Q4 2023 Vertex Energy Inc Earnings Call
Participants
John Ragozzino; Investor Relations; Vertex Energy LP
Benjamin Cowart; Chairman of the Board, President, Chief Executive Officer; Vertex Energy LP
James Rhame; Chief Operating Officer; Vertex Energy Inc
Christopher Stratton; Chief Financial Officer; Vertex Energy Inc
Doug Haugh; Chief Commercial Officer; Vertex Energy LP
Donovan Schafer; Analyst; Northland Securities
Eric Stine; Analyst; Craig Hallum
Noah Kaye; Analyst; Oppenheimer & Co., Inc.
Amit Dayal; Analyst; H.C. Wainwright & Co., LLC
Brian Butler; Analyst; Stifel Nicolaus and Company, Incorporated
Presentation
Operator
Good morning, my name is Jeannie, and I will be your conference operator today. I would like to welcome you to the Vertex Energy Inc. Fourth Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again, thank you. I would now like to turn the conference over to John Ragozzino. You may begin your conference.
John Ragozzino
Thank you. Good morning and welcome to Vertex Energy's Fourth Quarter and Full Year 2023 Results Conference Call. On the call today are Chairman and CEO, Ben Cowart, Chief Financial Officer, Chris Carlson, Chief Operating Officer, James Ray, Chief Strategy Officer, Alvaro Luiz, and Chief Commercial Officer, Doug Hock, I want to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs and actual results may differ materially for a discussion of some of the risk factors that could cause actual results to differ, please refer to the Risk Factors section of Vertex Energy's latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call and on the press release issued today.
Today's call will begin with remarks from Ben Cowart, followed by an operational review from James ran a financial review from Chris Carlson In review of our commercial strategy by Dan Hawke. At the conclusion of these prepared remarks, we'll open the line for questions with that, I'll turn the call over to Ben.
Benjamin Cowart
Thank you, John, and good morning to those joining us on the call today. 2023 was a year marked by significant volatility in the refining and renewable sectors. This instability was driven by several factors, including geopolitical tensions that affected crude oil and product prices. Additionally, shifting supply and demand balances had a profound impact on renewable credit values and lagging feedstock costs in the midst of these fluctuations.
2023 also marked a significant shift in evolution and growth of Vertex Energy as a company. Throughout the year, our focus was on launching a renewable business and optimizing our feedstock strategy following the construction and startup of the renewable diesel unit at the mobile refinery In addition, we have expanded our logistics footprint in mobile through our marine fuels and logistics operations and establish our trading and supply division, creating significant opportunities to vertically integrate the broader business and capture more of value chain along the way since the mobile refinery purchase, we have invested roughly $260 million of new cash into the renewable diesel business today, including fixed assets, the cash portion of working capital for inventory and funded losses through the year end 2023, we have grown our corporate overhead to support this growth and bring in the talent needed to drive progress towards our overall goal as a leading energy transition company. Given our accomplishments in the start-up and the development of these initiatives, we believe we are well positioned to refine our strategy, concentrating now on cash management, cost reduction and enhanced profit margins from the call today. The team and I plan to update you on the financial and operating results for the fourth quarter and full year 2023. I want to start by thanking my team all the employees listening to the call today for the good work they have accomplished throughout the year. As James will note shortly, we not only got a lot done, but we did it safely, which is the most important measure of all, before I hand the call off to James, I know many of you are eager to get an update on the ongoing process underway with Bank of America. As we've communicated, we are evaluating various alternative strategies to free up some liquidity and strengthen our current balance sheet position. We are continuing to work the process. We're encouraged by the progress made and I hope to bring this to resolution sometime during Q2 of this year. We fully intend to update the market once we have tangible information to share.
With that, I'll now hand the call over to James.
James Rhame
Thank you, Ben, and good morning, everyone. I will start, as always with our report on health, safety and environmental performance. Fourth quarter of 2023 was another clean quarter with zero recordable injuries. We did have four minor environmental noncompliance is at the mobile site associated with the planned power outage. Additionally, mobile saw zero process safety events continued its streak of outstanding EH&S performance at the site for the full year 2023. Our environmental health and safety performance reflects a great achievement by our team which I'm extremely proud of. After acquiring the mobile facility, the team was immediately put to test our conversion of the R&D facility was a monumental task as the site executed a project with multiple times as many boots on the ground as normal for the better part of a year throughout this period of unprecedented business with hundreds of unfamiliar faces on the site, the fact that the team was able to successfully maintain daily operations without serious injury or environmental damage and no disruption to our surrounding neighbors. Unity demonstrates the diligence skills and commitment to quality of each of our employees. I'm extremely proud of our legacy business. Also, as that group saw a reduction of 90% year over year and ocean recordables, I'm proud of our employees at every location. We're continually to prioritize the safety first mentality of our entire organization. And I must say thank you to all of our dedicated employees and contractors, the effort and care for each other seen across the entire business as a testament to the employees and contract partners that work within our facilities. Our team at the mobile site demonstrated strong operational performance of the conventional facility during the quarter, which act with average throughput volumes of 67,083 barrels per day for capacity utilization of 89%, consistent with the updated guidance of 67,000 barrels per day in January. Lower volumes reflect the combined impact of a strategic curtailment of throughput in light of deteriorating market conditions during the quarter as well as previously disclosed downtime to proactively replace an electrical transformer. Total OpEx per barrel for the fourth quarter was in line with our guidance at $3.83 per barrel and reflects increasing cost efficiencies gained from smoothed operation, which more than offset the inflationary impact of lower throughput volumes on a cost per barrel basis. Our conventional fuels gross margin per barrel during the quarter was $4.79, reflective of the challenging market conditions encountered in the conventional fuels markets during the quarter, at the onset of the fourth quarter. Market prices for finished motor fuels, including gasoline diesel, began a sharp correction and continued this downward trend throughout the first two months of the quarter before.
Finally, reversing course, in early December, weakness in fuel prices for much of the quarter have significant negative impact on our fuels gross margin per barrel in our conventional fuels business. However, just as quickly as prices began, the downward trend at the beginning of the quarter, base have steadily rebounded since early December and through most of the first quarter of 2024 our finished products such as gasoline, diesel and jet fuel, accounted for 66% of our total product yield during the fourth quarter 2023. This was in line with our guidance and reflecting continued focus on facility wide yield optimization, as we've previously described.
Now turning to our renewable fuels business. Vertex's renewable diesel plant operated smoothly, generating total renewable fuels gross margin per barrel of $12.11 for the quarter. Our fuel gross margin for fourth quarter 2023 included $6.1 million of benefit attributed to production volumes from the second third quarters. Adjusting for the third quarter LCFS credit, our fuel gross margin per barrel for the fourth quarter was approximately a negative $4.78. Our renewable throughput volumes averaged 3,926 barrels per day for capacity utilization of 49%, in line with our recently updated guidance as Chris will detail in a moment.
Our crude oil throughput projections for first quarter are expected to be between 60,000 barrels and 63,000 barrels per day. We'll have a planned small turnaround of one of the reformers and a pit stop of one of the crude units during March as we prepare the plants are generally higher margin periods in the second and third quarter ahead of gasoline demand during the driving season, we have seen margins increase in the first quarter and have accelerated crude throughput volumes in conjunction with the improved margin environment.
Looking out to the remainder of 2024, we continue to make good progress on the development of Phase two of our RD. conversion project as well as the work necessary to qualify additional feedstock. We continue to believe in our expansion of 14,000 barrels a day is on track for completion in the first quarter of 2025 as we've previously communicated, the RD. business continues to be challenging in 2024 as we use this time to develop capabilities and operating the unit as well as understand the differences with various feedstock slate, which Doug hard to expand on in a moment.
Moving quickly over to our legacy business. Operational performance in 2023 from or was outstanding as they saw a 4.4% capacity improvement year over year. And we also saw a 23% increase in collection volumes in our collections business through our UMO collection operations. Both of those groups have had an excellent 2020.
I will now turn the call over to Chief Financial Officer, Chris Carlson, for a review of the Company's financial results and additional detail regarding our financial and operating outlook for the first quarter 2020 footprint.
Christopher Stratton
Thank you, James, and welcome to those joining us on the call today. Before reviewing our detailed financial results for the fourth quarter and full year 2023. I want to reiterate our continued focus on the improvement of our balance sheet. The elimination of our high-interest term loan and convertible notes has been a key component of our overall strategy following our transformational acquisition of the Mobius facility in 2022 over the course of 2023. We made notable progress towards this quarter with the announcement of our private exchange of approximately $80 million of our 6.25% convertible notes due 2027. We expect to continue our pursuit of this strategy, utilizing the most efficient tools accessible to us along those path.
Turning now to our financial results, Vertex reported net loss attributable to the Company of $63.9 million for the fourth quarter and $71.5 million for the full year 2023. This compares to $44.4 million and $4.8 million reported in the fourth quarter and full year 2022, respectively. Total adjusted EBITDA loss of $35.1 million in the fourth quarter and $17.1 million for the full year 2023 as compared to $75.2 million and $161 million in the prior year period, respectively. During the quarter, we recorded operating cash flow before changes in working capital of negative $43.6 million. Total capital expenditures for the fourth quarter of 2023 were $11.7 million or 33% below our prior guidance issued on November seventh, reflecting a deliberate preservation of capital achieved via the deferral of certain discretionary capital expenditures. This primarily includes a realignment of planned capital expenses for Phase two of the renewable diesel project with the external time lines. The deferred timing of these Phase two expenditures has not directly impacted the project schedule.
Turning to the balance sheet. As of December 31, 2023, the company had total cash and equivalents, including restricted cash of $80.6 million versus $79.3 million at the end of the prior quarter. Vertex had total net debt outstanding of $205.5 million at the end of the fourth quarter, including lease obligations of $68.6 million, implying a net debt to trailing 12-month adjusted EBITDA ratio of 12 times as of December 31, 2023. As previously announced on January 2, 2024, we reached an agreement with our existing group of lenders to modify certain terms and conditions of the term loan agreement. The amended term loan provides for an incremental $50 million in borrowings, the full amount of which was borrowed upon closing on September 29, 2023, and therefore reflected in our year-end cash position of $8.6 million during a period of rapidly eroding fuels margins encountered in the fourth quarter, we took the opportunity to shore up the balance sheet with additional cash provided by the amendment in order to support adequate financial flexibility through the completion of our ongoing process with Bank of America aimed at evaluating strategic opportunities relative to the other tool available in the market to us. At the time, we maintained our view that the term loan amendment presented the most efficient means of achieving our goal in the short term. After considering several alternatives, we continuously monitor current market conditions and assess our expected cash generation and liquidity needs against our available cash position using the current forward crack spreads in the market.
Looking to the first quarter of 2024, we anticipate total conventional throughput volumes at Mobion to be between 60,000 barrels and 63,000 barrels per day. Our expected yield of conventional products is expected to consist of between 64% to 68% high value finished products such as gasoline, diesel and jet fuel with the balance in intermediate and other products such as VGO.
On the renewable side of business, we expect a total throughput of renewable feedstock to average between 3,000 barrels and 5,000 barrels per day for approximately 38% to 63%. Utilization on our total Phase one production capacity of 8,000 barrels per day. We anticipate an efficient total production yield by renewable diesel between 96% to 98% for the first quarter as well.
Anticipated OpEx per barrel encompassing both conventional and renewables businesses on a fully consolidated basis is projected to range between $4.59 and $4.95 For the quarter, we anticipate total capital expenditures for the first quarter to be between $20 million to $25 million. As of the fourth quarter of 2023, Vertex has entered into fixed price swap contracts covering approximately 40% of expected diesel and distillate production for the first quarter of 2024 at a weighted average swap price of $28.39 per barrel.
I'd now like to turn the call to Chief Commercial Officer, David Koch and Chris.
Doug Haugh
First, I want to share that our feedstock optimization strategy has progressed according to plan. As expected, our temporary LCFS pathway approval last year resulted in us receiving LCFS credits for imports to California, producing a $9.6 million benefit. We were also able to complete our runs and the data collection required to support our provisional LCFS application for for Vertex specific pathways covering soy, canola, tallow and DCF. This application has been submitted to carbon. We expect that we will receive LCFS credits. Based on these improved CI. scores, we're imports into California during 2024, which will improve our per gallon credit values as compared to the temporary I. values received last year with our provisional pathway application filed for our first for feedstocks, we have shifted our focus to completing additional 90 day runs of lower CI feeds, specifically Yuko in poultry fat. These fields represent not only improves the eye values, but also outright lower cost, which started aggregating inventory needed to support these roads and expect to complete the run through these additional feeds during the second quarter across all families of feedstocks, the team has been able to double our supplier base over the last quarter, and the market continues to provide tremendous support for our facility. Logistically, we've continued to receive supply primarily via barge and rail for the addition of Hugo and poultry fat to our supply base is that of truck deliveries to our logistics mix. We've started to rationalize our feedstock inventories of each grade as we build confidence in each supply chain and any supplier. It's optimization allows us to create more flexible blending schedules and having multimodal delivery capacity across dedicated tanks for each class of feedstock plus to capture price changes quickly has volatility in feedstock pricing has continued to be very material for primary message around feedstocks as one of abundant and flexible supply from a portfolio of suppliers that have been reliable and support through, appreciate all them working with us as we've pursued each of these pathways, we continue to build our yield curves and carbon intensity, David, through all these changes and feedstocks run rates, hydrogen uptake rates across a wide range of blends. Our plant has operated reliably and maintain high conversion rates. This reflects both on the design engineering, construction quality. We have now seen evident and plant performance, but also just as importantly on the commitment, skill and cohesive team work with which our trading operations and engineering teams have executed this demanding plant in conjunction with building a new business and renewable diesel production, continuing to build out our supply, trading risk management and commercial marketing capabilities. These capabilities, along with our continued development of internal logistics, barge and commercial delivery capabilities, position us to continue to reduce cost and secure improved netbacks and margins for our conventional refineries and our renewables business with our initial offtake contracts starting to come up for negotiation we could begin now to use new supply, trading and commercial capabilities across all of our products, improve our netbacks for our production. We have already seen benefits by leveraging our internal capabilities to bring a portion of our Marrero production to where we are blending capacity and we'll be able to produce a higher-value finished products product also supported the launch of our marine fueling business that allows us to capture retail margin on those barrels versus being traded in the bulk wholesale markets. We're still in the early stages, but this is the type of work we are doing to bring continuous improvement on net backs and build a reliable customer base around the business that maximizes the value of all of our products.
Benjamin Cowart
Frankly, Doug once again, our team has done a great job of managing our operations, reducing risk and executing the expansion of our business capabilities as we navigate the first quarter of 2024, we anticipate facing similar challenges and market fluctuations experienced in 2023. Our priorities will continue to be safety and reliability for the continued focus on cash management, cost reduction and tax from enhanced margin opportunities. I wish to reiterate to everyone on this call that our strategic decision to acquire the mobile refinery. It was driven by the significant long-term potential we saw and continue to see in the renewable sector. Our substantial cash investments in renewables are testament to our confidence in this decision. The renewable diesel project was launched with remarkable speed and cost effectiveness, yet it represents a multi-year endeavor within a still evolving market, reflecting on the journey 2022 was about establishing our foundation 2023 about building the structure and 2024 is focused on advancing the spring more towards our 2025 goal, by which time we expect our transformation into a leading energy transition company to yield results that better reflect the value of this business. Until then, we have work to do and we look forward to keeping you updated on the exciting milestones we have planned it here.
Thank you. I will turn the call now over to the operator for questions.
Question and Answer Session
Operator
If you would like to ask a question, press star followed by the number one on your telephone keypad.
Your first question comes from the line of Eric Stine with Craig-Hallum. Your line is open.
Benjamin Cowart
Hey, good morning there.
Operator
It appears Eric's line has dropped your first question comes from the line of Donovan Shafer with Northland Capital Markets.
Donovan Schafer
Craig, good morning, guys, and thanks for taking the questions. So I wanted to follow up on Doug's comments. Are saying during the prepared remarks that the CIU. and I think in the release it said you have successfully sort of completed the runs on the four feedstocks, Astra renewable diesels and then all the Cross, the T's dot the i's and sort of submitting everything and that that should come back. You expect sometime in 2024 getting the Yes, the benefit showing up sort of in the financials or recognition on that from the improved CI. scores. Is there do you have a sense at all of whether that's kind of like first half of '24, second half kind of earlier or later because there's some kind of risk or potential it gets pushed into 2025. I know you don't veer chronically things. Can they have a wide range of variation between agencies and whatnot and how quickly things get turned around. So I think higher would be helpful on your question.
Doug Haugh
I mean, yes, our expectation is that we should have the new scores in place for second quarter production possibly first quarter, although that's a you know, again, we'd have to have kind of outperformance on the part of the regulator, which to their credit. We've had good responses and relationship and they they've been supportive throughout the process so far now they're engaged and supportive and moving things faster, can we've also taken some steps to get the audit phase of the submission kicked off early. So we think that could that could reduce the cycle time. So but in short now we expect some benefit from that in the first half, not perhaps all of first half, but we're hopeful there far we'd certainly expect to be fully covered under those pathways for the second half.
Donovan Schafer
Okay. And then I'm kind of talking about the cost side of the equation, getting into some nuance things and whether or not these can be material or move the needle. I believe in the fourth quarter there was some impact from the Panama Canal as you can kind of quantify or talk about maybe the transportation cost dynamic in general, you know, the ability to switch to rail or whatever. Because with the renewable diesel that that's got to get to California, you don't really have too much option in terms of where you send the product. And so just how transportation costs play into that. And the other one would be natural gas prices are so low. And I don't know if the hydrogen you get to some help in the hydrocracker for the renewable diesel and yes, and a lot of it's coming from natural gas, and that is impacted by natural gas price. Those of course, are super low right now. So I don't know if that gives kind of a tailwind or helps there at all or if that's just de minimus of a difference to matter. So those kind of two things, transportation and natural gas.
Doug Haugh
Yes. I'll take transportation and I'll hand to James for the natural gas question? Yes, the fourth quarter transportation cost was up. Eric, I had in terms of the Panama Canal impact, I think it was on your $6 million above our normal rates, which we know you can look at the Q3 numbers and sort of interpret those. But we really it was a kind of a crazy situation where you send the ship, you participate in a live auction once you're there are on your way there and you don't really know what the cost is going to be until you get through and so kind of a chaotic mess, if you would. We've since fixed that for the first six months of this year, but they have a good trade on the transportation capacity for the partner at and firm slots or guaranteed positions through the canal that was able to take those costs out from the canal has improved operationally. So both of those are helping us. And we don't expect to see those costs in the first or second quarter, Tom, as a result of the repositioning we've done on that transportation. So that's been that's been favorable, but it was a tough lesson learned in Q4. We are far from the only wants to experience it and talking to other industry players. Everybody was up against the same same expense to get through the canal, I think basically at 40 or 50% throughput rates on terms of shifts per day as compared to normal. So there's a pretty big problem. But again, we we believe we've rectified that for the first half of this year and hopefully all year as things normalize. But we've got good line of sight for the first two quarters of this transportation costs hitting back to our normal business case rates that Canada.
James Rhame
Okay. Yes, nat gas, that is indeed the source of hydrogen from our Madison unit that we have on site today in the future. That will be about 50% of the sea going into the hydrogen plant on the large one that we're currently in construction, but we are seeing indeed cheap natural gas, which in turn translates the price of hydrogen.
On the energy side, I don't have the exact number for you, but we are seeing that and really looking at what do we think it's going to happen this year into the future and what's going to happen with natural gas. So that indeed is the case, we haven't hedged and we have not hedged any of it?
Donovan Schafer
Yes, yes, good.
James Rhame
Okay, good. Good demand we might see us is pretty is pretty attractive.
Donovan Schafer
Yes, as current for us very attractive. And actually, if I could just squeeze one more on kind of cash options or flexibility stuff there. And in the release for the upsizing of the term loan there is there is a sort of brief mention of another $25 million that is sort of maybe contemplated in the extension or at least like a framework or something put in there. So you can kind of give an update on like what's the how is that like a commitment by the lender in some way? Or is it some kind of fluids or discretionary, but you at least have the pieces in place. And there was also if you'd consider like of Marrero refinery or other assets as something you can monetize or we lean on in some way to raise cash?
Benjamin Cowart
Yes, Jonathan, there's been the change in our loan terms with the lending group included an additional $25 million. It is subject to their approval from the club of lenders have been very supportive of the business, obviously from the purchase of the refinery and all the work and investments that we've made. So and we do have that as a as a opportunity to go back to our lenders for additional liquidity focus, obviously is on the we have a process that and fairly addresses liquidity on a much bigger picture. So so that's the best at the state of the relationship with the lender. So I think that's good and we stay in close. We don't have contact with them, and they're up to speed on the business as we go forward.
Donovan Schafer
Okay, great. And maybe as well connects us to my questions off-line.
Benjamin Cowart
Thank you.
Operator
The next question comes from the line of Eric Stine with Craig-Hallum. Your line is open for you.
Eric Stine
No idea what happened before, but I'll just jump into it. So maybe thinking about the first quarter when thinking about first quarter and just the operational outlook, I see you're guiding to lower throughput, and I know that the market has improved somewhat and it sounds like you have hedged favorably to an extent. So just curious, I mean, it's not a non-answer, but the market is still very tough and you mentioned a small turnaround. Any other color on what's happened in first quarter, Bill?
James Rhame
Yes, this is higher because James, really what we're doing in the first quarter, we started the year. We are we we're held crude back a little bit because margins have not returned on us yet, but they have. And so we entered in turn raised rates through the month of February. It didn't have a little bit of maintenance in January that we did. And then in March, it's really about a reformer turnaround and a change in catalysts and doing work there as also our planned number one crude unit where we're going in and doing maintenance on it and cleaning it up. And this is our typical twice a year and our point of view in setting this up was we would do this prior to the driving season coming in April, May, June, July, and we'll be able to run full rates during that time. And I hope the plant back so that that's what was behind our thought. And that's our plan to do that and run full in the future based upon the market conditions, we believe that are coming.
Eric Stine
Got it. Okay. But my sense from Intel, Paul, maybe just last one for me and then I'll take the rest offline.I know when you are acquiring those utility and then embarked on the RD. plan that you viewed that, that you'd be in an advantageous spot from a feedstock perspective, both availability and price. I'm curious as you look back is that how it has played out?And just curious what kind of mix are you thinking about in terms of finished feedstock versus tolling and maybe the economics? It doesn't mean it doesn't really matter, but just curious on the others.
Doug Haugh
Yes, Doug here it's a great question. We've certainly seen the advantages we believed were there in the site materialize from a logistics and availability and security of supply standpoint, our deep roster of suppliers, a lot of liquidity across most every grade they want. And obviously, as we get into the the more disparate feeds that aren't produced from large integrated suppliers like the Yukos coming from small gatherers and collectors and poultry fat, which is prevalent in the Southeast with a lot of but the chicken industry around us from those take a little bit more work, like I like I mentioned, we are bringing in trucks now, which is we've avoided as long as we could just because a lot of handling costs and testing costs on each truck versus a larger reopener come. But we're seeing the prices of those be more than attractive enough to justify that work. So I think when it comes to prices we've seen on our basis versus the futures price, everybody can see some to be coming back in line where we expected. We're sort of starting to draw too many conclusions on the late summer spike is and I think finally, the flat prices went up substantially, but the basis really blew out we don't have any indication that we were disadvantaged in that regard derive any evidence that we were particularly advantaged either.
Right. So I mean, I think the whole industry sort of got caught in a pretty strong run up some, but we have seen as those and the steel prices are down and basis, that's come back in line that given where we're at logistically, we're able to take advantage of that very, very rapidly, and we've gotten a lot better at just rationalizing the inventory, as I mentioned, and I think we've been very transparent with folks that knew there was a lot of banks in industry. And I know every almost every analyst we talk to every investor we talk to you about, hey, when you're spending all this money, you're starting this brand new unit. You better make darn sure that you got inventory and feedstocks to feed it because everybody is worried there wasn't big enough to go around, obviously, some so we we create a lot of inventory headed in to Florida. Some took us really more run rates of both quarters to run through all that feed on. But now as we look at our typical days supply on hand, we're trying to stay. So 30 days max were before we had a couple of months' worth of inventory on hand, which is if not, where do you want to be in terms of lining up your ability to take advantage of price declines quickly and turn that into product and capture that capture crack. So we're much better positioned for that.
Now on how quickly the feed pricing adjusts to account for the decline in the regulatory credits that remains to be seen, we're still chasing that, right? I mean, we've got a frenzy continued to collapse and LCFS isn't helping much. It's been stable, but at a very, very low level and so fees have come down quite quite a lot, certainly dramatically from third and fourth quarter, but they still got room to run in order to create the right margin structure one needs, given that rents have declined faster home. So we feel good about the progress we've made in that regard and certainly very comfortable that we're in a great position from a supply chain standpoint, have access to a broad array of feeds on sufficient logistics, good, good modes of transport and now a really good opportunity to optimize our storage and terminalling positions to turn quickly and trying to eliminate as much of that lag impact as we can as we're coming down the price curve on the.
Eric Stine
Okay. That's great. Thank you.
Operator
Your next question comes from the line of Noah Kaye with Oppenheimer discipline.
Noah Kaye
Thanks. Up picking up on the marketing front. I think you know, in the prepared remarks, you mentioned some of the initial offtake contracts coming up for renewal or expiring. Can you just elaborate on that a little bit and talk about potential pricing and margin capture opportunities?
Doug Haugh
Yes. So the first the four contracts that we were able to retender to the market were predominantly kit on that came up this quarter. If it rolls over April first up to a new contract so we took that to market from Q4 last year and have been very, very pleased with the results. You know, it's a substantial netback improvement over our previous offtake agreement and with the equally creditworthy and reliable counterparty that we're excited to be doing business with on that we believe fully reflects the value of the product that we're producing is there was a quality spread that we weren't capturing previously that we do now. And the next opportunity for that is just marching through the products from diesel and gasoline. We have a notice period approaching. And then we know those are open for unbranded products April next year. So we've got some time to work on that in our offtake partner has been very supportive to good relationship. It's worked very, very well operationally, but we want to make sure that, you know, from a pricing standpoint for forward a fair position to it's full market value for our products, which we're now in position to do saw the results in jet. And we look forward to the results from diesel and gasoline as well.
Noah Kaye
Okay, great. The hedges that you entered into. And there's a lot of detail in the release and slides. So appreciate that. I guess just for those of us listening at home on kind of the hedge positions through January and February of effectively in the money. It looks like they were struck on fairly attractive terms and margins to be sort of in line with the market but maybe you can comment on that.
Doug Haugh
Yes. So just a little bit about our strategy. As you know, we hedged about 36% of our gasoline pool. Yes, Chris, and that was Greg again, kind of getting our programs in place, getting back into a routine of taking advantage of attractive cracks when they presented themselves on the forward curves, we felt like that, that gasoline spread and or late summer that carried through the end of the year was unusual. Some further, we also hedged. So we took advantage of that. That was a very favorable outcome on those hedges. Obviously, we wish we would have had more. But on the other hand, you always wish you would lose money on the hedges because you're making more money on the product, right? So but that turned out to be a good position. We took the same mindset for first quarter on diesel, where we saw very strong strengthening in the crack spread for first quarter late in the fourth quarter, well above our margin targets. So we took advantage of that for about half of our production on and again, those have been we feel comfortable in those hedges. I think there the market held up the whole time surprisingly. So from in this case, turns out, they weren't really necessary but we still believe it's a prudent approach when you see so cracks present themselves on the certainly the front quarter that are well above what you're planning for in terms of budget. And so that's that's the approach, I would say that. So as we look at this quarter, four and we look at the second and third quarter, as James mentioned, we're positioning the plant to gear up for driving season, make sure we can run max rates and capture. We expect to be healthy margins for the summer. So we won't know at that point. My expectation is at this at this date that we would not hedge second and third quarter of gasoline or diesel on the forward curves are telling us to do that at this time. And but I would expect in third quarter some four really throughout the summer, if we see the gasoline cracks present themselves as very attractive in the fourth quarter, we will plan to take advantage of that at that time for a material portion of our Q4 production. So if you think about seasonally, that's kind of how we're how we're looking at it. I know that the gas is strong going into the winter and we want to take advantage of it. And it's diesels unusually strong going into summer where we normally see a bit of a drop-off, not nearly as seasonal as gasoline, but still there, we would look at that first for Q1.
Noah Kaye
Okay, helpful. Last one, really around cash and capital expenditures on. So you're guiding for an uptick to that sort of $20 million to $25 million range in 1Q. I think a good portion of that should really be for for maintenance, correct.
So just help us understand how much is kind of for growth versus maintenance? And then how much is left to spend on the Phase two expansion for the RD operations?
Christopher Stratton
Yes, this is Chris. No, thanks on the majority of that $20 million to $25 million is around maintenance. As James noted, we're heading into a few turnaround opportunities that have been planned. So the majority again is maintenance, and there's a small piece that is growth and then a little bit R&D at the at least two thirds of that is that the maintenance selected. So less catalyst change in doing the work inside reformer book.
Noah Kaye
Okay. And then how much is left to spend on the R&D expansion effort based
Christopher Stratton
to the balance is about 30 million for future quarters, have a great day and most of that's loaded to the back half of the year.
Noah Kaye
Okay. And then that's what I was going to ask maybe just the last question, and it looks like down we've got our math right and some progress on inventories here on in terms of the working capital down, how we think about 1Q, you mentioned that you're in a leaner position now on the RV inventory side. But what should we be thinking about in terms of and potential working capital impacts, at least here to start the year.
Christopher Stratton
And from an inventory perspective, which as you guys know, is the biggest driver of our working capital. I'd say we're in a pretty good spot. You know, the inventory has come down during the fourth quarter. So going forward, we don't see a huge build or a large build in inventory. But I would say your working capital is going to remain fairly flat. Your bigger driver, strong cash is going to be CapEx.
Noah Kaye
Right, great. Thanks. I'll turn it over.
Operator
So your next question comes from the line of Ahmed Dayal with H.C. Wainwright. Your line is open.
Amit Dayal
Thank you. Good morning, everyone.And then with respect to the Bank of America process, what are your options right now that you are considering sort of the best options that they might be exploring for you and have you only one of those options that they might be presenting?
The reason I'm asking this question is, you know, you potentially have in our expansion efforts were already in play as well, but at the same time, you're still not max utilizing the available capacity. I'm just trying to get a sense of, you know, how 2024 will play out with this Bank of America process in play and how that impacts Illinois all of the other activities and what the timeline might be to get some sort of a decision on the next steps on that front?
Benjamin Cowart
Yes, good question. Fair question, Amit, but let me. Let me start by saying that this BMA process started probably 10 months ago because we knew that the R&D investment was sizable for the Company and more on the development front. So starting a new business from Johnson and bringing it to life like the team has done is nothing short of undertaking. The you know, as that as I said in my comments, we've spent $260 million at the end of the fourth quarter in new cash. So we don't have that much in long-term debt. So that really speaks to the health of the crude side of the business. And what it's brought to the table in contribution from the they have a process is designed to bring the liquidity back to the balance sheet for the investments that we've made on the R&D side and that that process was was focused on. Obviously, we knew as we went to the market it would open up other conversations, and that's certainly what's taken place. And we are tendering those those conversations as we speak. So that process could not have been executed better, but they have. I think they've done an amazing job. We've got really good people, really strong companies at the table that's interested and the work that we're doing both around the renewables long term because I think everyone sees some you know, that target being a 2025 renewables business. We're kind of at the end of a policy cycle, both at ARFS. and federal level and also at a California LCFS level. And so we've got some insight for '25 around our A., which is, you know, some some new frontline opportunity as well as LCFS. We got some insight. We just haven't yet seen the new RVOs that we hope to see from the from the ZAR side of the business so with all that in mind, you know, the the the interest and our day is very focused in that direction.
And also in SAP, SAP seems to be the you know, the next leg of this industry. And so so we've got a great platform to continue evolving the renewable business in that direction.
Second is the new just the broader interest in the asset. So we we've got some really interesting infrastructure capacity opportunities, yes, property scale. And so we've entertained, you know, some nonconforming conversations that take a little bit more time to check out. And so we've had management presentations. We've had site visits. We've had initial no indication of values, and we're moving towards some some firm offers to partner with the company so that's the best update I can provide and kind of where we're at. As you said, liquidity is important in the current R&D market. So we're very measured in managing our cash. We've got a very good cash focus system that we're exercising wisely. And so we're going to continue with, you know, with a diligent term preservation of cash focus on margin and reducing our costs. And like Doug said, we've got a lot of things out of our way today and we've got the people in place and they're doing a really good job of fine tuning know all fronts of the business.
Amit Dayal
And given that I leave it there, I'll take my other questions offline. Some of my other questions have already been discussed so thank you so much.
Thank you.
Operator
Your next question comes from the line of Brian Butler with Stifel. Your line is open call.
Brian Butler
Good morning, guys. Thanks for taking my questions. Were just on the first one on the conventional based on the hedges that you have in place and your expectation on the downturn as well as just kind of the production for 1Q, how should we think about the EBITDA of the conventional business for 1Q, assuming prices stay where they are?
Christopher Stratton
I mean, are we positive a little positive, a lot positive or negative? Yes. I mean, as we look at the forward curves right now, Brian, and then based on the cracks that Doug laid out. And yes, I would say we are positive at the moment.
Brian Butler
Okay. And then on the CI. scores, when you look at the new scores, can you give any color around maybe the magnitude of the benefit I mean how much of an improvement are we looking at relative where the baseline is?
And with that improvement, does that make our die of Britain, you pass breakeven on an EBITDA basis or is it still need feedstock? Our other feedstock improvements?
Doug Haugh
That's a great question. It's about on the improvement varies by I see, but it's you know, it's a it's a 20%-plus improvement over the defaults, in some cases better than that. So it's helpful, but I would say that it's a while it's not yet. It's probably that probably gets you pretty close to a breakeven margin with those on. But I would say that in general, some as fast as rents have continued to decline, I mean we've lost another $0.40 are reminiscent of just this quarter, so almost almost $0.70 a gallon since January now.
Right. So and we lost that James over $1 a gallon in the fourth quarter on rent. So yes, the LTFS has been depressed, and that's certainly a factor. And these CI. values will help us recover a little bit more value out of that even at these levels, for sure. But some the impact of that is muted because LCFS.
So the treasury anyway, right? So you get a little bit our higher value or more credit generation, but the credits are still worth a lot less than they were a year ago, as an example, on top of real, the real killer for RD margins right now it's just the rent performance on on D4 ends, we were down almost 50% off where they were between January and February for ARM. And some of that move is very violently feel weak. So when we're trying to we're trying to forecast run rates and and plan our volumes against the available margin, it's an extremely volatile fixture. So when you add Brent moves of that magnitude within a week. So that's what we're faced with. So I think I think the industry, I think we and the industry, frankly need on PPI to recalibrate. So the current margin picture on B&O P&O pretty good amount from where they are. They've come down a good bit from last fall, obviously, but there's more to give their US party margins are going to be very tough.
I'm sorry, right.
Brian Butler
I mean, I guess unless we see the feedstock come come in, I mean, I don't think rents are going to improve until we get a new RVO. And that's probably a couple of years out. It's sort of if rents aren't going to improve and feedstock remains persistently higher than expected Is there other options for the book, the RG no infrastructure? Or is it really you just got to hope these things improve and then R&D starts to work?
Benjamin Cowart
So Brian, I think that's a good question. And the answer is yes. I mean, the assets that we have and they're their own life prior to the investment. The investments that we've made are robust improvements and and can be recaptured in a different way long term. And so, you know, we we always have options and we had a we constantly review those options as we look at these current market conditions.
Brian Butler
Okay. That's helpful. And then just one last quick one. On the first quarter '24 with all the balance sheet changes, what's the expected interest expense.
Christopher Stratton
Now interest expense should run for the term the term loan, which is the biggest portion right at it, $8 million to $9 million.
Brian Butler
Okay, thank you very much.
Benjamin Cowart
Brian.
Christopher Stratton
Next month.
Operator
There are no further questions at this time. I will now turn the call back over to the speakers for closing remarks.
John Ragozzino
Operator, and thank you, everyone, for joining the call today. We appreciate your interest in the business and we look forward to keeping you informed as we complete this quarter and come back with the new information on the progress we're making here with the business.
Operator
Thanks. This concludes today's call. You may now disconnect my mic.
