Q2 2023 Delek US Holdings Inc Earnings Call
Participants
Avigal Soreq; President, CEO & Director; Delek US Holdings, Inc.
Joseph Israel; EVP of Operations; Delek US Holdings, Inc.
Mark Hobbs; EVP of Corporate Development; Delek US Holdings, Inc.
Reuven Avraham Spiegel; Executive VP & CFO; Delek US Holdings, Inc.
Rosy Zuklic; Head of IR; Delek US Holdings, Inc.
Douglas George Blyth Leggate; MD and Head of US Oil & Gas Equity Research; BofA Securities, Research Division
Jason Daniel Gabelman; Director & Analyst; TD Cowen, Research Division
Manav Gupta; Analyst; UBS Investment Bank, Research Division
Matthew Robert Lovseth Blair; MD of Refiners, Chemicals & Renewable Fuels Research; Tudor, Pickering, Holt & Co. Securities, LLC, Research Division
Paul Cheng; Analyst; Scotiabank Global Banking and Markets, Research Division
Roger David Read; MD & Senior Equity Research Analyst; Wells Fargo Securities, LLC, Research Division
Ryan M. Todd; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Unidentified Analyst
Presentation
Operator
Good morning, and welcome to the Delek US second quarter earnings conference call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Rosy Zuklic, Vice President of Investor Relations. Please go ahead.
Rosy Zuklic
Good morning, and welcome to the Delek US second quarter earnings conference call. Participants on today's call will include Avigal Soreq, President and CEO; Joseph Israel, EVP, Operations; Reuven Spiegel, EVP and Chief Financial Officer; Mark Hobbs, EVP, Corporate Development.
Today's presentation material can be found on the Investor Relations section of the Delek US website. Slide 2 contains our safe harbor statement regarding forward-looking statements. We'll be making forward-looking statements during today's call. These statements involve risks and uncertainties that may cause actual results to differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. The company assumes no obligation to update any forward-looking statements.
I will now turn the call over to Avigal for opening remarks.
Avigal Soreq
Good morning, and thank you for joining us today. During the second quarter, we delivered solid financial results. Our team executed well and stayed focused on our key objectives. We continue to do what we said we would do. We kept our commitment to return value to shareholders. We target a dividend that is competitive and sustainable. Given the market outlook, our share buyback program give us the ability to further reward our investors in the near and mid-term.
Year-to-date, we have returned $95 million towards dividend and share buybacks. Since June of last year to the end of this week, we have returned close to $275 million to investors. We also recognize there is a value in a strong balance sheet and financial flexibility. We continue to improve the efficiency of our cost structure. G&A improved the quarter and OpEx will follow. I'm pleased with our progress. Rosy will give more details in the financial section.
Turning to the operation during the quarter. We ran well through most of our systems. Improving the safety and reliability of our refining system is fundamental. During the quarter, we made steps in the right direction. We continue to make good progress. Our refining segment reflects strong contribution for our wholesale and asphalt businesses, driven by local market demand. In addition, our wholesale business benefited from higher location differentials. We see these trends continuing.
From a macro standpoint, in the month of July, our benchmark U.S. Gulf Coast tax spread improved by approximately $5 per barrel, which further improved our outlook for them. Crude is also a good story for us. We see the heavy light differential continue to compress, which is favorable for our configuration as our system is fully balanced at 95% light with no excess naphtha.
In addition, with the growth we see in the Permian production, we expect to be favorable in the Midland differential. Our logistics segment delivered strong results with adjusted EBITDA of $91 million this quarter. Our [prime acreage] is outperforming the Permian Basin. We now forecast around $100 million a quarter from this segment starting in Q4 of this year. Retail also supported a solid quarter. This was driven by higher fuel volume, increased average margin and higher inside store sales.
In closing, our team continued to successfully advance our strategy. I want to thank each and every team member for their contribution. There is still value to unlock as we continue to execute on our strategic initiative.
Now I would like to turn the call over to Joseph, who will provide additional color on our operation.
Joseph Israel
Thank you, Avigal. In the second quarter, our team safely processed 295,000 barrels per day of total throughput supported by favorable market conditions in our markets. The refining system generated $201 million of adjusted EBITDA.
In Tyler, our throughput in the second quarter was approximately 77,000 barrels per day. Production margin in the quarter was $13.87 per barrel and operating expenses were $3.78 per barrel. In the third quarter, the estimated total throughput in Tyler is in the 74,000 barrels to 78,000 barrels per day range. In El Dorado, total throughput in the quarter was approximately 73,000 barrels per day and short of our guidance, mainly due to a third-party transformer failure, which led to a power outage related shutdown. Our production margin was $6.06 per barrel, including an unfavorable impact of approximately $1.50 per barrel due to the power outage. Operating expenses were $5 per barrel. Estimated throughput for the third quarter is in the 76,000 barrels to 80,000 barrels per day range.
In Big Spring, total throughput for the quarter was approximately 62,000 barrels per day, approximately 8,000 barrels per day under our guidance, mostly due to unplanned diesel hydrotreater catalyst change and vacuum unit maintenance. Production margin was $11.55 per barrel, including an estimated unfavorable $4.30 per barrel impact from the unplanned events.
Operating expenses in Big Spring were $8.91 per barrel, including approximately $0.50 per barrel of the unplanned maintenance activities. To support safe and reliable operations in Big Spring, we are investing this year in mechanical integrity and sustaining regulatory items. In the second quarter, approximately $2.30 per barrel of our reported operating expense were related to that important initiative.
Our planned cost going forward is approximately $1 per barrel through the third and fourth quarter of this year. The estimated third quarter throughput in Big Spring is in the 64,000 barrels to 70,000 barrels per day range.
In Krotz Springs, total throughput was approximately 83,000 barrels per day. Our production margin was $6.21 per barrel, and operating expenses were $4.74 per barrel. Plant throughput in the third quarter is in the 78,000 barrels to 82,000 barrels per day range. Compared with the first quarter, the system benefited mainly from the improved gasoline crack spreads and reduced RVO cost in the second quarter while jet fuel and NGL crack spread provided some headwinds.
Strong asphalt and wholesale marketing added $82 million to our second quarter Refining segment earnings outside of our reported margins at each of the refineries and their associated capture rates. Approximately $30 million of that added value was generated in Krotz Springs, driven by light cycle oil, high sulfur diesel and alkylate sales. $14 million were generated by Tyler wholesale marketing.
Approximately $27 million were generated in El Dorado and close to $11 million in Big Spring, both driven by asphalt and wholesale marketing. Overall, estimated system throughput in the third quarter is in the 292,000 barrels to 310,000 barrels per day range. We continue to focus on safety, reliability and environmental compliance as our top priorities, and we expect margin capture and cost performance to follow.
With regards to DKL, as mentioned by Avigal, we are clearly beneficiaries of the strong Permian Basin growth also at the logistics business level. The Midland gathering system volumes have more than doubled from a year ago, and our team has demonstrated solid operations and growth, which are well reflected in the financial results.
I will now turn the call over to Rosy for the financial variance.
Rosy Zuklic
Thanks, Joseph. I'll start on Slide 5 of our presentation material. For the second quarter of 2023, Delek US had a net loss of $8 million or $0.13 per share. Adjusted net income was $65 million or $1 per share, and adjusted EBITDA was $259 million. Cash flow from operations was $95 million.
On Slide 6, we provide a waterfall of our adjusted EBITDA by segment from the first quarter to the second quarter of 2023. The decrease was primarily from lower results in refining, largely reflecting the decrease in crack spreads. The Gulf Coast 5-3-2 crack averaged $25.54 for the quarter, down from $32.55 in the first quarter. Strong performance from our wholesale and asphalt businesses as well as draws on inventory at quarter end, partly offset the lower cracks. Retail improved versus last quarter as crude prices fell, improving pricing at the retail level. In addition, volumes were higher, consistent with the season.
Moving to Slide 7 to discuss cash flow. We drew $43 million in cash during the quarter, ending the second quarter with $822 million in cash. The $95 million in operating activities includes approximately $80 million of cash outflows for the inventory draws executed late in the quarter. The timing of the inventory draw is the primary reason net debt increased this quarter. We received the cash for these sales in July.
Investing activities of $58 million is mainly for capital expenditures. Financing activities of $81 million primarily reflects return to shareholders. This includes $40 million in buybacks, $15 million in dividends and $10 million in distribution payments.
On Slide 8, we show capital expenditures. Year-to-date, we have spent $253 million. We estimate the full year to remain at approximately $350 million. Net debt is broken out between Delek and Delek Logistics on Slide 9. During the quarter, consolidated net debt increased by $79 million.
The last slide covers outlook items for the third quarter of 2023. In addition to the throughput guidance Joseph provided, we expect operating expenses to be between $210 million and $220 million. This includes $10 million to $15 million related to the mechanical integrity work at the Big Spring refinery, G&A to be between $65 million and $70 million, D&A to be between $85 million and $90 million, and we expect net interest expense to be between $80 million and $85 million.
Before we open the line for questions, a comment on our cost initiative efforts. Second quarter G&A as reflected on the income statement is $75.8 million. This includes $4.3 million of restructuring costs. Excluding this onetime expense, adjusted G&A for second quarter was in line with the first quarter of 2023. As provided in the guidance, we expect third quarter G&A to be lower in the range of $65 million to $70 million and now expect fourth quarter 2023 to be approximately $65 million. We are on track to meet our annual run rate cost savings of $90 million to $100 million as we exit 2024.
We will now open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Manav Gupta with UBS.
Manav Gupta
My only question here is the other inventory impacts for the big number, about $96 million. Can you help us understand all the components that went into that $96 million other inventory number?
Avigal Soreq
Manav, you know that we are working at FIFO and the whole point of the inventory is to bring us back to LIFO. So when we are showing the adjusted EBITDA at $260, that's the way to compare ourselves to our peers. So that's the headline here, right? The headline is we are FIFO, we want to go back to LIFO to be comparable. That's what we actually did on the adjustment. Simple and easy.
Manav Gupta
So just to be clear, no other adjustments just from FIFO into LIFO?
Avigal Soreq
Correct.
Operator
The next question is from Matthew Blair with Tudor, Pickering, Holt
Matthew Robert Lovseth Blair
Is there any update to the sum of the parts efforts? Is the goal still to get the DKL debt off the DK balance sheet? Are there some smaller things you can do in the meantime? And is there any update on the timing of all this?
Avigal Soreq
Matt, I'm going to start and I'm going to let Mark Hobbs who is sitting here with me to follow. But just to give you a kind of high-level comments, we are extremely focused on some of the management compensation related to sum of the parts. And we are very well aware for the inherent value of our assets, many logistics, retail, but also WTW and the biodiesel plant we have, and we are actively working to execute the plan. But then I would like Mark to --
Mark Hobbs
Sure, Avigal. As we've said in the past, and this is still the case, we continue to believe that our current share price does not fully reflect the value of our respective business segments. And evaluating the sum of the parts, we've analyzed and looked at all the options that are available to us, and we do believe that there's a clear path on the actions that we need to take, and we are working hard to execute on that plan.
We're not in a position to announce anything at this time, but I can tell you that we're working hard on the initiative. And it's complicated, it takes time. We're not going to rush into anything unlocking the value across any of our business segments, as we've talked about in the past. But we are committed to unlocking the value. We're committed to doing what's in the best interest of all of our stakeholders.
And so, when you think about whether it's across midstream, retail, Wink to Webster, all the things that we've discussed in the past, all of those things are things that we're evaluating. And as I said, we do have a clear path forward that we're working on. I'll leave it at that.
Matthew Robert Lovseth Blair
Okay. Sounds good. And then the trading and supply contribution of $115 million in Q2, some quite large, especially relative to the loss in Q1, could you talk about what drove that gain? For example, was the wholesale side, was that -- was that due to better like retail fundamentals? And then the asphalt contribution, was that due to just the falling crude price in the quarter? And could you also talk about how that's trending in Q3? And then finally, would you say that this is your regular business operations or does it involve taking some risk on your side?
Avigal Soreq
So a very comprehensive question. I will try to give you as much clarity as we possibly can. I think Joseph did a great job on his prepared remarks of giving some color around $82 million of the $114 million, and actually outlined at by asset and by business stream. All of those assets, we see them as a core business or assets that support the refinery. So it's very well -- something that it's repeatable but now I'll let -- Joseph got into that area very, very well, and I will let him add some comments on that as well. Please, Joseph.
Joseph Israel
Yes, Matt. We mentioned the numbers per site in our prepared remarks. Let me add some information as we are making progress with our visibility here and transparency. So, we move around 210,000 barrels per day of light products through our rack. In a typical quarter, we make $45 million to $50 million of contribution coming from the wholesale marketing. Obviously, different things create some volatility ups and downs. This quarter was really good at $60 million of the $82 million was wholesale related. Most of it is really just the location advantage that we have in the markets we operate in.
And then on the asphalt side, we do have 750,000 tonnes per year type of asphalt. Approximately 75% of it is in the El Dorado driven by Oklahoma, Arkansas, [potent] type of pricing, 25% left is more of a Big Spring.
In a good quarter, obviously, in the season, we're making approximately $20 million of contribution. And in the off-season and the way a transfer price work, it's probably around $5 million of positive contribution. This will give you a good start for the modeling efforts. I hope you all see its real. The numbers outside the $82 million are more inventories and derivative type of numbers. Did I answer your question, Matt?
Matthew Robert Lovseth Blair
Got it. Yes.
Operator
The next question is from Neil Mehta with Goldman Sachs.
Unidentified Analyst
This is (inaudible) on for Neil Mehta. So the first question here is on the more macro side of things. Just any views you can share on the current product market and any additional thoughts around Midland spreads and where differentials may be trending?
Avigal Soreq
(inaudible) first of all, thanks so much for joining us today. We see a trend positive like we see diesel close to a 5-year low figure lane. At 5-year low, we see demand pick up. We see the recession field that was very well during the first half of the year fading out just a little bit that also improved the cost spread for the right way. We see heavy turnaround season coming Q3 that we are not Q3 and Q4, that we are not part of that as you're very well aware.
So it seems that we see the heavy light differential compressing, which is obviously going our way. So it seems that for -- it's a good day to be refinanced those days. We see that trend continue. We see strong cost spread. So we are very positive around that.
On Midland differentials, I think when the market is a bit underestimated production and what can it make to differential, at some point, I'm sure that we'll see that movement and widening the middle inflation, we'll the production coming up, which is a positive. We see that on our own acreage. Obviously, in our own acreage, we were more than doubling versus last year. But generally speaking, we see the acreage -- Midland production coming up. So, it's a very positive news for us as well. So we are well positioned. Our configuration is good for this time being, and the demand looks solid and the inventory looks lower, very constructive.
Unidentified Analyst
That's very helpful color. And then the follow-up here is unrelated, but just wanted to ask about shareholder returns and the $25 million of share repurchases seen here subsequent to quarter end. Can you share any thoughts around the buyback cadence and what you may be seeing from either the macro or in the current share price that is contributing to the repurchase levels?
Avigal Soreq
Yes, I will give more broader view around capital allocation. So we see a dividend, first of all, competitive and sustainable through the cycle, and we are planning to maintain it and to hold that. And if we have opportunity in the future even to upgrade that, so that's something we are looking pretty consistently.
Obviously, we gave guidance for buyback, and if there are opportunities, we'll absolutely executing them. But we have also a balanced approach between buyback and dividend and the debt reduction. So again, we are seeing a constructive 2023, which allow us to have a good return to investors in all the three ways that I mentioned.
Operator
The next question is from Doug Leggate with Bank of America.
Douglas George Blyth Leggate
Avigal or Joe, I'm not sure who wants to take this, but Joe, you've been there now for -- you've been there for about 4 months now. You've had obviously a pretty good chance to take a look at the operations by asset. I just wonder if you could share your high-level thoughts on what you might do differently going forward? What have you seen that provides margin opportunities, cost reduction opportunities or maybe even portfolio high grading opportunities? Any color you could offer from your observation? And I've got a follow-up, please.
Avigal Soreq
So Doug, that's a great question for Joseph. He's excited about it. Thanks for joining us today. Please, Joseph.
Joseph Israel
Thank you, Doug. And I'll take the operations angle of it. So we spoke about the 2 events in Big Spring this quarter, right? So we made the appropriate repairs and we moved on. But I think more importantly, we have shifted gears with a much more proactive reliability approach here. And we are fully, fully focused on 3 key aspects of our operations: people, processes and the equipment.
With regards to people, we were able to fill key positions in the past couple of months with really strong industry talents. And with more people around to understand what good looks like, the foundation is very sound to really build on it, right? Procedures, training, very important, especially with the young force, workforce. And really lastly, equipment. In our prepared remarks, we discussed the $2.3 per barrel spent in 2Q under mechanical integrity. Most of the scope has been around inspection and eliminations of bar actors really to mitigate our risk. The plan is to continue in this second half of '23 with approximately $1 per barrel of budget to knock the high-priority items out really off the list.
When you look back, Delek has gone through a similar program in El Dorado in the past with really good results. El Dorado really runs well this days. In case some mechanical availability has trended up in the past couple of years, and you can see high rates more consistently. I personally ran Big Spring as a Chief Operating Officer 15 years ago under a different company. And I know what Big Spring and its workforce are capable of. So take everything together, Doug, I'm very confident about our direction here and I'm sure reliability and capture will follow.
Douglas George Blyth Leggate
I appreciate the color, Joseph. My follow-up -- this might actually be for Rosy, but whoever wants to try and tackle it. The trading -- the supply and trading contribution has already been addressed by a number of my peers. But I want to ask about the July movement. I mean on a go-forward basis, is there a different level, a different magnitude that we should be thinking about or do you consider what's happened here recently, including July to be more one-off in nature? Just how should we think about that going forward?
Avigal Soreq
Doug, it's Avigal. So Joseph was trying to give some highlights around how to look at it going forward and most of the assets over there are sustainable and enjoying form in each market. But I'm sure that once you read the Joseph's answer, it will make perfectly sense. And if not, I'm sure Rosy will love to follow up.
Joseph Israel
We want you guys to understand 2Q results, and we want you to be able to model them going forward and Rosy has all the tools to support you there.
Operator
The next question is from Ryan Todd with Piper Sandler.
Ryan M. Todd
Maybe a question on CapEx to start. I know 2023 CapEx is frontend-loaded because of the turnaround work. But are you still on pace to hit your $350 million target for 2023? And then I know it's a little early, but as you look forward to 2024, how are you thinking about the puts and takes in terms of what the 2024 budget may look like?
Avigal Soreq
We said that the $350 million is the number that we're at. And therefore, 2024 numbers, it's a bit early to talk about it. We're obviously just starting budgeting now. So I'm sure that we will be able to disclose the data on in the process. So, thanks for the great question.
Ryan M. Todd
And I guess one on the expense side. Operating expense and corporate expense were both lower than we expected this quarter. I know you talked some about the G&A trends expected through the end of the year. OpEx back up a little higher on guidance in 3Q. I mean can you talk about directionally what you saw in second quarter, the trend on operating expenses going forward and how all of this fits within the context of your cost reduction and efficiency goals? How far along are you on hitting those targets?
Avigal Soreq
Yes, absolutely. So Reuven here, the CFO, will give some highlights around the what we call internally zero-based budget. And then maybe Joseph will add some comments around OpEx. Please, Reuven.
Reuven Avraham Spiegel
So during the discovery process, we looked at DK and DKL, and we challenged the organization structures and how we can streamline them by using technology implementation, too many functions, various operational initiatives such as stream and system improvement, heater health and maintenance and reliability. In addition to that, we worked on optimizing our transportation segment, tracking specifically. And we divided the execution to 3 stages as some of the projects require more preparation and technology implementation and execution time.
Phase 1 was executed in June with most of the impact on the G&A. We are working on execution on Phase 2 in the fourth quarter and Phase 3 in the first half of '24. For '23, as Rosy said in her prepared remarks, we expect to achieve approximately $46 million in cost savings, a split of 40% to 60% between G&A and operations. And those initiatives plus the one plan for the first half of '24 will put us on track for a run rate of approximately $100 million savings.
Joseph Israel
I'll take it from the OpEx and the sites level. $5.43 per barrel might be competitive when you look into peers, but it's really not acceptable for us. we find our run rate closer to the $4.75 per barrel to $5 per barrel type of range for our entire system. Obviously, in 2Q, the elephant in the room was Big Spring.
I want to make sure we all know how to model that going forward. The $0.50 per barrel related to the outage is nonrecurring, and then the $2.30 per barrel related to the mechanical integrity nonrecurring. You take those from the $8.90 that we reported, and we are at approximately $6. $6 is still $1 per barrel higher than the run rate in Big Spring. Most of it is really just the low throughput and the inefficiencies around it, right? You cannot bring down variable cost as efficiently. You cannot turn down (inaudible) et cetera. So $5 per barrel in Big Spring run rate. El Dorado, also with the average type of work was approximately $1 per barrel higher than the run rate. Krotz and Tyler had a good quarter in the range.
Ryan M. Todd
And as you think about the 3Q guidance, is the -- are you implying that those are still relatively elevated in the third quarter? Or is there anything else driving the OpEx guidance there?
Joseph Israel
We mentioned the dollar per barrel left in Big Spring or the second half. So taking the $5 in Big Spring, add $1, so $6 there is probably a good way to go, and the rest of the system here should be in the run rate.
Operator
The next question is from Roger Read with Wells Fargo.
Roger David Read
Yes. I think to go down, continue down the road on the cost savings, but maybe thinking even the next steps, if it's not too premature to ask, but obviously you want to get your costs under control, you want to run well. But have you started the look at or consider something on the optimization side? I know feedstock-wise, there's not as much flexibility for you given inland units and pipelines in a lot of cases.
But to the extent you could do something on the feedstock side or anything you can do on sort of the yield or commerciality. So I was just curious how that's starting to shape up.
Avigal Soreq
Roger, obviously, once we announce something and executing something we are thinking about the next step. So we have other plans coming up, but that we are not going to give numbers and time lines of that just yet. But we have a few other initiatives that we are working extremely diligently in order to be able to share with you guys. And once we feel is it's mature, like the zero-based budget process was before is mature, we will come back to you with another leg of initiatives, the numbers and be more diligent around that and specific. So, the answer is yes, and we'll come back to you when it's ready. Joseph, you want to add to that?
Joseph Israel
Yes. So correcting our reliability, Roger, is definitely our best project, right? So we are doing it, and we feel good about it. For the '24 CapEx, we will bring some great ideas. We have several projects that are 50% and up in IRR and return. Most of them are refining related like cryo units and liquid recovery type of upside for our plants. We do have those optimization projects sign up for us in the next year to 2 years to execute.
Roger David Read
Okay. That's helpful. I think my other question is along the lines of increasing the dividend. Yet if we look at sort of the cash flow statement, balance sheet this quarter, it didn't really -- maybe I should say, really, it didn't meet necessarily justify an increase in the dividend. So I'm just curious, Avigal, what's going on behind the numbers that provides the confidence to raise the dividend here?
Avigal Soreq
So I will start, and then I will let Reuven follow. So we see a very strong cash environment, we see our performance coming very well. We see the -- cash flow also can down just a little bit because of timing of product receivable and payable. So, it's nothing that we are looking on that too much. It's just a minor tweaks in a few days. So it doesn't need to change our view of the business, which isn't -- that's the reason we are feel confident, very confident around the business and the ability to increase dividend. Reuven --
Reuven Avraham Spiegel
Well, just one add on. The June 30 is the cutoff date. With the inventory draw of $82 million in the last couple of days of the quarter, we had the EUR 82 million already coming in July. So that kind of made us determine that there should not be any change in our policy.
Roger David Read
Okay. So cash flows are stronger than what they look like in terms of the cutoff there.
Avigal Soreq
Correct.
Roger David Read
Appreciate that. Thank you.
Operator
The next question is from Paul Cheng with Scotiabank.
Paul Cheng
I think that -- 2 questions. One, we showed -- with all your cost reduction initiative and all that, so when we're looking at what you granted the corporate adjusted EBITDA on a -- maybe they're looking out by 2024, what will be the kind of normal run rate that we should assume in that line?
Avigal Soreq
Paul, it's Avigal. So if we are looking on the G&A basis, if you remember, like 2 quarters ago, we had a guidance that we're going to be 70% or lower for exiting the year. Now we upgrade the guidance, and we are seeing a better number. We're probably going to come back to you next quarter with some more tighter guidance for 2024. In terms of G&A, it's a bit early. We see that -- we want to see that all the projects that we are lining up actually materialize the way we wanted. And then we're probably going to give you more tight guidance for SG&A for 2024.
Paul Cheng
Okay. And second one is also real short. Have you made a decision or that when that you will make a decision on (inaudible) the whether you're going to make the investment there in the Paramount refinery in California? And also that one of your peers recently designed to get on the inventory arrangement with their vendor and because they're saying that the cost, the financing cost, is much higher and then they will be able to do better by themselves. So has the company consider whether you should continue to have that inventory management arrangement from the outside?
Avigal Soreq
So let me answer the first part and the second, second. So in terms of Bakersfield and the renewable diesel over there, it's obviously a free option, and we are obviously looking on that. At this point, we didn't make any decisions. We didn't make any decision, but once there is a decision around that, we'll obviously let you know. At this point, it's not a major item on our lease. It's a free option. If opportunity presents itself, we will definitely be there.
Around the intermediate agreement, we obviously improve our situation by moving from one vendor to another. We are looking on the capital allocation extensively. And if we'll assume that that we have a better way, we'll act around it. Obviously, that agreement is shorter. And the reason shorter is part of that is to allow flexibility in the future if we choose to.
Paul Cheng
And Avigal for the option on the Bakersfield steel facility, is there a timeline in terms of when do you have to make a decision or that you lose the option or is between? Can you remind us?
Avigal Soreq
There is no time line for that. The options exist, and there is no real time line for us to make a decision. It's more when the opportunity present itself, if we'll find it constructive and beneficial for shareholders, we do it and vice versa.
Operator
The next question is from Jason Gabelman with Cowen.
Jason Daniel Gabelman
I just wanted to clarify something on Paul's question. Is the Bakersfield renewable diesel asset, is that up and running? Because I thought there was the kind of option is once it's up and running. So just to clarify that.
Avigal Soreq
No, it's not. Still on planning.
Jason Daniel Gabelman
Okay. All right. My question -- the first one is going back to the trading supply and other line item. And I appreciate all the color and the run rate guidance forward is helpful. But I guess if I look last year, 1Q '22 was over negative $100 million each quarter versus kind of the $60 million positive run rate you would expect. So I was hoping you could elaborate on what drove that massive delta between the expected run rate and what you reported in the first half of '22 and even in 1Q '23. That would be helpful.
Avigal Soreq
So we changed a few ways. We are showing DKTS in the last 1.5 years or so. So I think that the guidance that Joseph gave going forward is more going to be -- allow you to model that better going forward versus looking on the past. In the past, it had different objectives around the entities. And when we streamline processes, we made it a bit more clear. And that's part of the reasoning that Joseph gave a much more clear guidance around that. We can all feel comfortable with around the asset. And there is a big part of that is sustainable.
Jason Daniel Gabelman
Okay. So if I understand what you're saying, there were other activities within that bucket that you're no longer engaging in to the same extent you were over the past 1.5 years. Is that fair?
Avigal Soreq
That's fair.
Jason Daniel Gabelman
Okay. And then my follow-up is just on the strategic reorg. Mark, thanks for the color. Should we expect an update before the end of the year? Is that a reasonable expectation for the market?
Avigal Soreq
So I said that in my remarks earlier that the executive compensation has a big component around some of the past. So you understand that everyone motivation is around that and everyone focuses around it. But we are going to make the right transaction for the company, and we try to balance between fast and high transaction. So we're on the same boat. So we want that. We have the right incentive in place to make everyone want it. We have the right plan in place to make it work. We just need to make sure that that's what we committed, and that's what we want to happen. So it's a big decision. We're going to make it right.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Avigal Soreq for any closing remarks.
Avigal Soreq
So I want to take my friends around the table here, the executive team, all of Delek employees that had a very good quarter. Very proud of safe and reliable operations, our ability to be safe and reliable is key, and I'm very proud of the great progress that the operation team is doing this quarter. I want to thank the Board of Directors for the support and you, shareholders, for the great support. Delek is up for a great journey and we are all very excited and we'll talk soon in the next quarter. Thank you so much.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
