HF Sinclair Corporation (DINO) Q2 2026 Earnings Report, Transcript and Summary

[Audio Gap] China withdrew from buying crude and typical size at the beginning of the Mideast conflict. The reduced consumption has led to stabilized prices in crude and China has also suspended exporting products. If they reverse these decisions, products exported from China will certainly impact the products market. But [indiscernible] the coal mine to watch it be the Singapore crack spreads, they tend to react first with China increasing exports. Otherwise, we see markets being constructive for the next several quarters, potentially into 2028. These events have had similar, if not more dire effects on the lube-based oil markets as much as 20% of the world's based oil supply for lubes being off-line, which brings me to our lubes business. It has been an important and meaningful contributor to the success of Sinclair. But today, we announced plans to pursue a separation of the segment through the capital markets, creating a new independent public company. We believe these 2 companies will benefit from enhanced strategic focus and operational agility, greater alignment of capital deployment within each specific growth priorities, increase ability to pursue strategic transactions independently without competing for resources within a broader portfolio, distinct and compelling investment profiles aligned with different investor bases and dedicated leadership teams and government structures with continued focus on driving performance. We intend that the separation will be a tax efficient for HF Sinclair and our stockholders and will be executed over the next 12 to 18 months. Our announcement provides 3 important messages. First, that the base oil refining assets in Mississauga will be retired. The team there has done an excellent and outstanding job operating the assets throughout the years but a combination of location, size and scope of the assets have reached a point that their long-term economic contributions to the business causes us to make this very difficult decision to retire the assets. Second, with the retirement, our finished product business will mean base oils to continue the successful efforts in their market. The business will continue to deliver base oil solutions through new strategic commercial agreements with 2 premier global base oil manufacturers, complemented by continued access to products from our Tulsa refinery. Finally, as a potential separate organization under Matt Joyce's leadership, an independent business -- an independent lubes business will operate in a capital-light business model for greater financial flexibility and stronger, more consistent free cash flow while leveraging its core strength in technology globally recognized brands and extensive channels to market. We are early in the separation process, and we'll provide additional information as appropriate. Finally, it would be natural to ask about our company's plans for [indiscernible] excess cash. We are mindful of our past indications for delivering a portion of free cash back to our stockholders, and we'll endeavor to continue to do so. We also have efforts going on where we see opportunities to enhance our existing assets. In other words, we already have things in progress. We will be discussing this with our board in our upcoming Board meeting. as the Board reaches decisions and the actions become actionable, we'll continue to share that information with our ownership community. Let me -- I'm going to go off script here, let's face it. Last fall, when all the refining complex are putting their plans together, we had no clue that a war was going to go on the Middle East. We've got excess capital now and we've got to be prudent and diligent in looking at how we spend this excess capital. Nobody had a plan for what we're looking at right now, and we've got to make sure that we look at it. Our organizational changes and putting valve over the growth initiatives is exactly that. We're going to look at the specifics within our organization and see where we can add value to the future. and she's got that skill set and knowledge to be able to lead the team to do that while Steve runs the day-to-day operations. That's the fundamental drivers behind our changes there. I'll now turn it over to Steve for additional comments.

Thank you, Franklin. Thank you all for joining our call. I'll now cover our business highlights. During the second quarter, we delivered strong financial results across each of our business segments, underpinned by solid operational and commercial execution. In refining, our crude oil charge averaged approximately 640,000 barrels per day which exceeded our guidance range and reflects our progress towards improving operational excellence and optimization across our business. This enabled us to take advantage of the favorable market conditions as we operated well. We have a planned turnaround scheduled at El Dorado, which commences in September. In our Marketing segment, we added 63 branded sites in the second quarter with more than 100 sites in the branding pipeline that are expected to come online over the next 6 to 12 months. We are pleased with our progress here as we continue to see year-over-year volume increases in our branded channel. We still expect to grow the number of branded sites by approximately 10% annually. In our Renewables segment, we reported another quarter of strong financial performance with $123 million in adjusted EBITDA, supported by favorable market conditions and disciplined execution of our business strategy. We believe the macroeconomic backdrop will remain favorable throughout the year and are encouraged with the recent performance of this business. We have a planned turnaround schedule to begin in the third quarter at our [ Cheyenne ] facility. From a strategic perspective, we continue to progress the evaluation and development of our multiphase initiative designed to leverage our strong logistics network and production advantage in the Rockies region to support increasing demand across Western markets. We expect that the first phase would increase capacity by approximately 35,000 barrels per day to move supply from Rockies production into Nevada and is targeted to be online in 2029. We are also moving forward with the El Dorado vacuum furnace project, which is expected to enhance operational reliability and improve product yields while enabling processing of up to an additional 10,000 barrels per day of heavy crude within our feedstock slate. The project remains on track for completion during the fall turnaround. We are also encouraged by the integration and early performance of our green trail fuels JV and marketing, and we continue to believe this will be an accretive addition and accelerate of our brand position. Further, we are evaluating several technology investments to advance the competitiveness of our business. We continue to see opportunities for future investment across our portfolio. And as we evaluate these opportunities, we're okay with carrying excess cash on our balance sheet while final investment decisions are made. During the quarter, we returned $265 million in cash to shareholders, consisting of $89 million in regular dividends and $179 million in share repurchases. Since the Sinclair acquisition in March 2022, we returned approximately $5.2 billion in cash to shareholders and have recorded -- reduced our share count by over 68 million shares. Today, we also announced that our Board of Directors declared a regular quarterly -- regular quarterly dividend of $0.525 per share, an increase of 5% over our previous dividend of $0.50 per share. As we look ahead, our strategy remains focused on enhancing safety, reliability and efficiency across all of our business segments, while unlocking more from our integrated value chain, including growing our Marketing and Midstream segments. With Refining fundamentals expected to remain supportive through the fall, we are confident that our diversified asset base will continue to generate strong cash flows. With that, let me turn the call over to Vivek.

Thank you, Steve, and good morning, everyone. Let's begin by reviewing HF Sinclair's financial highlights. Today, we reported second quarter net income attributable to HF Sinclair shareholders of $892 million or $4.93 per diluted share. These results reflect special items that collectively decreased net income by $68 million. Excluding these items, adjusted net income for the second quarter was $960 million or $5.31 per diluted share. compared to the adjusted net income of $322 million or $1.70 per diluted share for the same period in 2025. Adjusted EBITDA for the second quarter was $1.5 billion compared to $665 million in the second quarter of 2025. In our Refining segment, second quarter adjusted EBITDA was $1 billion compared to $476 million in the second quarter of 2025. This increase was principally driven by strong Refining margins and volumes in the Mid-Con and West regions as a result of steady demand, tight supply and favorable crack spreads. Crude oil charge averaged 640,000 barrels per day for the second quarter compared to 616,000 barrels per day for the second quarter of 2025. Our Marketing segment reported EBITDA of $28 million for the second quarter compared to $25 million for the second quarter of 2025. Total branded fuel sales volumes were 387 million gallons for the second quarter of 2026 compared to 337 million gallons for the second quarter of 2025. Our Midstream segment reported adjusted EBITDA of $112 million, both in the second quarter of 2026 and the same period of last year. In our Renewables segment, excluding the [ lower of ] cost or market inventory valuation adjustment charge of $30 million and asset impairment of $47 million we reported adjusted EBITDA of $123 million for the second quarter compared to a loss of $2 million for the second quarter of 2025. This increase was principally driven by increased RINs price, higher producers tax credit benefits, and increased volumes compared to the second quarter of 2025. Total sales volumes were 60 million gallons for the second quarter of 2026, as compared to 55 million gallons for the second quarter of 2025. Our Lubricants and Specialties segment reported adjusted EBITDA of $207 million for the second quarter compared to $55 million for the second quarter of 2025. The increase was primarily driven by higher sales volumes and product prices in the second quarter of 2026 compared to the second quarter of 2025. During the second quarter of 2026, we recognized a FIFO benefit of $46 million compared to a FIFO charge of $20 million in the second quarter of 2025. Net cash provided by operations totaled $1.5 billion in the second quarter, which includes $56 million of turnaround spend. HF Sinclair's capital expenditures totaled $118 million for the second quarter. As of June 30, 2026, HF Sinclair's total liquidity stood at approximately $4.26 billion, which includes a cash balance of approximately $2.26 billion and our undrawn $2 billion unsecured credit facility. As of June 30, 2026, we had $2.8 billion debt outstanding with a debt-to-cap ratio of 21% and net debt to cap ratio of 4%. Let's go through some guidance items. With respect to capital spending for full year 2026, there is no change to our capital guidance at this time, but it is subject to change as we continue to progress certain projects under evaluation. For the third quarter of 2026, we expect to run between 590,000 to 620,000 barrels of crude oil in our refining segment, which reflects the planned turnaround at El Dorado in the period. We are now ready to take questions from the audience. Operator?

Your first question comes from the line of Manav Gupta with UBS.

Congrats on a very strong beat. My first question is a little bit on the Refining macro. Even the last time in Russia-Ukraine complex started diesel was moving up, but gasoline wasn't really participating to these levels. This time, we are seeing a very strong gasoline rack out there. And I'm just trying to understand from the perspective of HF Sinclair, how this benefits the company? And if you could specifically talk about the 2 -- you 2 regions, Mid-Con and West, what you are seeing in terms of gasoline margins as well as diesel.

Thanks, Manav. This is Steve. Yes, it's mainly been a distillate story from a global geopolitical scenario, both in the Middle East, heavy distillate producers and now Russia that used to export quite a bit in distillate and now is even importing some -- but yes, the overall flows in terms of gasoline have been tight, and there's some export capability that's happening out of both regions in the Gulf and the West Coast or to the West Coast from the Gulf. in the overall market environment on cracks, we're seeing tighter cracks, particularly in the Mid-Con and gas as you see more things move south. And so less barrels are getting up into the Mid-Con, and so that structure is tightening up. But we've seen in the quarter, the demand picture look relatively healthy for not only the U.S. but our regions. And I think our regions have felt -- fared a little bit better both in gas and diesel, in both regions. Now in the West, we have a little bit of softness in diesel, but we think that, that is factored into more of the bio and RD coming online with the incentive structure that has been generated there. But overall, our markets look pretty strong, and we think that the tightness is furthering -- [ further ] because our inventories on a U.S. and a regional basis have been below the 5-year average. So as Franklin mentioned earlier, we see that global -- it starts from a global perspective and stocks are very low and it's going to take a while to replenish those. And that just comes back into the U.S. market with the overall market structure and the export values are attributing to lower supply that is in the market. And naturally, that creates a tighter structure with supportive crack environment.

Perfect. My Second question is more for Frank. So I'm just trying to understand, a, the timing on the lubes, why now, some of the key benefits, if you could reiterate, and 1 of the questions we are understanding is when something like this happens, you need the buy-in of the senior management. Is there a buy-in from the senior management in terms of are you still looking for an external CEO. And if you could help us understand how those dynamics are playing out because something as big as this would definitely the buy-in of the incoming CEO and CFO.

We've never indicated we were looking for an external CEO. So I dissuaded you of thinking about that. Secondly, senior management on both sides are very bought into this. And remember, I guess if you think about it, the Board owns the business and all we're doing is separating it so that they can both flourish. We have a good senior team at the lubes business that under Matt's leadership, and that will develop and build out as we get closer to the time of whatever transaction we decide to go with because there's a lot of work to be done in signing what's best for our stockholders. But we're not losing something. We're just splitting it among the stockholders to where value is being created and let them run independently. But the team has aligned in this. The Board is aligned in this, and we see this as the best direction for the lubes business.

And congrats, Steve again on being promoted to the CEO, Congratulations.

COO.

Your next question comes from the line of Matthew Blair with TPH. Mathew.

Great. Congrats on the lubricant spin. Do you have an estimate of what mid-cycle EBITDA for lubricants would look like going forward? And what kind of leverage could a stand-alone lubricants business support? And then also, is there any estimate yet on potential [ dis ] synergies from spinning out lubes?

I'll turn over some of the synergy to Vivek in a second. Yes, there's always -- whenever you stand up a public company, there's always some public cost that we will be identified a separate company audits, some additional fees that adjusted with that, but they're usually more than offset by having kind of the spotlight on the business. Let's take a step back. The Refining business dominates our franchise as it currently exists. And because of the volatility of the franchise that we have, that all refining assets have, all our franchises have, you tend to have a discounted value on multiples of EBITDA. The lubes is a more stabilized business and it's in different markets than the refining assets. And typically, they would run the lubricants business with a higher multiple. And so we would expect a step up in value as we take it out the door. In terms of gearing, we haven't reached that point we're not going to overlever this thing going out. We want to make sure it has the flexible and look at our own balance sheet, we're not what I would call an overlevered company. And so we were not going to treat them any different than we would be treating ourselves in terms of estimates of Vivek, I don't know what guidance we have in there, if any?

I think that's right, Franklin. There will be additional costs associated with separating lubricants and specialties as an independent public company. We're kind of early in the separation planning process and will provide estimated costs as time progresses.

And if I can just jump in, Matt, 1 of the things that -- this is Matt Joyce. We've typically looked at trailing 12 months as our rough guesstimate and guidance for $300 million to $350 million on an EBITDA basis. We're looking to execute that business in a way that we can continue to deliver various types of performance results on a go-forward basis, but with a capital-light structure in mind.

Okay. And my follow-up was on this capitalized structure. So I guess, could you talk a little bit about the impacts of shutting the Mississauga base oil refinery, in the slides that mentions that would reduce volatility also reduce your working capital needs. Maybe you could expand on that a little bit. What kind of EBITDA impact would you expect in shutting these assets? And does this take you on vertical integration as this like to essentially 100% because I believe previously, it was roughly closer to 2/3 or so.

Sure. So this is Matt Joyce. The way that we're looking at it is we've gone out and sourced a competitive offer from these global premier base oil manufacturers for both our own internal supply, but as well as distribution agreements, where we are going to represent their [oils] in the market so that we will have and continue to have that full suite of products with our continued production out of Tulsa for our Group 1s and our specialties. And then we'll also have Group 2 and Group 3 to offer to the marketplace on a third-party basis. But as a distribution partner, partnership. We'll then use those same sources for our own internal consumption. So as such, we expect that the L&S business on a go-forward basis is really going to lean into a free cash flow improvement on the financial profile. And what I can say today is that exiting the base oil production is also expected to materially lower our capital intensity as well as net working capital. So we can continue to provide you updates as and when the process progresses. But suffice it to say, we're pretty comfortable with where the financial position of the business on a go-forward basis is going to be.

Your next question comes from the line of Neil Mehta with Goldman Sachs.

Yes. Congrats a strong quarter. All the updates and, of course, some of the promotions here. 2 more day-to-day questions here, the [ GOES ] pipeline initiative that you guys were talking about, is an important part of building out the midstream effort, but I think you've also alluded to important part of cleaning up PADD 4 and potentially even into PADD 5 balances. So can you just talk about where you stand on that initiative? And what do you think the economic implications are not just for the Midstream business, but also for your Refining segment?

Neil , this is Steve. Let me talk a little bit on [ Go West ]. It is a very strategic project for us that we announced several quarters ago. The project continues to advance in terms of determining the right economic balance and the execution capability. We're still advancing towards taking FID on Phase 1 this year. But ultimately, we do see that the reason we're doing this is the tightness in PADD 5 that's continuing to get short, and we have advantages logistically in terms of production in the Rockies and our integrated Midstream assets where we can unlock more of that and supply the needed fuels that are growing in terms of an imbalance out of PADD 5. We think that this is just Phase 1, as we talked about, it's a multiphase approach that we'll continue to evaluate as we get past this initial phase, which brings up to approximately 35,000 less than in Nevada. Longer term, we think we can hit larger markets out in the West, including California. But we're not guiding on economics at this point. When we get into the phase of taking FID that the Board will opine on will come to the market with guidance and estimates at that point.

All right. And then just the return of capital can be enormous at current margin environment even in the forward curve. And so of course, can you comment on just the capacity for share buybacks the willingness to lean into repurchases even though the stock has done exceptionally well in the last year. And then on Slide 5, you talk about opportunistic M&A. So maybe, Franklin, you could talk about how that fits into your thinking here because what gaps, if any, are you trying to solve for? And what segments should we think about M&A being appropriate to look at?

Yes. Let's take them in order. Number one, we have implied and indicated and actually acted on about a 50% distribution of capital back to our stockholders, since spring of '22. Steve mentioned, that's $5.2 billion in a franchise that's currently valued at about $15 billion or $16 billion. So we've been dedicated to that. We will continue that emphasis as we go forward. Secondly, all my comments with respect of management and how the leadership shifting around, a lot of refining assets across the country, not just ours, but across the country. To some degree, have been a little underinvested in technology, and we're going to look at that real hard to make sure we have some of the technological advances to make sure we stay if you've heard our mantra site compliant reliable, make sure we are standing up when others might have problems that we're the ones that folks can count on. In terms of M&A, I wouldn't go broad with this. We're not going to go on a shopping spring or anything. I don't read anything to that. But marketing has a lot of opportunities where they can do some things. Midstream has what I'll call tuck-in opportunities within fields to where pipes can be [indiscernible] as opposed to putting them in trucks. We're going to look at a lot of that because [ he can ] crawfish sometimes be up just as much as even a big stake. And so it's going to be smaller things where we're going to put money to work, and I think you'll see the benefits because of the paybacks on those things, the returns are in that mid-20s percent, and you can't do that on big deals. You got to do it. It's work, but it's -- but you can get it done.

The next question comes from Joe Laetsch with Morgan Stanley.

Congrats to Steve [ and Vale ] on your new roles. So I wanted to follow up on the lubricant separation. Could you just talk about the thought process between a capital market separation and an outright sale?

Sure. That's easy. You're doing the same thing, but you're giving up value if you go to a sale process. Somebody is trying to either over-lever or maximize something for their own benefit, and we're taking that benefit to our own stockholders. And so -- and then you add on the effect that it's doing a sale means that United States government probably ends up with, I don't know, $200 million to $400 million of tax payments that gets no value to any of our stockholders. So we save that by doing a tax-efficient transaction, and we basically capture the gains that a third party may want to have. Now could a strategic come in and look at some synergies and all like that. possibly. But that's trying to mind-read what's in the heads of some strategics. And a lot of times, it's a waste of effort to do that. We think this is. Obviously, we're commercial if somebody wanted to pay a big number for Lube, but I can't say that, that would be out of the question, but that's not our intent. That is not what we're looking at. I mean it is looking at having a business that can be valued properly in the public markets and capture that value for our stockholders through 1 of these distributions.

Yes, that makes a lot of sense. And then shifting over to refining. So just from a throughput standpoint, it looked like the system ran well. Overall, crude oil charge came in above the top of the guidance range in 2Q, can you just talk about well during the quarter? And then maybe more broadly, can you talk about where we are in the refining improvement process and that target of 640,000 barrels a day on average.

Sure, yes. So well, I think what we've begun to do is really work in terms of leveraging our underlying reliability and operational improvements and then optimizing our kit. So to the extent that we have limitations, whether it be finishing in the premium products or we have excess intermediates. We've been able to optimize moving those molecules to different locations. And to be honest, it's looking more at our kit like an integrated kit. We're instead of stand-alone fence line balance, we're finding ways to move products and take advantage of markets or fill gaps while some of our fleet gets healthy on certain areas, running 640 in this quarter. As you mentioned, that is something that we aspire to do, where the market is there and certainly, the market was there. and doing that while we had already talked about last quarter having a few unplanned maintenance elements at El Dorado, I think we were able to demonstrate our flexibility and capability to do that. We still have a ways to go. And part of what we've talked about in terms of the organizational structure change is really to look at not only growth, but optimizing inside of the integrated value chain, so we think there's more to gain there.

Your next question comes from the line of Theresa Chen with Barclays.

First of all, I'd like to offer my congratulations to Steve [ and all ] for your new roles as well. And turning to some of the Midstream commentary. Stepping back, when we look at the compelling long-term supply and demand economics across PADD 4 and PADD 5 that underpins your Go West opportunity even beyond the initial phase, can you remind us how much of incremental phases do you think you will need the support of third-party shippers versus volumes from your own facilities? And as you evaluate and commercialize incremental phases, how are you thinking about potential competition from other refined products projects taking Mid-Con and Gulf Coast products targeting Western markets including Philips and Kinder's Western Gateway delivering to PADD 5 as well as existing expansions plus expandable assets from ONEOK an enterprise targeting PADD 4 markets, including Denver, Colorado Junction, Salt Lake and so on.

All right, Theresa, thanks. This is Steve. I'll try to break that down little bit. So -- the first part was on PADD 4 -- PADD 5 multiple phases. We've said the first phase is right at 35,000 in terms of unlocking Rockies production [indiscernible] the full phase and whether we go to a mid-phase or the final phase, it gets upwards to up to 140,000 to 150,000 barrels per day. We think that given our proximity, both our integrated -- our owned midstream position as well as our logistics proximity in the Rockies production, we will be able to fill a large portion of that. On larger phases, we will have the ability to connect some of our own production, but we think we would offer a compelling value proposition to move barrels out of the Mid-Con right into PADD 5. So I'm not going to comment on exactly how much is owned equity production versus third party, we'll commercialize that in due course, but we think we'll have the ability to go do that. And then as you asked about competing projects, we've said that the Western Gateway project is not a competitive project. When you look at the total balance structure in PADD 5 and you think about it from an imports PADD 5 in California import quite a bit of product. You've had 2 major refineries that have shuttered. We think the regulatory environment in California continues to be difficult to operate in. And therefore, you're going to need more supply. So we don't think these projects were necessarily competitive. We think they are complementary to each other, but we clearly wanted to advance our project given our footprint and make sure that whatever the opportunities are to go into pet -- Western PADD 4 and PADD 5 that we want to take advantage of that, which is why we announced and why we're advancing the project to move to FID by -- into this year. I don't know if I got all questions, I might miss 1 there.

We're good. Maybe turning to Refining. Can you just give us an update about the status of your FRE applications? Would you expect continued RIN relief for the applications that you filed?

Well, you guys probably know as well as we do. We are daily on the phone with Washington and various constituents, we have put in our 2025 petitions for Tulsa [ Arta Parco Casper in ] which cross -- they are in pending status. There are a few historical petitions for '23 and '24 that we're waiting on. You'll note that the D.C. Court has recently ruled in our favor on the EPA's decision to exclude [ Parker ] eligibility for '24, and we're expecting relief and results soon. We were hearing weeks, not months. We're hearing days, not weeks. We need to get an answer, as you know, the compliance deadline is September 1. And as those SREs are delayed to us, it has an impact in terms of how we can leverage those to offset a material burden. As far as the overall RIN bank goes, which I think is part of this question, something is going to have to be done. At the end of the day, the RIN bank is projected to go negative or only into a slightly balanced position by the end of the year. And if there's not some level of relief legislatively, I feel that is a race to the top in terms of pricing. And so we -- through our [indiscernible] networks and our trade organization, associations, we are engaged in the conversation, but we expect to get relief from the SREs imminently. We just need it to happen soon.

Your next question comes from the line of Doug Leggate with Wolfe.

Let me also offer my congrats to [ Steven Ledbetter ]. Franklin, I appreciate the very candid assessment of the current refining environment. I wanted to kind of try and parse some of your comments about how you manage this windfall, I guess, you could call it. It sounds like you might be opportunistic...

That is not how -- Doug, I would not characterize it as a windfall. It's just the rebalancing of the market based on external -- windfall makes me shutter because...

So let me pick up on that one. Do you think mid-cycle has changed in perpetuity, Franklin?

No. In that case -- Well, it's just rebalancing its profits from someone else that came our way that would have known elsewhere. But cementing society, we don't know what's going to happen with those refining assets. We do know -- what we do know is that if you look back in history to the 70s, the fuels market is not as impactful on the overall economy. And so the dire comments made by certain members of the executives of international oil companies have not -- [ the end ] of June came and went, and we didn't fall off a cliff. The fact is, is that we do need liquid fuels around the world. The free market forces are balancing that out where, yes, we are having greater crack spreads now but it's a function of what's going to happen to those refineries that are offline. And it's just going to take them for a while. And so we'll benefit from that for a while, and we're going to have to look and make sure that we put us -- we're going to have to take advantage of the opportunity is what I would say, the opportunity gives us a chance to reinvest into an industry that had underinvested for a while based on economic issues. We're going to reinvest where we're more efficient and hopefully more profitable for a longer period of time. You look at Sinclair and since the merger through the end of June, I'm looking at Craig here, I think our annualized rate of return has been 20% since 2022, we're working real hard to use what assets we have. And I don't want to be argumentative with you at all. That was not my intent and I apologize for that. But it's -- we're giving something to deal with, and we're going to deal with it. And in terms of taking advantage of the opportunity to make this company and franchise better and making a great opportunity for our stockholders.

No, I think it's fair to look at the extended duration of all these disruptions. We are published at double your discrete earnings for '26, '27 and '28, just for context. So we're there with you. The question we're trying to debate is what is discounted in perpetuity in the sector in your stock. And it really goes back to the cash return question, which is where that was going. Are you prepared to build cash in this environment, build net cash as opposed to the formulaic share buyback. That was really where I was going with this windfall coming.

Okay. It would not be our intent. No. That's a -- you -- this gets into asset allocation, which is really right in the heart of where our Board and our senior management team should focus their efforts -- it goes into how do we allocate assets doing the lubes transaction. And cash on the balance sheet with no particular place to go is not a very smart thing for any management or board to do. And so would we lean into buying more shares? Sure, if we don't see opportunities to have reasonable returns on that, of course. But we're not here to just roll around a room full of cash just for the benefit of having the cash on the balance sheet. That is not our case. Steve's got a comment.

Yes. So just as we talked about the structure, my role and [ Dow's ] role we saw our ability to go defend and take offense of the market. And so we've been evaluating several major projects. We are set up, the business is now set up to go execute upon those with efficiency, and make sure that we can allocate those dollars. So while to Franklin's comments, sitting having cash sitting on the balance sheet but no where to go, we are evaluating a number of large projects that we think would be accretive to the business and return very good value to the shareholders. That we're just not ready to talk

Yes. We're not ready to go live with that. And so -- but you have to look at the legacy of this company that we have been good managers of the capital given to the company, and we hope to continue to be.

I'd also add that we're tracking well against our target of 50% payout ratio so far during the year. So we are close to 40%, and we still have 6 more months to go.

The next question is from the line of Phillip Jungwirth with BMO.

Just wanted to ask on the market environment for lubes. First, last quarter, you mentioned cost inflation headwinds. Just what's the latest here in success of pricing actions to offset this? Are you seeing much demand sensitivity due to price? And then second, just coming back to a comment you made earlier about 20% of global face oil capacity being off-line, roughly, what's the breakdown here across these different areas where you're seeing unplanned downtime due to conflict or thin export policy just because some of these could take longer to normalize than others.

Correct. Yes. Thanks for the question. This is Matt. Just looking at the second quarter performance, we had an exceptional quarter. We saw that driven by higher volumes, and we took multiple pricing actions throughout the quarter. we did and we're able to get through pricing in base oils that allow for us to have some margin expansion. And of course, you saw that we had some favorable FIFO impact. So we had a bit of an behind us. We've exhausted quite a lot of that inventory, and that's worked its way through. So we are going to see in the third quarter, we will see some more higher-cost inventories that we'll be managing through. And the team is doing an exceptional job of going out and getting those costs recovered as we progress. What we've also seen is that the demand for our finished lubricants business has also been really stable and as well as our specialties business. So we've had a good performance there. It's important, though, we have been watching very carefully cost discipline. And when we look for the future, we have to go out and get as much as we can from the markets, and in particular, the base oil markets that are in that short supply. So we talked about the 20%. Those are primarily Group III base oils that are off-line at this stage. And our team have done a nice job of sourcing our feedstocks, both from the Gulf Coast as well as from overseas to continue to maintain our production in our Mississauga facility at a ratable event. And so that we're able to provide our customers with the products that they require. So we do see that this is going to be a near-term opportunity for us, and it's a benefit that we're taking advantage of in the market today. But with the separation and what we're looking at for the business, we are looking at this business for the longer term. and the strategic rationale behind that is that the Lubes and Specialties business can create even more value through a focused capital-light specialty products model. And the access to the sources of base wells that we have been able to negotiate is a much better position for us than the ownership of these refining assets. And we're excited about having that distinct strategy capital allocation that's really truly ours and some exciting jumping off points for growth in the portfolio of products that we offer to the market.

Okay. Great. And then refining capture was stronger than anticipated. You didn't get a whole lot of help from crude diffs either. I was just hoping you could talk about the tailwinds improvements to this metric in the quarter. And while we're only a month into 3Q? Just how are you viewing the puts and takes so far around refining capture.

Yes, I think this is Steve. I'll take that one. Capture was, again, I think, a positive. We've talked about what we've been doing in terms of our underlying ability to get more value out of the molecule through extending value chains and our heavy oil value chain and our retail asphalt, producing more -- the jet flexibility projects that we put into [ Puget ] that came online in Q4 and really getting the molecules in the right space. Our light product yield improved. It was mainly -- both in distillate. We had 11,000 barrels a day more year-over-year in distillate. That was a good thing given the pricing environment, and we also were able to generate more premium in the quarter. So extending the value chain getting our crude slate flexibility in place across all of the facilities that can run different crude slates and have access to different crudes. That's been a focus of ours. We also ran well. When you're running and you're finishing the product, you're able to sell the higher-value products into the market and have to downgrade things. And against us to the point you made our leading crude was our largest drag inside the quarter and that was associated with the massive volatility in what was happening in the geopolitical stage, and steep backwardation only did flatten out more steep backwardation only to flatten out. You had some regional crudes that were priced out wide. Fortunately, the crack environment covered that. So -- it continues to be the game of taking waste out of the value chain and getting more value for all the molecules and higher grading the product and taking advantage of feed staff through the kit. Those themes won't change. And as we look into Q3, we see another strong quarter for us. We do have the turnaround at El Dorado that commences in September. But aside from that, I think we're looking at another strong quarter as we continue to advance our reliability and our optimization initiatives.

The final question comes from the line of Jason Gabelman with TD Cowen.

I wanted to circle back to the Lubes spin announcement that you made this morning. And just trying to make sure I'm understanding correctly, the EBITDA from what the remain or the SpinCo will be? Because historically, if I look back and it seems like you're spinning out what historically has been called the rack forward business, you retired that language in 2022. And then you're shutting down most of the [ rec back ] business. If I look back to what those businesses earned in '21 and '22, it was about even split on average between the subsegments at about [ $350 million of ] EBITDA. So is what you're keeping moving forward, half of that $350 million or around [ 175 200 ]? Or do I have that math wrong?

Jason, it's Matt here. Yes, I just want to take a minute just to clarify, what we are actually putting out as far as guidance, we're going to limit what we guide on at this point in time. What I can say is that our trailing 12 months in a traditional year would be anywhere between $300 million and $350 million. And we anticipate the new LMS organization that independent business will deliver something in that range. And here's how. With the way that we have built the relationships with the 2 premier suppliers we are now going -- and the continued operation of our Tulsa refinery and our Group 1 supply as well as our specialties business. We will effectively have everything intact as far as our business is concerned and what we anticipate will be our margins, but they will be based on a capital-light model. So we will be supplied supply materials from those suppliers, external suppliers on a long-term basis that will provide us ample base wells for our own requirements for our branded business, that being the Petro-Canada brand, the Sinclair brand, the [ Red Giant Oil ] brand, [ Sonneborn ], et cetera, for both finished and specialties as well as having a distribution agreement, which will also afford us a new revenue stream that would serve as a rack forward type view to our business, similar to the relationship we enjoy today with the Tulsa refinery. So in doing so, we have, we believe, remained intact with our traditional -- what would be more traditional run rates on EBITDA. But we aren't going to guide any further than that at this point in time.

Okay. Understood. Just I guess my 1 is also on the lubes updates today and specifically on the Ontario shutdown, just given the base oil margin environment is so strong right now. It is slightly surprising you've announced the closure. Is there any flexibility to extend the life of that asset if the Middle East conflict drags on? Are there more structural changes in the base oil market that keep that asset in the money?

Yes, this is Franklin. I'll take that one. We don't have a line in the sand on exactly the date we're going to go to a safe state basis. So we're not unmindful of where the market is. but not being unmindful of the market today, we also recognize that there are a number of base oil suppliers who are increasing capacity around the world with a lower cost environment than what we have in Mississauga. So those assets will be coming on over the course of a period of time. And we had to make the hard decision. We're in basically a residential area outside of Toronto in the St. Lawrence Waterway, which is not the prime place where you would put a refining asset to begin with. And it's a small asset, where it would take substantial capital to kind of compete with some of these projects that are going on around the world, creating lower-cost base oil products. And so it was a difficult decision. I mean, the team there running those running their finding assets is outstanding. They've been doing a great job for a number of years, but we've got logistics issues that we're going to have to confront in the future. We felt like this was the right time because we believe that there will be certainty on supply base wells from other places around the world coming on and it gives us the opportunity to take this time to greatly get to a safe state over the next few months. And so yes, we're very mindful of that. It went into the calculus of the decisions that we were doing. But I appreciate the question.

We have reached the end of the Q&A session. I will now turn the call back to Franklin Myers for closing remarks.

Thank you so much. Before we end the call, I'd like to take a moment to share that [ Eric Nitcher ], our General Counsel and a frequent and solid participant on these calls, who is also here today has expressed his desire to retire effective at the end of the month. I want to express our gratitude and appreciation for Eric's contributions to the company during his tenure at HF Sinclair. For those of you who know Eric, you're aware that he had a long and successful career at [ BP ] ending his career there when he retired as their General Counsel. Eric joined us after the merger between HollyFrontier and Sinclair has provided seasoned leadership to the company in its legal function and as the company came together and matured. We wish Eric good and great times as he moves back -- moves forward back into retirement. An announcement on Eric's successor will be forthcoming soon. We just want to express our appreciation and thank you all for joining our call today.

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