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Edited Transcript of PBF earnings conference call or presentation 13-Feb-20 1:30pm GMT

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Q4 2019 PBF Energy Inc Earnings Call PARSIPPANY Jun 3, 2020 (Thomson StreetEvents) -- Edited Transcript of PBF Energy Inc earnings conference call or presentation Thursday, February 13, 2020 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * C. Erik Young PBF Energy Inc - Senior VP & CFO * Colin Murray PBF Energy Inc - Senior Director of IR * Matthew C. Lucey PBF Energy Inc - President * Thomas J. Nimbley PBF Energy Inc - CEO & Chairman ================================================================================ Conference Call Participants ================================================================================ * Bradley Barrett Heffern RBC Capital Markets, Research Division - Analyst * Carly S. Davenport Goldman Sachs Group Inc., Research Division - Business Analyst * Douglas George Blyth Leggate BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research * Jason Daniel Gabelman Cowen and Company, LLC, Research Division - Director * Matthew Robert Lovseth Blair Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research * Paul Cheng Scotiabank Global Banking and Markets, Research Division - Research Analyst * Paul Benedict Sankey Mizuho Securities USA LLC, Research Division - MD of Americas Research * Philip Mulkey Gresh JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst * Theresa Chen Barclays Bank PLC, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, everyone, and welcome to the PBF Energy Fourth Quarter and Full Year 2019 Earnings Conference Call and Webcast. (Operator Instructions) It is now my pleasure to turn the floor over to Mr. Colin Murray of Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- Colin Murray, PBF Energy Inc - Senior Director of IR [2] -------------------------------------------------------------------------------- Thank you, Ashley. Good morning, and welcome to today's call. With me today are Tom Nimbley, our CEO; Matt Lucey, our President; Erik Young, our CFO; and several other members of our management team. A copy of today's earnings release, including supplemental information, is available on our website. Before getting started, I'd like to direct your attention to the safe harbor statement contained in today's press release. In summary, it outlines the statements contained in the press release and on this call, which 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. Consistent with our prior quarters, we will discuss our results, excluding special items. This is a net $20.2 million adjustment, which includes an after-tax noncash lower-of-cost-or-market, or LCM adjustment, which decreased our reported net income and earnings per share. As noted in our press release, we will be using certain non-GAAP measures while describing PBF's operating performance and financial results. For reconciliations of non-GAAP measures to the appropriate GAAP figure, please refer to the supplemental tables provided in today's press release. Also included in our press release today are throughput guidance figures, which now include the Martinez refinery as of its February 1 acquisition date. I will now turn the call over to Tom Nimbley. -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [3] -------------------------------------------------------------------------------- Thank you, Colin. Good morning, everyone, and thank you for joining our call today. Overall, we are pleased with our fourth quarter results, which reflect solid operational performance in all of our regions, following the extensive maintenance we strategically advanced into the first half of 2019. In the fourth quarter, complexity mattered with changing IMO-based market dynamics. Oil trade flows shifted and crude slate changes were observed throughout the industry and at our refineries. Less complex refineries producing high-sulfur fuel, made significant changes to their business model and got lighter. In the last 6 weeks, the oil industry and the world have been presented with some serious challenges. The markets have been volatile, to say the least, and they continue to be so. The mild winter in the Northern hemisphere has dampened demand for heating fuels and more importantly, the coronavirus has limited commerce and mobility in highly populated areas as governments and health organizations work diligently to solve the pandemic. With the losses to demand, the oil market will do what it always does, rebalance. Global refining margins started this year fairly weak and runs were curtailed due to economics. It appears as though we were starting to see some life in the cracks, but oil demand losses in the first quarter have outweighed the IMO-related benefits we were seeing in Q4. The magnitude of demand losses cannot be ignored or even accurately estimated at this point, but the oil market has continually demonstrated that it can and will rebalance. The industry opportunities presented by IMO have not gone away, rather the pause button has been hit. The demand destruction we have seen from the weather and the virus are temporary. Product inventories have been building, but refinery runs are hampered by economics and are likely to remain constrained for the balance of the first quarter. The current health prices will get sorted out and demand will recover. Oil demand will likely recover more rapidly than refinery runs. We are entering an active planned refinery maintenance period globally. Planned crude unit downtime will peak in April in a forecasted range of 7 million to 9 million barrels per day. There is light at the end of the tunnel as we exit Q1. Demand is set to seasonally pick up as we entered it with peak demand periods. We were very glad we had complex assets in Q4, and our results demonstrate the power of complexity and flexibility. With the completed acquisition of Martinez on February 1, we are very pleased to have added another highly complex asset to our portfolio. While the first quarter is facing some significant challenges, we will not waver on a base assumption that complexity matters. Now I'll turn the call over to Erik to go over our financial results for the quarter. -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Tom. Today, PBF reported adjusted earnings per share of $0.60 and $0.90 for the fourth quarter and full year 2019. Fourth quarter adjusted EBITDA comparable to consensus estimates was approximately $272 million and $872 million for the year. PBF's adjusted tax rate for the quarter was approximately 25%, but please continue to use 27% as an effective rate going forward. Consolidated CapEx for the quarter was approximately $119 million, which includes $110 million for refining in corporate CapEx and $9 million incurred by PBF Logistics. As expected, our Q4 CapEx was our lowest quarter of the year, with most of the spend associated with the successful restart of the Chalmette coker and continued work on the Delaware City hydrogen plant tie-ins. Our strategic decision to front-load maintenance in 2019 allowed our refineries to run unimpeded during the fourth quarter. As a result, we were able to generate more than $500 million in cash from operations prior to CapEx, including returning inventory to normalized preturnaround levels. We ended the year with over $2.5 billion of consolidated liquidity, which includes approximately $780 million in cash at PBF and $35 million at PBF Logistics. Our consolidated net debt-to-cap was 25%. Last month, PBF Energy successfully issued $1 billion in senior notes due 2028 at a 6% coupon. The proceeds of this offering were used to refinance and extend the tenure on a portion of our existing debt and to fund a portion of the Martinez transaction, which closed on February 1. The balance of the Martinez funding came from cash on hand and drawings on our revolving credit facility. Finally, we are pleased to announce that our Board has approved a quarterly dividend of $0.30 per share. Now I'll turn the call over to Matt. -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [5] -------------------------------------------------------------------------------- Thank you, Erik. Before commenting on our performance in the fourth quarter, I would like to take this opportunity to publicly welcome Martinez to the PBF family. This transaction was a long time in the making, and we are more than pleased to add this premier refinery and first-class organization to our company. We received regulatory approval at the end of January, which gave us a window to close the transaction at the perfect time as the West Coast market headed into what historically has been a seasonally strong market. We believe now -- we believe we now have the strongest kit on the West Coast. What does that mean? Our 2 refineries with combined Nelson Complexity of 15.5 can run the harshest crude slates and produce one of the highest clean product yields on the West Coast, across the industry for that matter. Martinez, in particular, has over 103% volume yield across the refinery and over 95% high-value product yield. Everything we have learned in the first 2 weeks of ownership has confirmed our assumptions on the strength of the Martinez machine. We have already begun to optimize our 2 refinery system on the West Coast. Looking back on the fourth quarter, our 5 refineries delivered a total throughput averaging over 840,000 barrels per day, and overall ran reasonably well. Looking ahead, we have begun our Toledo FCC turnaround, which is by far our largest single turnaround for the year. We expect to be substantially complete with Toledo turnaround by the end of Q1. As we have stated, our refineries are well positioned for IMO. The benefits may have been pushed out by global events, but PBF circuit has been able to prove out the power of our complexity over the last couple of months, by demonstrating our capability of running high-sulfur fuel oil, or resid. Given the right conditions, we believe we can run up to 125,000 barrels per day, if you will, across our system. Our decision to run alternative feedstocks will, of course, depend on economics. We will always seek to achieve the lowest input costs and highest yield of clean products. We have a dedicated team of planning and economics people that are evaluating countless iterations of alternatives every day. Finally, in regards to our strategic projects. The Chalmette coker project start-up in November, on time and on budget, and we have achieved the coking rates we expected. Our increased capabilities, improve our flexibility to run additional heavy high-sulfur inputs, while improving our overall yield of high-value products. The hydrogen plant project at Delaware City is progressing well, and we expect that to come online near the end of the first quarter. The additional hydrogen capacity at Delaware will allow us to run more high-sulfur inputs and produce high-value products. We are doing the work needed to put our refineries, now at 6, in position to be successful. The markets will be dynamic, but we are focused on the safe, reliable and environmentally responsible operations of our assets. With that, operator, we're ready for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll go -- take our first question from Theresa Chen with Barclays. -------------------------------------------------------------------------------- Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- I wanted to touch upon the earlier comments made about the evolution of IMO and the currently muted effects. If you wouldn't mind elaborating your expectations of like, when could you see some goalposts and timeline for a development? Are we waiting for March 1 with the carriage ban? Or is it going to be more of a second quarter of progress development? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [3] -------------------------------------------------------------------------------- Sure. The point we made is we do believe that IMO is real. We saw the effects in the fourth quarter. It obviously has been completely blunted and candidly overwhelmed by the combined effect of the demand destruction associated with the warm weather in the first quarter and throughout the winter and now the pandemic. I don't think the carriage ban will help. But frankly, we don't think there's a significant amount of cheating going on right now. What has happened here is a couple of things, and I think it's important to weigh them in. Mainly, it's the demand destruction. So what happens is, well, we're going to see some things here. We're going to -- the winter is going to be over in 5 weeks. We'll have to see how long it takes to get the virus contained. I think once that's contained, and hopefully, that will be relatively soon, but who knows. We're likely going to see more stimulus injected in some economy, certainly in China, and we will see a resurgence of demand. We're also going into some structural changes that happen every year, and that would -- the butanes are coming out of gasoline. That's already underway in the state of California. So I would guess that we would see a recovery on IMO sometime in the early second quarter, but that is going to be completely dependent on what happens with the virus, I think. What we saw is demand destruction at the same time, and Matt will maybe elaborate on this at some point. We ran a significant amount of high-sulfur fuel oil. If you listen to what our competitors have said, our peers have said, they ran a lot of high-sulfur fuel oil. We effectively traded out crude because it was more economic to run resid. Well, heavy -- high-sulfur price or fuel oil prices have come back in. And right now, the economics are going to swing that we're going to run back to crude, and we're going to slow down the amount of high-sulfur fuel oil we're running as feedstock. So it will be an ongoing journey to turn the knobs to take advantage of what the most profitable feedstock is. So I think, long answer, but lots of knobs to turn. -------------------------------------------------------------------------------- Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- And in terms of the virus, clearly, it's very hard to contrangulate, exactly what kind of demand destruction on the product or feedstock side and for how long. But do you have any anecdotal evidence of seeing, for example, distressed cargoes accrued in the market right now as related to the virus? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [5] -------------------------------------------------------------------------------- We are seeing -- and this may be early, because a lot of this crude that was being run, was already planned for and how to play out, runs how to play out. But certainly, it looks like we're starting to see evidence of Latin American, South American crudes that we're going over to the east, kind of being pushed back because of the runs cuts in China and to economic run cuts throughout the entire world, in many cases. And those crudes look like they're starting to show up in the Gulf Coast of the United States and on the West Coast of the United States. Early, but certainly, we've seen some movement on the medium sours that were being absorbed into the east. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- And our next question will come from Matthew Blair with Tudor, Pickering, Holt. -------------------------------------------------------------------------------- Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [7] -------------------------------------------------------------------------------- I was hoping you could talk about the performance on the East Coast. It looked like you outperformed some of your peers. What were the drivers behind the strong margin capture? Was that mostly the ability to run HSFO as a feed? And if so, could you provide any sort of numbers around the upside you received there? -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [8] -------------------------------------------------------------------------------- Yes, I would describe it in terms of the fees that we are able to run, and that, again, goes to our complexity. So that can come in the form of fuel oil, which got exceptionally weak in the fourth quarter. We're 2 refineries on the East Coast that can run high-sulfur fuel oil. And obviously, Canadian grades wind out quite a bit as well. And when that happens, we're in the catbird seat to achieve that. In regards to specific impacts from specific grades, it becomes very, very difficult to do. We're not going to get into that specificity. But the fact that matter is, we run to the cheapest feedstocks, and we can run the harshest slates in the world. And so when opportunities presented themselves, we go get those feedstocks, and that will differentiate ourselves from other PADD 1 refiners. -------------------------------------------------------------------------------- Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [9] -------------------------------------------------------------------------------- Sounds good. And then, I guess, extending on that point. What were your East Coast crude by rail volumes in the fourth quarter? And can you share any expectations for Q1? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [10] -------------------------------------------------------------------------------- Totaled crude by rail between WCS and Bakken, I think was 75,000 barrels a day. In the fourth quarter, we would expect to have about the same level of crude by rail in the first quarter. And then probably, it will drop off as seasonally WCS tightens up as we get into the second quarter. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Take our next question from Doug Leggate with Bank of America. -------------------------------------------------------------------------------- Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [12] -------------------------------------------------------------------------------- Tom, I wonder if I could kick off a micro question. Because you mentioned you expect capacity utilization to remain constrained, I think you threw out a number of 79 million barrels a day of maintenance off-line. I just wondered if you could walk us through what you're seeing there. And how you think that compares to prior years? Now obviously, there's a lot of moving parts right now with the Chinese situation, but just trying to figure out if you think that's enough to kind of clean up this -- the product overhang that we're potentially going to have as we go into the summer? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [13] -------------------------------------------------------------------------------- Yes. Thanks, Doug. That's a great question. The short answer I'll give you is, I personally believe it will be the 7 million to 9 million, which basically, I think was around the level that we had in a similar period last year. But a lot of that was being driven by people taking units down pre-IMO. A lot of that 7 million to 9 million is outside the United States, but there's a fair number of units that are down on a -- coming down on a planned basis. The other thing I would mention, that does not include economic run cuts. So I think in addition to the planned unit downtimes, as we see the demand destruction that we're seeing right now and there's lots of numbers as to how much China is already cut back. I saw this morning the reports that they've shut down another refinery in total. But I think the combination of the planned unit downtime, plus the economic response, and the whole industry is going to respond. If you can't make money, you're going to start cutting. So I think that will eventually cover the lower demand that we'll see and balance the marketplace. -------------------------------------------------------------------------------- Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [14] -------------------------------------------------------------------------------- I appreciate that answer. My follow-up is probably for Erik. First of all, guys, congrats on getting the Martinez deal closed. So obviously a big deal for your redundancy on the West Coast. But Erik, what should we think now in terms of balance sheet debt targets? How do you think about where you want the balance sheet to be and how you get there? -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [15] -------------------------------------------------------------------------------- I think our message is probably consistent with where we've been since we went public in 2012 that there will be times, probably post acquisition, where we may have net debt-to-cap that ticks in or around 40%. And I think on a pro forma basis, that's kind of where we are today. But our immediate goals are to start to delever the business. We did use our ABL to finance a portion of the working capital that we acquired from our inventory, really we acquired from Shell. So I think the long-term goal is to stay inside of that 40%. Obviously, at the end of the year, we were in kind of the mid-20 range. I think that's obviously a long-term goal as we go. But where we are now is we've got our 6 refinery system. We think we're going to generate significant returns this year, and the plan would be the immediate use of cash is to start to delever that balance sheet. And I think that message has stayed consistent since the end of 2012. -------------------------------------------------------------------------------- Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [16] -------------------------------------------------------------------------------- Apologies for just asking you to elaborate, Erik, a little bit, but maybe just 2 points of clarity. So we assume new equity is off the table. And can I also assume that there's no imminent additional acquisitions plan? -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [17] -------------------------------------------------------------------------------- I think at this point, our focus, as we said on the last call, our laser-like focus was on getting Martinez closed. We executed that transaction a couple of weeks ago. I think we put in place a long-term cap structure to ensure that we had a lower interest cost going forward. And I think right now, our focus is on bringing Martinez into the fold, continuing to optimize our business. We have a lot of size and scale today that we didn't have a few weeks ago. And so ultimately, the plan is, let's go ahead and get Martinez into the PBF family. We've got some standardization to do internally, and we should start to see some of those benefits through the end of the year. And ultimately, we are focused on operating our business. -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [18] -------------------------------------------------------------------------------- So the answer to your question... -------------------------------------------------------------------------------- Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [19] -------------------------------------------------------------------------------- So no new equity... -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [20] -------------------------------------------------------------------------------- The answer to your question is, Doug, yes and yes. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- And we'll take our next question from Neil Mehta with Goldman Sachs. -------------------------------------------------------------------------------- Carly S. Davenport, Goldman Sachs Group Inc., Research Division - Business Analyst [22] -------------------------------------------------------------------------------- This is Carly Davenport on for Neil. The first one is just on high-sulfur resid discounts, which have obviously narrowed relative to what we saw in 4Q. So can you talk about the key drivers of that dynamic? And what the path forward in 2020 looks like? And also, I think you mentioned capacity to run 120,000 barrels per day of resid feedstock, so curious what drove the delta versus, I think, the 100,000 barrels per day that you've previously mentioned? -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [23] -------------------------------------------------------------------------------- So a couple of things. In regards to prompt prices, I think if you take a step back and we're reading a lot over the last couple of days in terms of speculation and what prices are saying about the market. I don't think there is a price today that is not affected by what's going on in China. And obviously, Tom mentioned the warm weather compounds that. But the ramifications of the virus and its impact on demand, and then its subsequent resulting cuts in China, that's been through that their refining system. The ripples through that, ripple through every single price and every single crude and every single resid barrel that you can count. And so bringing a micro focus to what it is today, I don't think is necessarily representative of what it will be once the world is through this crisis. In regards to the amount increasing is simply, we added another highly complex refinery. And that refinery has its own ability to run high-sulfur fuel oil. Don't confuse our ability to run with our currently running. Because if the prices move, our actions move with them. And so the market, I would say, and sort of across the spectrum is twisted and knots on everything as a result of what's going on in the world. And we react and so does the rest of the world. -------------------------------------------------------------------------------- Carly S. Davenport, Goldman Sachs Group Inc., Research Division - Business Analyst [24] -------------------------------------------------------------------------------- Great. Very helpful. And then the follow-up is just around cash flow. Was there any working capital impact to call out in 4Q? And then just curious if you have any high-level thoughts on framing out normalized free cash flow power post-Martinez? -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [25] -------------------------------------------------------------------------------- In the fourth quarter, I think our prepared comments just touched on getting inventory back to a normalized level. Our goal is always, at the end of every year, to get back to a certain level. We achieved that target. During the first half of the year, we've built a significant amount of inventory as we were going through accelerated maintenance through the end of the June time frame. And so we felt like we work to that inventory down towards the back end of the back end of the year, we probably saw north of $200 million -- $225 million worth of working capital swing back in the form of cash on the balance sheet in the fourth quarter. That being said, that's our normalized level of working capital. So I think directionally, there are going to be times as we go through maintenance periods where we may be building inventory again. That's normal course of business for us. At the same time, working capital will be affected by not only volumes but price. And so we've seen some relatively volatile price moves here over the past 6 to 8 weeks. Those may continue into the future. And you may see a period where we have lower inventory volumes, but higher prices. Well, that will impact working capital as well. I think our target is always making sure we have ample working capital, ample inventory levels to operate the business well, to take advantage of markets when they are there. But ultimately, the last thing we want to do is actually work ourselves in a position where the refineries cannot operate safely because they don't have enough inventory to operate. So that's kind of on the working capital side of things. From a free cash flow. Look, I think we've never provided any type of guidance in terms of where the market is going to go. Because, quite frankly, we're focused on those variables that we can control, operating expenses, working capital level and CapEx. The 6 refineries that we have in house, now 5 of which are extremely complex, we think -- have a lot of earnings capability. The key piece is where do cracks go and probably most importantly, are we going to start to see a widening -- a continued widening of light heavy differentials? We believe we will. We would like to think the 6 refinery system has more earnings power than our 5 refinery system. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Brad Heffern with RBC. -------------------------------------------------------------------------------- Bradley Barrett Heffern, RBC Capital Markets, Research Division - Analyst [27] -------------------------------------------------------------------------------- I guess another one for Erik, probably. You guys have updated the 2020 throughput guidance to include Martinez, but I think the expense guidance that you gave at the beginning of the year still do not include Martinez. Are there any numbers that you can give us? Or should we expect that those are going to be updated at some point? -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [28] -------------------------------------------------------------------------------- I think at this point, we've had the refinery now for a little under 2 weeks, and we are working through what our plan is for calendar 2020. And I think we're going to be coming out with some updated operating expense numbers, probably the end of this month, beginning of next month. We've got to do a few things internally before we were ready to kind of roll that out. I think our first step was to try to provide some insight into where we think throughput will be based on current set of economics. So we've included that in the press release. -------------------------------------------------------------------------------- Bradley Barrett Heffern, RBC Capital Markets, Research Division - Analyst [29] -------------------------------------------------------------------------------- Okay. Got it. And then you guys talked about how complexity was a benefit in the fourth quarter. But when I look at the East Coast slate, the light crude runs were the highest as far back as my model goes. Was that just barbelling against the HSFO? Or any other explanation you can give for that? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [30] -------------------------------------------------------------------------------- It's a combination of the two. We have the barbell, when we run a significant amount of WCS or any very heavy crude. So we need to keep the top of the towel wet, and that means you got to run a light crude to balance. But at the same time, Bakken was actually a very economic crude on the East Coast of the United States improved by rail and it was actually trading Brent plus 1, Brent plus 2. So that became the best light crude that we could run. -------------------------------------------------------------------------------- Bradley Barrett Heffern, RBC Capital Markets, Research Division - Analyst [31] -------------------------------------------------------------------------------- Okay. Got it. And then if I could just sneak one more in. Just on G&A during the quarter, obviously, it was a pretty large number. Was there anything unusual in that number? And then how should we think about the run rate going forward? -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [32] -------------------------------------------------------------------------------- I think our run rate going forward is consistent with the guidance that we laid out. There are really kind of 2 pieces that will impact that G&A number that I would say are probably onetime. We hope they are ongoing because it means our business is doing well, and that's compensation-related expense. So -- and that's incentive compensation-related expense. We typically do not accrue that expense until the tail end of the year because that's when we have a lot more clarity on where the full year results will be. Ultimately, that's what flowed through. At the same time, we did have stock-based comp that we do not include in our full year guidance. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question will come from Paul Cheng with Scotiabank. -------------------------------------------------------------------------------- Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [34] -------------------------------------------------------------------------------- Matt and Tom, when we're looking at Chalmette, we saw, I think, has been inconsistent and has been challenging, and including this quarter. And what can be done with our non-op capital in order to fix it and get it much better? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [35] -------------------------------------------------------------------------------- I'll start and then Matt can weigh in. First of all, I agree with you. Frankly, we were -- have worked hard on Chalmette, but we haven't gotten to the promised land yet. We did make the move with the coker. That's very much a positive that came up pretty much on time, on budget and is running at rates. The fourth quarter, though, we actually had a pretty significant turnaround in Chalmette in the fourth quarter, and that we shut down its cat feed hydrotreater for -- and that was to effectively change out the catalyst and also do a minor project that will improve margin and increase clean product deal. But it did impact our ability to run fuel oil. We didn't run any fuel oil in Chalmette in the fourth quarter, we are running fuel oil in Chalmette today. So we have a lot of work yet to do, but the combination of some of the investments we've made, restarting to reform and that the hydrotreater and now the coker and this investment that I just talked about on a cat feed hydrotreater, which gives us more capability to run heavier, harsher material, will help the Chalmette refinery. But the big thing with Chalmette, which is like everything else in our system is, we -- if we get the light heavy dips widening out and we get fuel oil and IMOs, that Chalmette will be fine. -------------------------------------------------------------------------------- Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [36] -------------------------------------------------------------------------------- Okay. I think in the fourth quarter, how much is the high-sulfur fuel oil, 150,000 or higher? And how much of that you expect to run, given the current economy in the first quarter? And how that spread between your different system? -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [37] -------------------------------------------------------------------------------- What we ran in the fourth quarter was about 50,000 across our system. I won't comment necessarily on what we expect to run in the first quarter, mainly because I don't have a clue where the market is going to go, and we're simply going to react to the market every single day. As I said, we've -- over the fourth quarter and into the first quarter, we've been able to demonstrate to ourselves, what we're able to do, and we're in a position to do it, but we'll react to the market. -------------------------------------------------------------------------------- Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [38] -------------------------------------------------------------------------------- And Matt, in the fourth quarter, everything that's run in Delaware City are the high-sulfur fuel oil? -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [39] -------------------------------------------------------------------------------- Not 100% that was run in Delaware City, no. But we were able to run some in Paulsboro as well. -------------------------------------------------------------------------------- Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [40] -------------------------------------------------------------------------------- Oh, in Paulsboro also? And that -- when I looking at your -- I mean just simplistically, when you show the crude and feedstock percentage, is the high-sulfur fuel oil you nominate together as a part of the heavy? Or you nominate together as part of the other feedstock and brands? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [41] -------------------------------------------------------------------------------- The -- actually, what we show it at the different refineries is different. In some cases, it's shown as a feedstock in with the crude. And there's another piece that it's in the other feedstocks. But we've obviously -- the total that we run is going to be -- or what we run is going to be a total of those 2 areas. That makes sense to you? So in one refinery... -------------------------------------------------------------------------------- Paul Cheng, Scotiabank Global Banking and Markets, Research Division - Research Analyst [42] -------------------------------------------------------------------------------- But we can't just -- based on what you are reporting here, to be able to tell whether that you have increased or decreased the one-off high-sulfur fuel oil? -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [43] -------------------------------------------------------------------------------- No. You have to rely on us telling you. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- And our next question will come from Phil Gresh with JPMorgan. -------------------------------------------------------------------------------- Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [45] -------------------------------------------------------------------------------- Erik, I know you're going to wait to give a specific cost guidance on 2020, but perhaps you could remind us on the capital spending side, how we should think about a normalized CapEx run rate across your system, as Martinez is in there now, not specifically this year but looking out? -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [46] -------------------------------------------------------------------------------- Just -- well, I can give you -- I'll let Erik to go to the out years. And I don't think it's inconsistent with what we talked about. But for this year, in particular, we've done a fair amount of work over the last couple of weeks, and it only has been a couple of weeks. But in terms of what we said in June, I think we said $75 million for 2020, I'd moderate that slightly, it's probably a range of $75 million to $90 million. And then there is a project this year, which is a strategic project in many ways. And we are able to work it with Shell where they are actually delivering new reactors for cat feed hydrotreater. We're going to look to get those reactors in quicker than maybe otherwise because they actually come with a return, knowing they will further increase yields across our conversion units. So that's probably another incremental $10 million of spend this year, but that will come with some benefits on return. In regards to our long-term forecasting, I don't think anything's changed. -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [47] -------------------------------------------------------------------------------- No. It's consistent with what we laid out in the guidance last month. -------------------------------------------------------------------------------- Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [48] -------------------------------------------------------------------------------- Okay. And then just one follow-up question. I don't mean to belabor the high-sulfur fuel oil plant. I totally understand that there's a lot going on that's pretty dynamic with the virus and demand effects. But I guess I would have thought if demand generally is weaker, that, that would mean prices would be weaker, but obviously, prices have been stronger. So I guess, is it the dynamic here that just the refineries evolve chase to kind of the same high-sulfur fuel oil feedstock opportunity, and that has been the main driver of the strength. And now that we're going to see a rotation potentially back to heavy crude that, that would soften back up? Is that how you see this playing out? -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [49] -------------------------------------------------------------------------------- Not entirely and that certainly, that has an impact. I'm not confused on that, but you also have other impacts, which is a lot less high-sulfur fuel oil is being produced because refineries were running less. So when we say, sort of every number is sort of tortured by the effects going on. It becomes very, very difficult. But you certainly have a supply of high-sulfur fuel oil to market declining as a result of run cuts. -------------------------------------------------------------------------------- Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [50] -------------------------------------------------------------------------------- Okay. But to be clear, Tom, you had mentioned that you don't think folks are out there cheating and still running high-sulfur fuel oil. So it's creating excess demand right now. -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [51] -------------------------------------------------------------------------------- Yes, I wouldn't believe that's the reason for this. I would say, in addition to the comments that Matt made, and a lot of this is demand, shipping industry is not immune to what's going on. So there's probably less consumption of high-sulfur fuel oil or very low-sulfur fuel oil, which has now started to come off from the glorious heights that they had. And then there is -- certainly, as we talked about in our prepared comments, there has been some movement on the part of medium conversion refiners who do not have resid destruction capability. In the fourth quarter, we're getting that clock cleaned, that's a technical term. And so what they had -- what they started to do was try to lighten up to the extent that they could, which decreases the amount of fuel oil production. I suspect that you're going to see even them, maybe go back the other way, if these prices were to remain. But I don't think they will. I think it will widen back out. -------------------------------------------------------------------------------- Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [52] -------------------------------------------------------------------------------- Okay. Yes, a lot of moving pieces. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Our next question will come from Paul Sankey with Mizuho. -------------------------------------------------------------------------------- Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [54] -------------------------------------------------------------------------------- I was just wondering, the way markets are shifting here, I was just wanted you to remind us, if you would, about the extent to which you hedge. And whether you would be doing that and why you would? And I think if you could continue into reminding us how much difference contango versus backwardation makes given the shift in the curve, would be question one. -------------------------------------------------------------------------------- Matthew C. Lucey, PBF Energy Inc - President [55] -------------------------------------------------------------------------------- Just in regards to how we hedge our portfolio. We have a fairly simple policy, which is our investors are investing in the crack spread, and we're trying to deliver that across a number of pads and regions. So we're not actively hedging cracks or anything of that nature. What we'll do is we have a baseline of inventory. And to the degree we build from that, we'll take hedge positions to bring us down or obviously, vice versa, but we don't play the game of hedging cracks in a material way. Tom, I don't know if you want to comment on contango and backwardation? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [56] -------------------------------------------------------------------------------- We just watch it, Paul. And obviously, it's shifting now and is now an incentive as we get data where the industry might look to start floating stuff on the water, and we'll pay attention. But we really don't use that as a metric to change our business. I would go back -- our business model would go back on the hedging part of the equation, and that is absolutely right. We don't play speculative games on the crack because of the investors. We -- people who buy PBF stock, as you well know, they buy the crack. They're investing in a graft. What we do on long-haul or even make some short-haul crudes that we buy, we effectively hedge to manage the basis. So we lock in the price of the crudes when we get -- when we buy, and so do we get -- by the time it lands, that's the number we've got. That's the main area that we hedge. -------------------------------------------------------------------------------- C. Erik Young, PBF Energy Inc - Senior VP & CFO [57] -------------------------------------------------------------------------------- And Paul, I think in the fourth quarter, we saw about $1.5 million worth of derivative-related gain. So typically, what you would see is, if there is a gain, you would see the offset on the physical side of the market and vice versa. -------------------------------------------------------------------------------- Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [58] -------------------------------------------------------------------------------- Yes. I mean for what it's worth, we totally support your strategy and agree with your rationale for it. On the throughputs -- my follow-up is just on the throughputs, we're a bit light here, it seems for Q1. Can you talk about Q1, the rest of the year? And any -- if you've sort of referenced this already, but any views on overall industry throughputs, given the situation that we're seeing? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [59] -------------------------------------------------------------------------------- I'll talk about that. And I think at your conference -- video conference earlier in the year, we -- I kind of put this out there. I actually think that we're obviously going to have lowest throughputs here during the crisis that is being managed or attempting to be managed. But that ultimately will pass. But to a large extent, I think there's going to be pressure, especially as we come out of this and if IMO comes back and you start to see spreads on the light heavy crudes, and you start to see heavy fuel oil, the clean dirty spread. The clean dirty spread was up at 40%, it's 25% now, but that's still quite a bit higher than it was last year. But if it widens out, there's going to be pressure on some of the inefficient refineries. So the refineries that are running these medium sour crudes and making fuel. And so I wouldn't be surprised that you have continuing run cuts throughout this year and maybe even some consolidation. So I view this as -- I don't know that we're going to see the same utilization worldwide that we've seen in the past, until the new refineries come on, then, okay. And that will change the paradigm. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- And your final question comes from Jason Gabelman with Cowen. -------------------------------------------------------------------------------- Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - Director [61] -------------------------------------------------------------------------------- I understand that and appreciate the fact that these IMO benefits have been delayed a bit. But I guess, I'm wondering what your thoughts are on the duration of the benefits, both on the light heavy crude quality spreads and on the product margin upside. And I ask this with the thought that there's going to be a lot of refining capacity coming online towards the end of this year, that could potentially be using heavy sour, medium sour crudes and impact the crude quality spreads a bit? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [62] -------------------------------------------------------------------------------- Yes, there's two -- a couple of pieces of that. It's certainly the case, and there's obviously deliberate and conscious constraint of medium heavy crudes that are underway and being exacerbated by the sanctions that have been imposed by Iran and Venezuela, et cetera. But right now, I would still say that we would expect IMO to have an impact. And after we get through the virus, and it already is, but that will affect the light heavy spreads. Now on product demand, it's interesting. And as somebody referenced it, I haven't seen a situation where we had such volatility and so many knobs to turn to stay current with the marketplace. So what is -- some of our peers have referenced this. Right now, we have actually had had economic incentives to almost run a refinery backwards. You take VGO that was going into a cat cracker, which will produce gasoline and diesel and some of our competitors have announced that they were actually selling that, not running it to a cat cracker, by the way, we're doing it as well. And instead of running it and producing gasoline and distillate, keeping it as VGO, and then selling VGO into a high-sulfer fuel oil -- a very low-sulfur fuel oil pool. So what did I just say, well, you're probably going to put a floor under production on gasoline and distillate, if the cracks are bad. And again, the markets will rebalance, and I think that we'll be fine. -------------------------------------------------------------------------------- Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - Director [63] -------------------------------------------------------------------------------- All right. And just a follow-up. I know we've touched on running high-sulfur fuel oil a bit. And I think that, as an analyst, it's tough to understand what the economics of that are. So I guess, very simply, in today's environment, where prices are, doesn't make sense to run high-sulfur fuel oil? -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [64] -------------------------------------------------------------------------------- The answer -- short answer to your question is no. So on a go-forward basis, if these prices saying, we won't be running the volumes that we will switch out. And again, the beauty here is this kit has got enough optionality that I can respond pretty quickly to any change in the economic environment. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- And now I would like to turn the call back over to Mr. Tom Nimbley for closing remarks. -------------------------------------------------------------------------------- Thomas J. Nimbley, PBF Energy Inc - CEO & Chairman [66] -------------------------------------------------------------------------------- Thank you very much for joining us on the call today, and we look forward to having the first quarter call, and hopefully, we'll have to put this pandemic behind us. It's a terrible thing for the people in that process. Thank you. Have a great day. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- And this does conclude today's program. Thank you for your participation. You may disconnect at any time.