Delek US Holdings, Inc. (DK) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Brandy, and I will be your conference operator today. At this time I would like to welcome everyone to the Delek US Holdings Earnings Conference Call. [Operator Instructions] I would now like to introduce Mr. Mark Cox, Chief Financial Officer, for Delek US Holdings.

Thank you, Brandy, and good morning to everyone. We appreciate you taking the time to join us today on our conference call and webcast to discuss our first quarter 2012 financial results. Joining me on today's call will be Uzi Yemin, our President and CEO and other members of our management team. As a reminder, this conference call may contain forward-looking statements as the term is defined under federal securities law. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the word believes, anticipates, plans, expects and other similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Today's call is being recorded and will be available for replay beginning today and ending August the 3rd, 2012, by dialing 855-859-2056 with the confirmation ID number 72738094. An online replay may be accessed for the next 90 days at the company's website at delekus.com. Last night we distributed a press release that provides a summary of our first quarter 2012 financial results. This press release is available on our website and through various news outlets. On today's call, I will walk through our first quarter financial performance and Uzi will offer a few closing strategic comments. For the first quarter 2012 Delek US reported net income of $46.2 million or $0.79 per diluted share and this compares to net income from continuing operations of $16.9 million or $0.31 per share in the first quarter of last year. Year-over-year improvement in our company's profitability was due primarily to the strong performance of our refining segment including the El Dorado Refinery results. Refining represented nearly 90% of the total contribution margin generated in the period. During the first quarter the refining segment benefited from a combination of elevated Gulf Coast refining margins, widening crude differentials and strong regional demand for refined products. On a combined basis, our refining system sold more than 140,000 barrels per day during the period, despite the planned maintenance outage of the Tyler refinery, taking full advantage of favorable market dynamics. Refining segment contribution margins more than doubled during the first quarter of 2012 to $116 million when compared to the year-ago period. We also had another quarter of strong performance from our Retail segment, as every sales category experienced growth over last year's first quarter, and same-store merchandise sales grew 7.6%. Our competitively priced fuel offering continues to drive same-store fuel growth, even in a period that gasoline prices increased significantly. In the marketing segment total sales volumes increased 5.8 million in the first quarter excluding sales of our new biodiesel and ethanol bulk programs, which I'll talk about later in our call. Before I provide more financial information, I would like to discuss the impact of the temporary shutdown of the Exxon North line on our El Dorado refinery operations. Historically, the El Dorado refinery received most of its Gulf Coast crude, a crude that is priced at a premium to WTI, through the Exxon North line. This past Monday, in response to Exxon's temporary shutdown of the line, we reduced total throughput at the El Dorado refinery to approximately 55,000 barrels per day. We are monitoring the situation closely, and are working to partially replace scheduled shipments on the North line with crude supplied via alternative sources and with other feed stocks. Now I'd like to walk through a few highlights from the income statement for the first quarter of 2012. Total operating expenses increased by $24.2 million to $84.4 million in the first quarter when compared to the same period last year. This increase was primarily due to the inclusion of the El Dorado refinery operating expenses and the cost associated with the planned maintenance shutdown of our Tyler refinery in late March. Depreciation and amortization expense increased to $19 million in the first quarter of this year. That compares to $14.9 million in the prior year period. General administrative expenses, excuse me, were $27 million in the first quarter of 2012 and that compares to $18.3 million in the prior year period. Both of these increases were primarily attributable to the inclusion of El Dorado. Interest expense was $12.4 million in the first quarter of 2012, and, again, that compares to $7.3 million in the first quarter last year. The increase in interest expense was primarily attributable to additional debt incurred in completing both the El Dorado and ministry [ph] acquisitions that we completed last year and the beginning of this year. This was partially offset by a reduction in other term debt balances, compared to a year ago. Interest -- income tax expense, was $26.4 million for the first quarter of 2012, compared to $11.1 million in the first quarter of last year. Our effective tax rate declined to 36.4% for the first quarter of this year and that compares to 39.6% for the first quarter of 2011. Turning to liquidity, Delek US had $235.1 million in cash and $441.2 million in debt at quarter end, resulting in a net debt position of $206.1 million. Our current net debt is only slightly higher than the net debt position we had in the first quarter of last year, despite our purchase of the remaining 65.4% of Lion Oil and 3 midstream acquisitions that occurred over the last 12 months. Looking now at capital spending, our CAPEX this quarter was $20.7 million, of which $14.7 million was spent in the refining segment, $2.4 million in retail, $0.5 million in marketing, and the other $3 million at the holding company level. Also, we have slightly increased our original forecast for capital spending for all of 2012 by nearly $12 million, and we now expect to spend approximately $124.8 million this year. Discretionary projects, which should contribute to our future profits represent more than 70% of our CAPEX budget. The breakdown in forecast of CAPEX by segment is now $95 million for refining, and roughly $25 million for retail, and $5 million of other capital spending. Let's start now with our refining segment. As I noted earlier, refining segment contribution margins increased to $116 million in the first quarter of this year. This compares to $54.3 million in the first quarter last year. As a reminder, the contribution margins for Q1 2011 doesn't include any El Dorado results, as we didn't complete the acquisition until the end of April of last year. This year the Tyler refinery generated approximately $71.6 million in contribution margin, while our El Dorado operations generated approximately $44.4 million in contribution margin. The year-over-year improvement in refining contribution margin was attributable to a number of factors. One of the most important factors continues to be our assets' favorable locations. This helps us in 2 ways. First, the location allows our refineries favorable access to cost advantage domestic crude oils, like Midland crude and local Arkansas crude. Second, our refineries are in areas of the country that continue to generally benefit from Gulf Coast based pricing for our products. Additionally, elevated Gulf Coast refining margins and strong seasonal increases in asphalt prices contributed to our strong performance in the quarter. Let me give you a little more color on the West Texas Crude Market. During the first quarter we benefited from our access to Light Sweet Midland crude, which traded at a discount of approximately $1.50 per barrel compared to WTI. For barrels to be supplied in the months of April and May, the Midland market traded on average at a discount of $5.30 per barrel, and currently the market for June barrels is trading at a discount of around $6.00 per barrel. The Midland discount is helping us offset the premium we pay on some of the other barrels we buy for the Tyler refinery. We expect in 2013 that we will have the ability to source all the crude for Tyler from the Midland area if justified by economic conditions. Looking now at Tyler, total throughputs were 55,525 barrels per day in the first quarter of this year, and this compares to 58,461 barrels per day in the first quarter of last year. Total sales volumes increased to 56,840 barrels per day this year, and this again compares to 58,261 barrels per day in the first quarter of 2011. As I noted earlier, Tyler had planned maintenance work that occurred during the last week of the quarter, which was the primary reason for the decrease in both total throughputs and sales volumes. Excluding the impact of that shutdown, Tyler operated at more than 90% of capacity during the first quarter of 2012, and this compares to 89% in the same period last year. Direct operating cost per barrel sold was $5.62 per barrel in the first quarter of 2012, and that compares to $5.59 last year. This increase, again, was primarily attributable to the maintenance shutdown, which resulted in $3.3 million in additional operating expense during the quarter. Tyler's refining margin, excluding intercompany product marketing fees per barrel of $0.55 was $20.03 this quarter, and that compares favorably to $16.42 for the same period last year. The 532 Gulf Coast crack spread was $23.87 per barrel in the first quarter of this year, and that compares to $17.54 per barrel in the first quarter of last year. Looking into the second quarter, we continue to benefit from discounted crude source from Midland. Through May, our total crude cost including the premium we pay on some of the barrels sourced to Tyler will be $1.00 per barrel over WTI, which is better than the $1.50 per barrel premium we paid in the [indiscernible] year. The 532 Gulf Coast crack spread, which currently trades around $20.00 per barrel remained elevated in the month of April, and averaged approximately $27.00 per barrel, getting us off to a great start in the second quarter. Turning now to El Dorado, I want to remind everyone that year-over-year comparisons aren't relevant given the timing of our acquisition last year. Total throughputs at El Dorado were 78,492 barrels per day and total sales volumes were 85,011 barrels per day in the first quarter of 2012. This increase in sales volume compared to the fourth quarter 2011 was primarily attributable to seasonality of the asphalt market. El Dorado operated at 90.7% of capacity during the first quarter of this year. Direct operating cost per barrel sold was $3.31 in the first quarter of 2012, which was a decline of $0.34 from the fourth quarter level. The quarter-over-quarter decline was primarily attributable to higher product sold during the quarter. El Dorado's refining margin was $9.04 per barrel sold in the first quarter, which was a significant improvement to the $2.09 per barrel margin we had last quarter. During the first quarter, the El Dorado refinery processed [indiscernible] consisting of local Arkansas crudes, West Texas crude that was primarily sourced through via the Midland crude hub, and offshore crudes. Looking into the second quarter, for April and May we have continued to increase the amount of cost advantage crudes for our El Dorado refinery to about 35,000 barrels per day. This includes a combination of local Arkansas crude, WTI and WTS for Midland, and East Texas crudes. In early 2013, we expect our access to Midland source crudes at El Dorado to increase by 25,000 barrels per day. This will replace mainly Gulf Coast crude that is currently trading at a premium to WTI. Lastly, I want to remind everyone that our quick hit capital projects remain on track and we expect them to bring incremental contribution margins starting in the third quarter. Our initial estimates were mostly LSR/Sat Gas and the Vacuum Tower Bottoms projects are expected to add more than $30 million in annual contribution margin. Looking now at retail, retail's contribution margin improved to $7.3 million in the first quarter of this year, and that compared to $6.5 million in the first quarter last year. The first quarter improvement was driven by higher same-store fuel volumes, merchandise sales growth, and lower operating costs. Same-store merchandise sales increased $7.6 million in the first quarter of this year when compared to the year-ago period. This was MAPCO's eleventh consecutive quarter of same-store merchandise sales growth driven by ongoing promotional efforts. Private label product sales, as well as continued momentum in our food service category, which was up 24% over last year. Same-store sales of private label products in areas other than cigarettes increased 35% in the first quarter of this year, compared to the prior year period. Private label sales as a percent of total merchandise sales, again excluding cigarettes, was 4.4%. This increase in private label sales is almost a full percentage point over last year and carries a margin of over 40%. Our merchandise margin declined to 29.4% during the first quarter of this year, and that compares to 30.8% last year, primarily due to the impact of a change in the retail pricing program of our cigarette manufacturers. In spite of the sharp increase in fuel prices during the first quarter, we were able to increase same-store fuel gallons sold by 28% and remain similar -- and maintain similar fuel margins compared to the same period last year. Overall, we believe our more aggressive approach toward retail pricing and our reimaging program helped to increase traffic into our stores during a milder than normal winter. As of the end of the quarter, the retail segment operated 375 locations versus 404 locations in the prior year period. Of the 375 locations in operations, 183 stores or almost half of the store base is either a reimaged location or a large format prototype. During the first quarter over 13 million gallons, or 14% of the fuel sold in the retail segment, was supplied by our El Dorado refinery. As a reminder, we are working towards supplying up to 10,000 barrels per day from El Dorado into our retail network within 5 years. Our new construction initiative remains ongoing, as we continue to build new stores in our core markets and target the addition of 8 to 12 stores annually. Looking at marketing, the marketing segment contribution margin was $8.1 million in the first quarter of this year and is roughly flat with the same period last year. Double sales volumes were 15,383 barrels per day, an increase of 5.8% compared to the same time last year. Stronger demand for products, mainly gasoline in West Texas drove for the overall increase. Included in the contribution margins are the results of our new initiatives to supply our refineries with bulk [ph] ethanol and biodiesel, which added approximately $800,000 to contribution margin in this segment during the first quarter. With that, I'll turn the call over to Uzi for a few closing remarks.

Thanks, Mark. When we spoke with you a couple of months ago, we noted that 2012 crude [indiscernible] differentials had started to widen again from fourth quarter 2011 levels. This fact coupled with the locations of our refineries allowed us to deliver the best first quarter in our company's history. In fact we sold over 141,000 barrels per day which exceeds our crude capacity of 140,000 barrels per day despite Tyler's planned outage. We have been talking to you the last few quarters about the strategic initiative and decisions that we have made to further increase the refinery's segments access to larger volumes of WTI link [ph] crude, and we have benefited from these initiatives. As new industry projects develop in the future like the Seaway reversal or the Keystone XL Pipeline, crude differential should contract from current levels. However, we believe that our geographic locations will provide lasting advantages that should allow us to improve our crude slate [ph] even farther in the near future. We believe this should allow us to improve the quality and stability of our earnings profiles moving forward. 2012 is setting up to be a very interesting year, and we remain excited by the opportunities that our larger asset base affords us. Further we will continue to evaluate opportunities that our strong free cash flow will provide us in terms of driving values for shareholders. We will continue to use our free cash flow to fund dividends and to reinvest in our business as we see strategic opportunities to improve our current assets. We will also use our free cash flow as we see opportunistic platforms to expand our asset base through external means. Our recent acquisitions of both the Needham [ph] [indiscernible] and [indiscernible] Pipeline systems as well as our strategic purchase of the Big Sandy Terminal and product line are great examples of how we can put our free cash flow to work with an eye toward increasing future shareholder value. With that, Brandy, would you please open the call for questions?

[Operator Instructions] Our first question comes from the line of Jeff Dietert with Simmons.

You announced the Paline and Nettleton pipeline acquisitions and the Big Sandy Terminal last time we talked, and as you look at industry infrastructure around Longview is there significant opportunity to further build your midstream infrastructure? Do you see that as a big growth area for the company?

Jeff, thank you for your question. Obviously, Longview is a strategic hub since it not only has 5 pipelines leading crude to that area, but it is connected to our both refineries. So we will continue to look at Longview as a huge hub for us in terms of local crude. Bring crude from the west. Bring crude from Gulf Coast if it makes sense, and continuing to increase our capacity in that area. At this point we have our 2 pipelines that take us from Longview to Tyler and then obviously we have the Paline [ph] going from area of Longview to El Dorado. So, for us, Longview continues, and will be a huge hub.

Do you see other areas where midstream infrastructure additions could benefit your strategy?

As we discussed in the past, the amount of drilling that is taking place in that area of northern Arkansas, I'm sorry, southern Arkansas and northern Louisiana is tremendous. So, I'm sure that in the future as these drillings mature, there will be opportunities for more midstream assets, for us either to purchase or to develop ourselves.

You talked about the Exxon North line outage. It sounds like that's reduced your throughput by maybe 5,000 barrels a day. And is that Louisiana Light Sweet based crude, is that how we should think about that loss of feed stock?

Well, it's actually, our capacity now, and El Dorado's obviously 80, and we're running now 55. Now, we, please remember that a year ago, only a year ago, we were running 15,000 WTI-linked crude. Now, in this call, we already said that we are running 35 in El Dorado. So, these crudes are the Gulf Coast crudes. These are the [indiscernible] of the world, the Poseidon, the EIC. So, for us, despite the fact that these crudes are a loss, on the other hand the marginal on these crudes is not tremendous. Now, we do have opportunities to replace these crudes in different ways, and we're looking at them. We can pull the plug and increase it, but we want to make sure that the economics work because anyhow, these crudes are marginal at best in today's crack.

Got you. So, there's a 20, 25,000 barrel a day loss of Gulf Coast crudes at El Dorado.

That is correct. Now obviously, we can, as I said, we can replace them, it's just ask ourselves "Should we replace them?"

Our next question comes from the line of Ed Westlake with Credit Suisse.

Just a quick question. This is hopefully a very short one. On the $5 discount in the midland Permian basin, by the time you transport that across to Tyler what sort of discount can you actually receive at the refinery gate for that crude?

At today's contract we have, the cost to ship them is very minimum. In the future, even when we spoke about 2013, the ability to bring more Midland barrels, and I think we mentioned Tyler to be essentially everything Midland. And El Dorado will be another 25 of Midland, still very minimum.

And in terms of since you've announced those projects and clearly if you've seen the Permian growth, the Texas numbers came out on Friday. They were just astonishing. The suppliers in that basin must be interested in you as a longer term customer. Are any people looking to lock-in the Permian discounts to get their volumes to market?

If you look at the forward curve 2013, you are talking about around $2.00. The last time I looked it was like 2 weeks ago. Today's level is $6.00, around $6.00. So if we're doing 2013 strip, we're leaving a tremendous amount of value on the table. Yes, we can lock it in tomorrow morning. The shortest answer though is we don't want to do it because we believe that as the industry believes, the production in Midland will continue to increase and will allow us to farther enjoy widened margins.

Yes, understood. And so, just as you translate that sort of widening discounts and the stuff you are doing on the crude side into cash flow, obviously your CAPEX has gone up a bit this morning, still that is nothing. I guess one question: Would you be able to return even more cash to shareholders? What are your thoughts around that?

Well, we continue to be committed to returning cash to shareholders. We had 2 special dividends. Our goal is to increase, if you will, dividend to the shareholders through special dividends. So each time we see that there is good result, we'll come with a special. That's our policy at this point.

Right, right. So a little bit like the Holly program where after you generate free cash flow and get the debt down post the acquisitions, you'll return the excess cash that you don't think you need to shareholders.

Sure. Mark, do you want to add something to this?

No, I think it's an alternative. As you talked about the CAPEX and we also look at debt retirement as another opportunity. So we look at it as part of the entire program to increase value for shareholders. So it's certainly a valuable component of our alternatives and it's one we would rate highly.

And my final question, now that light, sweet refiners are the "toast of the town", any ways you can de-bottleneck Tyler or El Dorado at a low capital cost?

Fred, do you want to take this?

Tyler, we've got a little bit of headroom just based on our ability to increase the barrels of crude getting to the refinery. We can squeeze a few through there. We've looked at expanding it further, but as you go upward towards 70,000, you would be having to revamp almost every unit in the refinery in order to do that. Now El Dorado is another story. The crude and vacuum unit there is already capable of running 100,000 barrels a day. We have additional work that would need to go on with downstream units, but that work has been scoped out. I think we said in prior calls it's roughly $150 million worth of additional capital expenditures to make all of that happen.

Our next question comes from the line of Blake Fernandez with Howard Weil.

Guys, good morning. Congratulations on the record first quarter results. I had a question for you in the Big Sandy Terminal. The verbiage in the release suggests that you're potentially having some flexibility to market to other product areas. Historically I've always viewed that as kind of a captive market for you. Do you have the opportunity to actually branch out a bit? Can you just talk about the strategy a little bit there?

Yes, Blake. This is Fred. The Big Sandy is about 20 miles north of Tyler so it gets us closer to customers on the northern end of our system. Some of the customers have expressed a desire to live there because it's a little more convenient, a little lower transportation cost. One of the things we're looking at there is maybe some flexibility in alternate products, or more flexibility around biodiesel or ethanol blends.

Okay. Great. The second thing, Fred, maybe this is for you as well, is there any material down time planned for the balance of the year?

No.

Okay.

Nothing planned at either refinery.

Okay. The last one I had for you was simply on the merchandise margins. I saw that there was a hit to the margin based on, it looked like new pricing for cigarettes and whatnot. Is that kind of a good assumption or a run rate going forward?

Yes, Blake. In our company there are several MLP's. One of them is the cigarette MLP. That is a hit [ph] of 1.5% to the margin. Now, we do increase our private label and we do increase our other initiatives that will offset that in the future, but at this point, a good assumption is 1.5% lower than what it used to be.

[Operator Instructions] Our next question comes from the line of Ben Brownlow with Raymond James.

If you guys could talk a little bit more about the G&A, the break out of that year-over-year increase with El Dorado, acquisition expense, bonus etc.

Well, G&A obviously increased because we have another refinery. On top of that, we had some legal bills and acquisition bills. However, one more thing that is happening in our company, our program is that we compensate our employees based on our results. And as we see this year fixing to be a very good year, we increase the accruals for compensation for our employees. You want to add anything to that, Mark?

No, that's the components. With performance, we've increased some bonus accruals a little bit. We have some expenses as Uzi mentioned related to the 2 acquisitions we've made prior this year, plus some additional projects we're working on now.

Do you see sort of a $25 million, $26 million run-rate going forward quarterly?

If the results will continue the way the way it is, we will be about the 20-mark, I don't know if it's 25, 26, but we'll be a little bit higher than the 20-mark.

And I know you guys said the bulk of crude was sourced from Midland at Tyler. Do you have a percentage of what was between Midland and Cushing for Tyler?

We don't get any Cushing barrels to Tyler. It's either local barrels or Midland.

Our next question comes from the line of Paul Sankey with Deutsche Bank.

A lot of the questions have been answered, obviously. I'm sorry I'm on late. I just wanted Uzi what your perspective is on the Motiva start-up. I know a big advantage for you has been that you are very much a niche refiner within Texas but is there any threat to that niche from additional supply?

First of all, it's still yet to be seen, the impact of the Motiva facility going up. However, as we discussed in the past, in Tyler we are sold out. One of the things that Pete says within our company, I wish I had 80,000 barrel refinery. So it's not a threat to Tyler, we think. In terms of El Dorado, we think that the fact that there is local drilling going on, as well as our plan to increase Midland in the future will more than offset the situation in the marketplace. Now if you will look at the macro [ph] situation, the entire marketplace, I think that there will be some, if you will, weak hands that will decide that they are going out of their facility. But that's yet to be seen.

Yes, okay. That's interesting. Uzi, I know you always have strong views on the oil market. What do you think about the current, it's just obviously a very dislocated market really because of infrastructure, but also because of underlying secular trends. What do particularly think is secular and sustainable about what we are seeing and what do you think is near-term noise? And I'll leave it there, a good open question for you, Uzi.

Well, if we ask about the price of crude oil or T.I. in general and then brand [ph] can relate to that, I think that the price of T.I. being $105 and brand [ph] around $120 is too high. I do not think that the market can sustain these numbers. So in general, I think that crude oil should not be in this area. As the infrastructure is coming along and as more drilling takes place in different places in the world, but mainly in the United States, I think there will be pressure on the crude oil market to adjust itself lower. In terms of the differentials, again, we built our company based on the assumption that these differentials are not sustainable. These are great differentials for us, we enjoy them every day but we prepare ourselves for the future and we see brand T.I. being $5.00 to $7.00 and then a premium of local barrels between $3.00 and $5.00. So, these are the assumptions that we are using for our company as we build our company for the future.

Okay, that is interesting, Uzi. I think the other stuff I would have asked you about, which are things like specials and stuff you have answered.

Our next question comes from the line of Paul Cheng with Barclays.

I have a number of hopefully quick questions. Mark, can you give me the market value in excess of the books for inventory?

$55 million.

$55 million?

Yes.

Usually, on the same-store sale when you guys say 0.8% in the first quarter year-over-year gain, is that apples-to-apples, means that only including the stores that have been opened for more than 12 months or is that overall brand together?

No, it is year-over-year. It is same stores.

Yes, I know it is year-over-year, but is the sample in that comparison is all of the stores that have been open for more than 12 months?

It is same stores. It is apples-to-apples. We do not give you something -- that means that we had more traffic and more transactions in our stores, same stores.

Do you have what is the April number?

I do have the April number, yes. It is a little lower than that. I do not know, I do not remember. Do we have it here? I do not remember. I am sorry.

Okay. Maybe you can have someone send me a quick email?

We will do that gladly.

Okay. Mark, when we are talking about Tyler, I think in the first quarter you guys were saying that the crude position [ph] [indiscernible] is about $1.50 higher than the WTI Cushing. What is your estimate on that basis that in the 2nd quarter?

I think what we said in the script was quarter-to-date it has been about $1.00, Paul.

That would be for both April and May combined.

Right, so do you expect that is a reasonable proxy for the whole quarter?

Yes, I think the differentials have widened a little bit going into June but that is probably a reasonable proxy at this point.

Okay. Maybe this is for Fred. Fred, on the Sandy terminal that you bought, even though it is very close to Tyler, but I thought you already essentially sold out all of your product from Tyler within a really close radius. So, do you really have any excess barrels that you can sell or ship to that terminal?

Well, Paul, in the summertime typically not, we will sell out. In the winter time, this past winter we were fortunate that demand was very strong, particularly on distillates that allowed us to keep up at higher rates, but if you look at utilization at the refinery there is room to crank it up higher, and we think that the Big Sandy facility will help us access the markets that will allow that to happen more profitably. Maybe put another way, it will help us keep those incremental products closer to home.

So you are saying that essentially that allow you to be more year round, you can run -- if the physical availability of the facility is there then you can run at 95% year round, otherwise during the winter time you have to run at a lower rate?

Not necessarily. I think that it will certainly be a contributor, but I cannot say necessarily that the market will absorb enough to keep us there full time.

Paul, to answer your question, we can run 95% and still sell everything. The difference is that Big Sandy will allow us to, in the future, location differential for customers that do not want to drive all the way to Tyler. What Fred said is basically that we will get higher returns for the long haul deliveries, if you will.

And you say and Fred that you gave a number say $150 million that a rough estimate for the capital requirement to finish the job at El Dorado expansion, if you really want to get to 100,000 barrels per day. What kind of timeline and what considerations do you have before you make that decision?

Well, a bulk of the ability to get to 1,000 [ph] is additional asphalt markets. The 100,000 capacity depends on a heavier crude slate than what we operate with today so we need to look for the opportunity to expand our asphalt market in support of that expansion. Now we have not started engineering to look at adapting that expansion to a lighter crude slate, right now we have the flexibility to go anywhere from 36 gravity to 28 gravity on our overall crude and still run almost full capacity. So higher throughputs right now will dictate that we run a heavier slate and that means more asphalt.

If you want to on the conversion unit side that to build in a bigger cracking capacity so that you don't have as much of the asphalt. Is it doable? I presume it is, and how much is the incremental cost there maybe?

Well, the Cat Cracker expansion is included in that $150 million.

Can you expand even bigger, that's my question. So that you don't really, you can run it and increase the [indiscernible] without increasing the asphalt?

It hasn't been looked at, Paul.

Okay. Then, what timeline if you're going to look at it, or at this point that you have no plan to look at that kind of options.

Paul, there are more projects that are included in the $150 million that we're looking at right now. I will probably make a decision next month or 2 of a couple of pieces, extra pieces out of these $150 million. The LFR project was part of $180, now we're saying it's $150 because we are already conducting a couple of projects. In the next couple of months we will look at more projects, in order to, if you will, take another bite on the elephant of preparing ourselves for the big decision. But our strategy right now is to take all these $150 and used to be $180 and look at the most profitable projects and go and try to knock these down and then going forward we'll make a decision about the remaining toward the turnaround which is 2014.

Okay. Two final questions, one for Mark and one for Uzi. For Mark, that you show some inventory in both Tyler and El Dorado this quarter. How's that inventory sales that may have impact your unit margin, your unit operating costs? For what that is, does it have any impact? Did it have any impact?

When you look at the total sales volume in El Dorado, you can see that we sold 85,000 barrels a day, even though we only produced, I think around 78,000 barrels a day. I can tell you that a big portion of it was the gasoline that was sold, and there was not too much margin on that gasoline with our arrangement with Jay Aaron. As we sell gasoline inventory, the margin is very limited, so, I believe that had we not sold that inventory during the quarter, the actual margin in El Dorado would have been higher. When you look at the operating costs in the El Dorado, of course that the $3.31 was positively impacted by the fact that we sold more barrels. But overall, when you look at the unit margin in El Dorado, the refining margin probably would have been higher had we not sold those extra barrels.

Okay. So, I see, so you essentially saying that the inventories sales that you made in El Dorado didn't really make much money.

Correct.

With 1 exception, Paul. Asphalt. Asphalt belongs to us. And asphalt sits on the books as we said in the past, with the market price at the time that is the reason we got the hit, well, one of the reasons we got the hit in the fourth quarter, as we marked down asphalt. Now as we get into the asphalt season, obviously as we sell it we will mark it up. Asphalt is a big exception, it belongs to us.

Right, but in the first quarter it is not a big issue because you did not sell that much asphalt from your inventory, I presume?

100,000 barrels.

How about in Tyler? Does the inventory have any meaningful impact on your unit margin and your unit cost?

We are doing [indiscernible] in Tyler and the inventory belongs to us. We are pretty much close to our target so there is not too much noise.

Okay and, Uzi, in your discussion with Delek Group, I presume they are very happy with their ownership in the company, and I presume that they want to remain in control, do you get the feeling that, I mean, how low is their working interest minimum requirement maybe?

Well, obviously, they are very happy. They invested $40 million in this company, and they got more than that in 1 quarter, so that for them is a good return. However, they know that in order to increase the value for everybody, they need to sell some shares at 1 point. I would not necessarily make the assumption that they want to stay in control for the rest of their lives. I think that it is yet to be seen. I am not saying that they do not; I am just saying it is yet to be seen as they will see that more free flow as well as the fact that we have other shareholders getting in, I think they will see the benefit of diluting their holdings.

So it's not a dead-set [ph] that they need to be in excess of 51%?

That is correct, it is not.

[Operator Instructions] There appear to be no further questions at this time.

Well again, I would like to thank my colleagues here around the table, our employees as well as you the shareholders and people that take a look and get a good look at our company. We appreciate your support. Obviously, this was a great quarter for us, and we continue to be optimistic about the future. Have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.