our advantage.

[Evan Calio:]

Maybe a follow up to that, and your prior comments on how long it takes to achieve your optimized state, the acquisition case and a PBF optimized which had about a $100 million of delta. I mean can you talk about what and maybe in the buckets that you talked about like crude sourcing and yield and optimization. I mean can you talk about, what stays in faster and what takes longer and any kind of scoping on times so we can understand that?

[Tom Nimbley:]

Yes, I think obviously if you look at what we’ve said in the past, we talked along the lines of $55 million to $70 million of EBITDAR improvement on an annualized basis from the combination of optimization changes and permits on the crude and product side. We believe that will come faster. And really it will come faster, because of what I said the market is our friend right now. If it turns then we would have to deal with it. But certainly some of the things that we were forecasting and thought would be up opportunities were so come into fruition. We will be running more medium salaries and we will be making some crude substitutions. We will be looking to do something different with the bottom of the barrel, maybe even integrate that into our East Coast system, maybe perhaps make more asphalt things of that nature that we contribute to that. The other optimizations in terms of how we treat yields and maybe reduce operating cost or get into some new products that’s going to be kind of mid range. We frankly have to get in there. And then obviously come behind on a back-end of it, will be the benefits associated with the idled equipment, because frankly no, we can’t ascertain that until we all put up this equipment and verify that, that indeed is not going to be, there won’t be minimal issues which started up.

[Evan Calio:]

That’s good, that’s good. Maybe shifting gears on Torrance is there any since the last call, I mean is there any updates you have on that, the ESP Process and kind of still on track, I know you’ve not assuming control until its fully operational and proven so, but on track for February start-up date?

[Tom Nimbley:]

Yes, they have advertised February 16, and on that basis we said if typically 6 weeks assuming no hitches we would be targeting perhaps in April. I would say California is a difficult environment and that’s probably a little bit of a strong lift to them. But hopefully they would be able to make it and we’re looking forward, we would obviously like to get it as we enter into the gasoline season.

[Evan Calio:]

That makes sense. Alright, guys. I will leave it there. Thank you.

[Operator:]

Our next question is from Chi Chow from Tudor Pickering Holt. Your line is now open.

[Chi Chow:]

Great, thank you. I want to ask a couple of questions on your East Coast crude slate, looks like you ran more sour crudes than ever in the East Coast both mediums and heavy. Can we expect the similar run rate going forward given the widening of the percent discount from the mediums, heavies we’ve seen in the recent months?

[Tom Nimbley:]

Yes, but certainly if this market holds and you are exactly right Chi that, we are going to run probably $55,000 a day of rail crude or $60,000 a day of rail crude. And as we go forward, we have a $30,000 a day contract with Exxon, we might move some of that Chalmette, we’ll split it between Chalmette and the East Coast. And we have a kind of baseline of about 25,000 barrels at Bakken that is economic and even at these spreads, because of the benefits it has in the still. Beyond that the economics completely favor running medium sours and heavy sour crudes. And of course the facts that we had these cokers, we are able to do that and that is a demark from the rest of the airborne facilities. Certainly our economics now continue to favor that, and as I said frankly that’s the type of crude slate we’ll be pushing into Chalmette, because the economics are attractive. And it is not only, just the absolute spreads, but you heard in it that, having a $4 or $5 Brent ASCII spread, at $100 crude is one thing, it haven’t added a $50 crude basis is a different paradigm. So, we would expect that’s the slate we’re running for are effectively 100% medium sour we are running Vasconia, we are running our medium isthmus. We are running no light sweet crudes and the only light sweet crudes we are running in Delaware we would plan around is just 25 a day, so at Bakken that we see benefits just from having to baseload it.

[Chi Chow:]

Thanks for that color, Tom. So, there are just a lot of interesting moving pieces in heavy crude market right now. You do have the Canadian heavy is now available in Houston be a pipeline. We just heard about this approval of the crude swap with Pemex from Maya. Can you talk about how you are thinking about these in other dynamics long-term on the impact on the heavy crude market?

[Tom Nimbley:]

Well, I think my view and then Tom might weigh in as well is over time we will have to see what happens you have seen recently some announcements by Shell and cutting their CapEx and the upgrade is in Canada, but the world is a wash with crude. You got our rand coming on board next year. You have got increased production in the Middle East. The Colombians are pushing a lot of crude in a marketplace. So, while we clearly see the pressure being existing from the domestic cutbacks on the light shale and certainly, if you are completely relying on light shale crude on East Coast you have a little bit of an issue, because it’s landing in at a pretty big number. Western Canadian crude we can run even at these spreads, we probably run it and make a little bit of money and Chalmette can run it, because obviously you can get it – get it done there little bit cheaper. But, we also believe that there is going to opportunities in the medium sour market and heavy crude market going forward. And we’re positioned to be able to take advantage up with the equipment we have got.

[Chi Chow:]

Certainly, it seems that way with that adding Chalmette and Torrance, it certainly appears that you are making a bet on the medium and heavy crude market, was that a conscious decision or is that just how the chips fell with the acquisition market?

[Tom O'Malley:]

Tom, let me take that. Look in terms of a conscious decision, we’ve long had the view that the flexibility to handle medium sour and heavy sour crudes is at the core of future profitability for the company. Tom already mentioned the concept of the world having a lot of crude available, certainly if you look at Iranian crude, which long ago used to come to the United States, it really looks like Iraqi and Saudi crude, 1.5% to 2% sulphur, 30 gravity perhaps a little heavier, a little lighter. Iranians are going to produce quite a bit more crude, certainly I would think that the growth in the Iraqi production will continue albeit, it might have interruptions given the military turmoil out there, but the ability to run these heavier, higher sulphur crudes just has to be a tremendous advantage for us and we would prefer to buy refineries that have that ability. Therefore, I suppose you could call it a conscious decision.

[Chi Chow:]

Great. Thanks, Tom. Erik, I just have one kind of bookkeeping question. Can you help us reconcile the cash position up into the quarter? It was just a bit surprising to see the cash balance going down sequentially from 2Q given the earnings results either big strong working capital or something like that?

[Erik Young:]

Yes, there was roughly $300 million draw on working capital and it’s really a timing issue Q2 to Q3. We expect to get a big portion of that back here as we go into Q4. So, that was going to be your biggest driver overall. And think about it in the context of we had a decent amount of payables on the balance sheet and also picked up in the crudes at the end of Q2 that then were ultimately paid into Q3.

[Chi Chow:]

Okay, thanks. Appreciate that.

[Operator:]

We will take our next question from Johannes Van Der Tuin from Credit Suisse. Your line is open.

[Johannes Van Der Tuin:]

Well, congratulations on the solid quarter especially up in Toledo. Quick first question which had to do with you have been able to benefit from the volatility within quality differentials, which are to your advantage being on the coast being able to have cokers and things like that, which is a fantastic thing to have. On the other side of it, as you noted, the rail arb is generally closed, because crude diffs are narrow. Does that change your thinking about I guess dropdowns in the PBFX over time and not necessarily what you will dropdown in total EBITDA, but just the order of which assets look more attractive to dropdown into the MLP versus less in the medium term?

[Tom O’Malley:]

Tom, let me take that. Look, we are not dropping down any additional rail facilities into the MLP certainly in the foreseeable future. As you know from our public announcements on the acquisition of Chalmette which should close as we say within a week. And on the acquisition of Torrance which will be a bit later, we are collecting quite a bit of pipeline and terminal assets. So, certainly, we want to diversify the income stream within PBFX and we will be – we hope at least dropping down other non-rail assets. And as for the pace of the dropdowns, well, we are trying to grow PBFX. We think that’s the right way to go. And we have been growing it rather quickly. And I think the market should expect us to continue to grow quickly.

[Johannes Van Der Tuin:]

And as a follow-up, I had a question about Torrance and speaking to people, there is a bit of a tourism out there, which in fact maybe false and I would like you to be able to at least address it that it can be difficult to operate in the California market without retail? And I was wondering since you have such a breadth of experience within the California market if you could speak to that say what are the advantages and perhaps disadvantages for operating or just differences of operating a refinery in California without that retail arm?

[Erik Young:]

Well, look with regard to retail, I would certainly tell you that there is a difference between Northern California and Southern California. Northern California is surplus gasoline and generally exploits it to Southern California. So, in the north, yes that’s a little bit harder to operate up there without retail. In the South, there is a good commercial market I have had in previous companies very large retail positions. We always attributed as the separate business, it’s the separate profit center. I don’t see any practical issue associated with that. We will be entering into a rather substantial agreement with the Exxon Corporation on various products coming out of Torrance. So, I don’t see any special difficulty and I would say straight out not to signal the market, but to tell the market we are not looking in any retail at the present time. It’s not a business we are going into. With regard to operating in California, both Tim Nimbley and I and many other people within our organization have a lot of experience out there. It is a complex marketplace to operate in. I would hate to be doing this if we didn’t know from our previous jobs how we need to evaluate things, but we are frankly very comfortable. We don’t see a problem. We have got to comply with the market as it is. But honestly speaking that’s the same in Delaware, the same in New Jersey, the same in Ohio. Each one of these markets has certain peculiarities that one has to deal with and we operate locally. We don’t have a situation where each and every time we want to buy paperclips it comes back to the Parsippany headquarters. We have put very capable people on the ground. They know how to run it in the local business and that probably is a differentiation of PBF from other onus of facilities in various states.

[Johannes Van Der Tuin:]

Much appreciation. Thank you.

[Operator:]

We will take our next question from Blake Fernandez from Howard Weil. Your line is open.

[Blake Fernandez:]

Guys, good morning. Congrats on the results. I had to hop on late. So, I apologize if you have addressed this, but I had a few just quick ones for you. So, one, I was just looking for a timeline on a formal CapEx, including all of the facilities. Do you think you are in a position as we get towards year end to get kind of an aggregated CapEx outlook or you are going to wait until you formally close on all of the facilities before doing so?

[Erik Young:]

We are in the process now like about going through the budget process. We haven’t finalized that. We had our first set of reviews. So, we are kind of keep moving on it. We will be in a position to provide strong guidance here at the end of the year as we move to the end of the year, certainly inclusive of Chalmette. At Torrance, it will be – it completely depends on the pace of which we are going to be closing on this thing. We have an idea of what we think we might be doing, but it won’t be at the same level of specificity that we will have for the other four refineries, but we will be providing guidance here in the next six weeks or so for the company in 2016, including Chalmette.

[Blake Fernandez:]

Great.

[Tom O’Malley:]

Tom, let me just add there and this is a general clarification to the marketplace and a kind of, I don’t know if I want to call it a corporate effect or general policy. Look, we are going to close on a total refinery for $322 million plus call it $150 million of working capital or thereabouts at the end of this month. Thus I look around and I see other companies announcing $800 million and $1 billion projects within refineries. And I frequently scratch my head and I say, it seemed to making a lot of sense if you can buy a whole refinery for half that amount. The one thing we want to be clear about to the market is that we are not investing in these giant projects and we don’t buy refineries that require these giant projects. We have a hydrogen plant scheduled to go into Delaware. It’s a terrific opportunity, but hydrogen plants are generally done with other people’s money and I suspect that will be the case here at third-party operation of it. So, while Tom will be ready and the company will be ready to give you I guess a fulsome investment project, including Chalmette, not including Torrance, because we are not given out investment budgets for places that we are not sitting inside out. You are not going to see huge numbers coming after you.

[Blake Fernandez:]

Okay, good deal. The second question is maybe for Erik, but to the extent you have got free cash flow generation over the coming quarters, I mean I know we have got about $149 million of buyback authorization, but obviously we have just on the recent equity issuance to fund these acquisitions, do you think it’s fair to think that debt reduction is kind of the focal point here over the coming quarters to the extent that you got excess cash flow?

[Erik Young:]

I think it’s a combination of debt reduction and then consideration for the future acquisition of Torrance as opposed to doing share buybacks. I know you mentioned you missed the first part of the call. Tom O’Malley mentioned that we would not be doing share buybacks going forward.

[Blake Fernandez:]

Sorry about that, okay.

[Tom O’Malley:]

Well, that’s a hold-on going forward. I mean the reality for us, we had a buyback program. We bought in a bit more than 6 million shares. We bought them quite favorably in terms of price I believe was $1.25. Once we saw these acquisitions coming down the road, we obviously stopped buying back. And the reality is if you look at our financial situation, I think it would be prudent on our part to keep the money within the company. We will not be buying back shares certainly in the next six months and my guess is the next 15 months. After that, look if we really do well and it makes sense from a business point of view, who knows.

[Blake Fernandez:]

Okay, sorry to be redundant there. The last one, I realize that you don’t want to get into too much disclosure on Torrance, but one other things we kind of get asked about and that we look at is the implied margins needed to get to some of the EBITDA targets, it seems like it’s a bit above kind of the average West Coast margins that some of your peers over there would be recognizing. And I am just wondering if you can talk a little bit about how Torrance stacks up as far as being top quartile or middle of the pack. I know there are some differences in complexity in crude runs, etcetera. But any help there would be appreciated?

[Tom Nimbley:]

Tom?

[Tom O’Malley:]

Yes. I think the – a couple of points I would make about Torrance. Obviously, it’s got a 14.9 Nelson complexity index. It is a powerful machine that is an advantage. Its crude processing, I mean it runs at 16 degree API crude, which gives an advantage versus rest of the competition out there. There are a lot of machines out there that can run and queue-up every crude. But frankly the coking capacity that exists and the hydro-treating capacity that exists in Torrance is very strong. The other thing that we see is beneficial. Torrance is a gasoline machine. And we do believe that there is going to have – this rebound in gasoline is going to have some strength. We have seen growth [indiscernible] or others 3% to 4% year-over-year growth, we are seeing that in California. Obviously, that is being spurred somewhat by the – to a large extent by the lower flat price gasoline. But we are very comfortable with the numbers that we have and what we put together the whole key to talks. It has to run reliably. And California markets as you all know when we look at it large variance. If you have an event like Torrance had, frankly the whole industry probably benefited from that shutdown in terms of improvements in cracks as the supply chain moved around to spot, moving components in barrels into California. That’s going to happen in California we think [Technical Difficulty] probably improve other liability when we own it so that it – we are not the ones that are creating the problem, but we are taking advantage of the opportunities.

[Blake Fernandez:]

Understood. Thanks guys. I appreciate it.

[Operator:]

Our next question is from Doug Leggate from Bank of America. Your line is open.

[Doug Leggate:]

Thanks. Good morning everybody. I apologize as you know there was another call going on I may have missed this earlier on the call, but I am just curious as to what is the latest thoughts on the utilization of the rail facility in terms of whether you still see alternative opportunities to bring both Canadian and inland crude oil to the East Coast? And I have got a follow-up please.

[Erik Young:]

Let me answer that Tom. Doug thanks. Look there is absolutely no question nor should there be any conclusion that rail movements at the time are price challenged. We have the situation in Canada where we are certainly going to continue to move rather significant volumes of rail crude through our facility in Delaware that will be somewhere between 20,000 barrels and 40,000 barrels a day. If we look at the light-sweet crude in the Bakken that these numbers we’re budgeting for the year 2016 about 25,000 barrels a day through the rail facility. Whenever we look at these numbers in essence if we wanted to try and do more, and then we compare it to what’s available over the dock. And certainly availabilities over the dock are financially had a tremendous advantage today. So we’re going to move that way. So, when we look at 2016 those are the numbers that we’re dealing with about 30 a day of Canadian and 25 a day of light-sweet crudes, it could be a bit more, a bit less that’s really going to depend on what we see in the marketplace.

[Doug Leggate:]

Got it. Thanks for the answer, Tom. I guess its Canada related follow-up, but one of things we’re kind of thinking about is almost like an intended consequence of what’s going on with US production right now. Is the potential as we’re seeing the US refiner swing to a large international diet and I’m kind of thinking that maybe incrementally positive just from the point of view of lower gasoline yielding out of those barrels, I just wonder if you could opine on that, if we continue to see the level of imports that we’re seeing from international, does that start to refer some of the domestic increase in gasoline production that we’ve seen over the last several years. I guess its kind of…

[Tom Nimbley:]

Well certainly to the degree that you’re replacing the light-sweet crude with heavier oil, you’re going to get a little bit less gasoline production. In the particular market that we operate in, particularly on the U.S. East Coast, there is really not that much of an impact, because our competitors on the East Coast Trainer now which belongs to Delta Airlines, which frankly I owned once before on another company Bayway which belongs to PSX, again Tom Nimbley and I have operated that refinery before on PES. They are in a market where they’ve got to take in light-sweet crudes. So they don’t have the capability to run in a medium sour crude. So they are, they are not going to crop their gasoline make, because they are going to run light crude through the air. I think certainly on the Gulf Coast you are going to see a bit more impact. But my feeling and Tom correct me on this, in the overall picture, yes maybe you were talking about a 100,000 barrels a day or something on that or at a 120,000 barrels a day. I don’t think you are talking about much more.

[Doug Leggate:]

Got it. I appreciate it. So I can let me squeeze one last one and very quickly. It seems they got this wrong, but it seems that Torrance had some other additional downtime under excellent operatorship. Are you still comfortable with mid-year completion for that transaction?

[Tom Nimbley:]

Yes, we are and ExxonMobil has had some other issues other than the ESP over the last couple of years, Appalachian unit reliability and a hydrogen plant that they had some problems. What the good news is they’ve effectively diagnosed those issues, the root cause of those issues and they have taken care and they retuned the furnace and taken steps to solve those problems. So, hopefully their behind us, remember they had spent a significant amount of money and investments in that plant including turnaround the entire SEC. We said earlier they are saying and still advertising mid-February for completion and startup of the new ESP. I don’t see them having made any progress on this interim operation that they were proposing, I think its likely going to be weighted in ESP, ESP well it gets rebuilt and then startup. And we’re hopeful it will be April 1st and we do expect to see benefits from them having made the investments to solve some of the reliability problems that you are correct that they had, in addition to the ESP.

[Tom O’Malley:]

Tom, let me just add a little something there, I think a lot, we’ve Tom and I have been involved buying refineries from various companies over the past 25 years. And one thing I can say with the great of certainty based on the experience that we’ve had is that buying a refinery from the Exxon Corporation is really at the top of all list. Certainly, they have had things go wrong as indeed of every refiner all over the world from time-to-time. The difference with the Exxon Corporation perhaps in other companies that you might encounter is they don’t do Band-Aids. When they fix something, they really fix it. So, we see at Chalmette in the past year. Chalmette is having a very good year. Certainly, they made big changes there. And Exxon is in the process of repairing things out in Torrance. And our experience is when Exxon repairs something, it’s not like bringing your Ferrari into the local garage that handles Chevrolets. They do it the right way. So, I would tell you that buying from Exxon is truly really at the top of our list of refinery suppliers.

[Doug Leggate:]

Appreciate the answers guys. Thank you.

[Operator:]

We will take our next question from Chi Chow from Tudor Pickering Holt. Your line is open.

[Chi Chow:]

Hi, thanks. I just want to have one clarification there on Torrance. Maybe you just answered that in your last response, but is there a targeted period of time you need to see the ESP and FCC running before you feel comfortable on closing the transaction. You kind of hint that there is 6-week time period, is that about right?

[Tom Nimbley:]

It’s not about 15 days is what we have talked through with them on making sure that it runs and runs reliably and we have the opportunity to convince ourselves that there were no issues.

[Chi Chow:]

15 days?

[Tom Nimbley:]

Yes, okay. Thanks. Appreciate it.

[Operator:]

I would now like to turn the program over back to Mr. Tom Nimbley.

[Tom Nimbley:]

Well, thank you everybody. If there were no other questions and unless Tom has some comments, we thank you for your participation and have a great day.

[Operator:]

Thank you for joining. This does conclude today’s program. You may now disconnect at any time.