Frontier Oil's CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 5.11 | About: Frontier Oil (FTO)

Frontier Oil (NYSE:FTO)

Q1 2011 Earnings Call

May 05, 2011 11:00 am ET

Executives

Nancy Zupan - Chief Accounting Officer and Vice President

James Stump -

Douglas Aron - Chief Financial Officer and Executive Vice President

Michael Jennings - Chairman, Chief Executive Officer, President and Member of Executive Committee

Kristine Boyd - Manager of Investor Relations

Joey Purdy - VP, Refinery Supply

Analysts

Edward Westlake - Crédit Suisse AG

Daniel Burke - Johnson Rice & Company, L.L.C.

Evan Calio - Morgan Stanley

Paul Cheng

Jeffrey Dietert - Simmons & Company International

Sam Margolin - Dahlman Rose & Company, LLC

Douglas Leggate - BofA Merrill Lynch

Chi Chow - Macquarie Research

Unknown Analyst -

Blake Fernandez - Howard Weil Incorporated

Operator

Welcome to the Frontier Oil First Quarter 2011 Earnings Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Ms. Kristine Boyd, VP Investor Relations. Ms. Boyd, you may begin.

Kristine Boyd

Thanks, John. Good morning, and thanks to all of you who are joining us this morning for our first quarter 2011 earnings call. On the call this morning are Mike Jennings, Chairman, President and CEO; Doug Aron, EVP and CFO; Jim Stump, VP of Refining Operations; Joey Purdy, VP of Commercial Operations; and other members of our executive management team.

Before we get started, I would like to read our Safe Harbor statement.The primary purpose of this conference call is to describe the assets, operations and certain current and historical financial conditions associated with Frontier Oil Corporation.

This information and associated comments made during the course of this conference call may include forward-looking statements concerning the company. These may include statements of plans and objectives for future operations, statements of future economic performance or assumptions or estimates.

The accuracy of these forward-looking statements is subject to a wide range of business risks and changes in circumstances that are described in the company’s reports that are filed from time to time with the Securities and Exchange Commission. Actual results and outcomes often differ from expectations.

Please note, our call today does not constitute an offer to buy or sell any securities related to our recently announced merger with Holly Corporation. All solicitations to buy or sell securities and to secure shareholder proxy votes will be made under current SEC rules and regulations.

I would now like to turn the call over to our Chairman, President and CEO, Mike Jennings.

Michael Jennings

Great. Thanks, Kristine. Good morning. Thanks for joining us. We're proud to present our first quarter results to you today, which represents our first quarter record for our company. This morning, Frontier reported $140 million in net income or $1.32 per diluted share for the first quarter of 2011. This compares with the first quarter 2010 net loss of $40 million or negative $0.39 a share.

This quarter's achievement follows another quarter of significant improvement in inventory [ph] refining fundamentals and strong operations at both our plants to capitalize on this opportunity. Frontier's average diesel crack spread increased by more than $18 over the first quarter of 2010 to $25.53 per barrel in the most recent quarter. And Frontier's average gasoline crack spread increased by more than $9 over the first quarter of the prior year to $15.43 per barrel in the first quarter of 2011. Crude differentials also improved substantially in the most recent quarter compared to 2010. Our average light/heavy differential increased to $18.60 per barrel in the recent quarter, up from $4.91 per barrel in the same period of 2010, while the average sweet/sour differential increased to $3.58 per barrel, up from $1.77 in the first quarter of 2010.

The net effect of these improvements in crack spread and crude differentials was more than a $16 improvement in our gross refining margin of $19.84 per barrel in the first quarter of 2011, which compares to $3.30 per barrel in the same period of 2010. Refinery operating expenses increased on an absolute basis to $75.8 million in the most recent quarter compared to $68.9 million in the first quarter of 2010 due in part to weather-related outages and necessary maintenance. However, with a 26,000 barrel per day increase in product sales, operating cost fell on a per barrel basis to $4.24 per barrel, down from $4.44 in the first quarter of the prior year.

The El Dorado Refinery has seen good results from the new Gofiner gasoil hydrotreater, which we installed at the end of 2010. And Jim will have more discussion on the light product yield improvements from that project later in this call.

The Cheyenne Refinery accomplished the FCC and out key turnarounds during April and is returning to full utilization this week. Cheyenne will be completing the tie ins for its LPG recovery project in the third quarter and remains on course to complete the final phases of the profitability improvement initiative by year end.

To date in the second quarter, Frontier continues to experience advantage crude pricing caused by the surplus of mid-continent crude relative to takeaway capacity. The average spread between WTI and the Gulf Coast equivalent barrel LLS was over $13 in the first quarter and is nearly $16 in the second quarter to date. While the average spread between our heavy sour barrel WCS and the Gulf Coast equivalent Mayan [ph] barrel was over $17 in the first quarter and is about $14 quarter to date.

Not only are these spreads significantly benefiting our raw material costs but they're also creating support in the crack spreads, which are being set in part by the refined products imported to our markets from the Gulf Coast and other refining centers, which have limited access to these constrained crude supplies.

With this support, the first quarter crack spread strength is continuing and even improving in the second quarter. Doug will provide these numbers later in the call.

Our merger with Holly Corporation is progressing well and remains on schedule for an early third quarter close. We are pleased to receive the early termination under the waiting period of this Hart-Scott-Rodino act in mid-March and we filed our amended S4 statement with the SEC last week.

We're building an outstanding management team and supporting staff for this new company and Holly-Frontier has the makings of a premier U.S. refiner. We're eager to begin operations as a combined entity.

With that, I'll turn it over to Jim Stump for discussion of our quarterly operations.

James Stump

Thanks, Mike. Good morning, everyone. In El Dorado for the first quarter, crude throughput averaged about 133,100 barrels per day and total charges about 147,700 barrels per day. Operating expenses averaged $3.68 per sales barrel or $49.8 million on an absolute basis.

In Cheyenne for the first quarter, crude throughput averaged about 42,700 barrels per day and total charges about 44,600 barrels per day. Operating expenses averaged $6.01 per sales barrel or $26 million on an absolute basis.

For the second quarter of 2011, El Dorado's expected average crude rate is about 127,000 barrels per day, total charge is about 142,000 barrels per day and expected operating cost of about $3.82 per sales barrel.

Cheyenne's expected average crude rate in the second quarter will be about 44,000 barrels per day, total charges about 45,000 barrels per day and expected operating cost of about $5.27 per sales barrel.

Heavy crudes are expected to be about 25% of El Dorado's crude slate, and about 57% of Cheyenne's crude slate for the second quarter. As Mike mentioned, the final phase of the El Dorado Gofiner project was commissioned late in the fourth quarter of 2010.

The results we have seen in the first full quarter of operations confirm the improvement in refinery liquid yields that we expected from the project, including incremental diesel yield of 1,800 barrels per day and incremental gasoline yield of 200 barrels per day.

In addition, the expanded Gofiner increased El Dorado's gasoline capacity, allowing additional MMEA gasoline imports.

The value of these benefits resulted in additional refinery margin of $5 million per month in the first quarter, which was a quarter that realized very high values in additional refinery and improving refinery liquid yields.

For our lower sensitivity case we looked at the improved profits in environment consisting of a $75 WTI price, a $10 321 crack spread, and a $5 per million BTU price for natural gas, which would achieve a monthly profit improvement for the project of $1.8 million.

Cheyenne safely and successfully completed the major SEC and out key turnarounds and we're returning to normal operations this week. As Mike mentioned, the LPG project is on track for completion later this summer and we have no other major turnarounds this year at either refinery.

And with that, Doug is going to wrap up our call.

Douglas Aron

Thanks, Jim. In the first quarter, we generated $181 million in operating cash flow, net of a $4 million increase to working capital. We spent $16 million on capital improvements and paid $36 million in dividends. We ended the quarter with a cash balance of $685 million, which exceeded our debt outstanding by $338 million. As of March 31, we also had a remaining income tax receivable of $31 million. Our 2011 capital budget is expected to total $110 million, including $28 million for the completion of the LPG project in Cheyenne.

During the first quarter, reduction to intermediate inventories resulted in reduced raw material cost of the El Dorado refinery, benefiting El Dorado's quarterly gross margin by about $1.92 per sales barrel. Our hedging results contributed a loss of $4.3 million after taxes to the first quarter results due to about a $15 increase in crude price through the quarter.

The first quarter 2011 results also include an after tax charge of $3.2 million related to the anticipated merger with Holly. Finally, I'll update you on a quarter-to-date crack spreads and crude oil differentials.

For Cheyenne, the gasoline crack spread averaged about $19 for April and $25 month-to-date so far in May. The diesel crack spread averaged about $31 for April and $33 month-to-date in May. While the light/heavy differential including transportation is expected to average about $16 in Cheyenne for the second quarter.

In El Dorado, the gasoline crack spread averaged $23 for April, and about $28 month-to-date in May. Although I believe as of yesterday, we've seen that tick up just over $30 per barrel on gasoline. The diesel crack spread averaged about $27 for April and about $25 month-to-date in May.

The light/heavy differential including transportation is expected to average about $13 per barrel in the second quarter for El Dorado.

And with that, John, I believe, we're ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Doug Leggate from Bank of America.

Douglas Leggate - BofA Merrill Lynch

Going to try a couple. One on hedging and one on the comments on turnarounds. I'll go with turnarounds first. I understand from what you said that there's no major plan maintenance over the balance of the year, but you did, as I understand it, plan to bring up the LPG project towards the end of June. I assume there would be some kind of down time associated with tying that in. Can you give us an update on the schedule there? And what the potential opportunity cost would be of doing that given how strong margins are? And I've got a follow-up on hedging, please.

Michael Jennings

Very good. That's something that we're studying pretty closely. The project will likely be finished and ready to be tied in, in late June or early July. Really it's early July is where we've got it plugged on the calendar right now, Doug. The issue is one of gasoline production during that period of time and lost opportunity. And so the impact on gasoline production is around 80,000, 90,000 barrels of lost opportunity to tie that project in. That's against a monthly benefit of the project, which we see at about $2 million per month. So we're going to be weighing the impact on lost profits versus getting that project up and running. And it could well be that we slide it further forward to sync it up with other maintenance, which would be a regeneration of our platform or our reformat of Cheyenne refinery. That will follow later toward August, September time period.

Douglas Leggate - BofA Merrill Lynch

Okay. So there may still be some downtime then?

Michael Jennings

Yes. But at that point, there will be downtime but it would be planned downtime that we need to take otherwise.

Douglas Leggate - BofA Merrill Lynch

Got it. While we're on the subject of Cheyenne, Mike, can you talk a little bit about the progress in operating cost?

Michael Jennings

I think we've made great progress on operating cost in Cheyenne. First quarter reflected some additional maintenance we needed to do to our diesel hydrotreater, as well as some weather-related costs. But we've got the Cheyenne plant from a staffing perspective effectively where we want it to be. There are few moderate operating cost opportunities left in front of us but we're pretty well there.

Douglas Leggate - BofA Merrill Lynch

Great. My follow-up was just on hedging. It just struck us with the $15 move in the oil price of hedging losses might have been a little higher. Is something changed there in the way that you're attending for that? And I'll leave it at that.

Michael Jennings

Doug, our accounting hasn't changed. It's an astute observation. We do less hedging now than we did in the past. Our typical short crude is really geared toward excess intermediates at our refineries. And so far as we have those, we also hedge a little bit of the pipeline transit inventories coming from Canada, but not as much as we did in the past. So we're probably hedging 1/3 as much as we did in prior years.

Operator

Our next question comes from Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley

I was just curious, and the first of 2 questions here. Have you guys been in any discussions with third-party logistic companies to move more Bakken crude [ph]into Cheyenne like in either train or most of your Bakken flows coming from pipeline? And is there any opportunity to maybe make a midstream investment to take advantage of water differentials particularly out of Bakken?

Michael Jennings

Joey can you answer that please?

Joey Purdy

Yes, we're pipeline connected out of Guernsey directly to Cheyenne. And Guernsey is -- the Bakken is a little bit constrained periodically coming into Guernsey but for the most part, we have at Cheyenne we have unfettered access to Bakken crude already.

Evan Calio - Morgan Stanley

Okay. And then with regard to, maybe you could discuss a little bit about the heavy/light dynamic in your crude slated at El Paso -- I'm sorry, El Dorado and Cheyenne, given the direct differentials in both have blown out. I know that WCS spread is a huge [ph] $25 in a quarter, yet your El Dorado is running at a lighter slate. Is that really just a yield transportation cost benefit outweighing kind of the water WcS and just maybe any comments around that?

Joey Purdy

You want to take that Mike?

Michael Jennings

Please. Part of that is the crack spreads and the TI discount rights. So when you got as good as crack spreads as we had in the first quarter right, which is very unusual, right, you're going to run from maximum product make instead of maximum crude differentials right. So El Dorado is going to bounce between maybe 20% heavy and 40% heavy on the top side, depending on what's your relative crack spread to crude differential is. And we had such good crack spreads in the first quarter that we went after the maximum production set of that equation.

Operator

Our next question comes from Paul Cheng from Barclays Capital.

Paul Cheng

A number of very short questions. First on the balance sheet, can you tell me what is the market value in excess of the book for inventory?

Douglas Aron

I'm going to have a LIFO reserve for Paul.

Nancy Zupan

I could answer that. The market value exceeds our book by $430 million.

Paul Cheng

$430 million. And a number of your competitors is looking at ways to take advantage of your WTI spread by expanding the capacity. When we're looking at Cheyenne and El Dorado and also that in Holly in their case, do you see that's a relatively cheap opportunity that you would be able to expand the funding off the refinery to take advantage of that?

Michael Jennings

Well, Paul, the front end is the cheapest iron in the refinery and the challenge really is that the fuels finishing unit and the conversion units are substantially more expensive. And so at each of our 2 refineries within Frontier, we have pretty limited downstream finishing capacity, a little bit of space in our cat cracker that we intend to address either crude slate or otherwise. But there are -- we have a lot of driver with this crude economics and with these margins to look inside our plants at incremental opportunities. And our folks on the Niobrara and Cheyenne, we've talked about that a bit in the past and we're working it in the field right now with producers. But getting a crude deal to support a refinery expansion, in my mind, is really the way to work going forward because it blocks in the economics that justify the expansion. Using that Cheyenne refinery to process local crudes, particularly if they're priced attractively for us, will reward an expansion through time. And whether we go all the way down through the refinery to conversion of fuels finishing units or we ship intermediates toward the to El Dorado plant is really a decision that's in front of us. But obviously, given the margin environment and given the inland crude production, we're looking hard at a number of different opportunities.

Paul Cheng

But is it fair to say that because you are pretty matched between your funding and the back end of your refinery, that any expansion need to be a full slate including both sign not just a very cheap way to expand the fund?

Michael Jennings

We don't have cheap expansions of scale at within our Frontier plants right now. We took advantage of that in El Dorado in 2006 and '07 in building that big creek unit and vacuum tower.

Paul Cheng

Any idea whether Holly have any opportunity there?

Michael Jennings

The greatest opportunity that I see within Holly right now is the Tulsa integration. And then subsequently, the integration between El Dorado and Tulsa to fully utilize the units that are available. But that's going to take work as a combined company, which we're fairly limited from right now.

Paul Cheng

And is there any major capital projects that currently is on the table just being considered, both for you guys and Holly? Other than, say, a full plant expansion?

Michael Jennings

Well Paul, I promise you that at the refinery level, they have all kinds of interesting projects that may work and we're looking at those. But in terms of seriously considering expansion projects right now, we have nothing that's affiable [ph] and ready for our board to consider. So we were on a maintenance capital budget for 2011 with the exception of the LPG recovery project in Cheyenne. And we're going to stick there for a while. Obviously, the margin environment has us looking around at what we can do to make some more money. But I think an entire full plant expansion from crude unit down through fuels units is probably unlikely at this time.

Paul Cheng

And then in the hedging. You said that in the first quarter that you are doing roughly about 1/3 of what you used to be, is that a new policy going forward? Or is this more likely a one off-year?

Michael Jennings

Paul, when crude went to $45 a barrel, it was fairly apparent to us that it had more upside than downside and we backed off of our hedging at that point pretty significantly. We still tend to hedge the excess intermediate builds within our plants, as I referenced, but the hedging of the crude inventories is something we don't do as much of as we used to do.

Paul Cheng

Right. Should we assume by -- in the past, I think it's 1.5 million to 2 million barrel, now that should be assumed as may in the 0.5 million barrel count range per hedge?

Michael Jennings

Yes.

Paul Cheng

Okay. As final one, I have to apologize, when you went through the throughput number expectations for the second quarter, I didn't get a chance to catch all that. Can you repeat that?

Michael Jennings

Somebody repeat those for Paul.

Douglas Aron

Yes. I'll do it. In the second quarter, El Dorado's average crude rates expected to be 127,000 barrels per day. In total charges, 142,000 barrels per day. For Cheyenne crude rate of 44,000 barrels per day and total charge of 45,000 barrels per day.

Paul Cheng

And that the operating cost at El Dorado is $382 million and Cheyenne is a $527 million, and heavy by El Dorado is $25 million and Cheyenne is $57 million. right?

Douglas Aron

For heavy crudes slate, yes.

Operator

Our next question comes from Sam Margolin from Dahlman Rose.

Sam Margolin - Dahlman Rose & Company, LLC

I was just curious to see like this sort of industry-wide upgrades happening in these Northern Midwest regions. How you see heavy discounts playing out going forward? On the one hand, there's more competition for it but at the same time, I mean, it's barely keeping up with supply growth. So is there a view you guys have as far as what kind of differentials we can expect and if you might switch to lights in some of your more flexible refineries, if anything is going to narrow?

Michael Jennings

Joe, do you want to take a shot at the crystal ball?

Joey Purdy

No, not really. I mean, I guess you would certainly expect that the large cokal projects in the upper MidCon are going to put some pressure on heavy crude supply later this year, next year whenever they're completed right. So we've anticipated that for some time. We think currently, the heavy differentials kind of typical come in for the summertime and we would expect it to get wider again out in the fall and into the winter. But we are, whatever you want to call it, cautious about heavy differentials going into 2012. At the same time, we wake up and find ourselves in a very good position right where the lights we crude [ph] find our way into our refineries. And the obvious question is what kind of crude are these refineries, that are adding cokers, not going to run whenever they start running heavy crude, right? There's still going to be an abundance of crude, and it's our job to look at the market on a month-to-month basis and pick what makes us the most money in our refinery .

Sam Margolin - Dahlman Rose & Company, LLC

And just one more on Cheyenne. I mean, as Niobrara starts to ramp up, do you guys anticipate leaving some of this Bakken behind or is there a quality dislocation -- I just think a lot of us here are trying to figure out where all this stuff is going to go?

Michael Jennings

The Niobrara barrel is relatively sweet, though looking kind of heavy. It first goes to the asphalt makers and those with limited sulfur recovery capacity. Cheyenne has relative advantage towards sour heavy crude so at $5, $6 off for the Niobrara, we continue to run the relatively advantaged WCS barrel at $15 or $16 off. However, once the Niobrara exceeds the sweet crude runners capability and the sulfur has to be extracted, it's going to have to buy its way into refineries like Cheyenne. Between that and the proximity, giving us a big logistical advantage, I think that as that production grows to sort of 30,000 barrels a day, Cheyenne will be a very relevant refinery for that. And at that point, we start looking at, is there a term-crude deal that warrants refinery expansion, take advantage of our location and of our product processing capacity to make some money on that local crude play.

Operator

Our next question comes from Blake Fernandez from Howard Weil.

Blake Fernandez - Howard Weil Incorporated

A couple of quick ones for you. One, G&A seemed to tick up pretty good in the quarter, I'm assuming that's related to stock-based comp, but can you confirm that? And is this a decent run rate going forward or woud you expect that to come back down?

Douglas Aron

Blake, we had what, $5 million of Holly merger expenses in G&A for the quarter and I think that's the differential not the stock-based comp. $5 million pretax, $3.2 million after tax, Blake. I bet you that explains most, if not all.

Blake Fernandez - Howard Weil Incorporated

Yes. Okay. And then the second one, Mike, pushing $700 million of cash on the books, walking into what looks to be a very good second quarter here, I know you've got the merger ahead of you. Is it fair to just think you keep accumulating cash until the deal is done? And then evaluate things on a kind of integrated basis going forward?

Michael Jennings

Well, it's stipulated in the contract that that's what we're going to do. We've got capital budgets locked in, we've got dividends locked in, share repurchases locked in. So we have pretty limited flexibility until this deal closes. And at that point, we're going to have a lot more opportunity to be strategic with our cash balances as a combined company.

Operator

Our next question comes from Chi Chow from Macquarie Capital.

Chi Chow - Macquarie Research

Mike, you mentioned on a -- with the integration with Holly, between Tulsa and El Dorado, would the plan to be sending the excess gas haul ph] from Tulsa up into the El Dorado cat cracker, is that what you're thinking about?

Michael Jennings

That's the immediate opportunity. But the new Gofiner at El Dorado is a substantial gas haul[ph] upgrader. We're also getting some conversion through that unit. But in addition, we've got some couple or 3,000 barrels of daily capacity inside the cat cracker that whereby, it can outrun the El Dorado crude unit in a normal crude slate. So using that capacity, it's going to allow Holly Tulsa facility to run, you pick the number, but probably 6,000 barrels a day of incremental crude. You work that through sort of a gross margin per barrel calculation, it ends up being fairly substantial money in this margin environment.

Chi Chow - Macquarie Research

And that deal [ph] would be railed up, is that the plan?

Michael Jennings

We're working on pipeline connect alternatives. But there is likely pipeline transportation.

Chi Chow - Macquarie Research

Really? Okay. I'm a bit surprised that the gasoline margins that you guys talked about at Cheyenne here in the second quarter, can you talk about what you're seeing on the supply-demand balance here in the Denver, Wyoming market?

Michael Jennings

Joey, do you speak to that please?

Joey Purdy

Yes. I mean in general in the mid-con in Pad 4, what you got gasoline inventories of a tad on the low side down in the 5-year average to maybe a little bit below. Got a little bit of the opposite on diesel, diesel is a little bit on the high side but the crops are very late going in the ground in the mid-con because of all the weather that we've had. So I think in general, we see at least a neutral position as far as inventories in the mid-con and in the rockies. So we are cautiously optimistic right that these crack spreads are going to hold up, of course a lot of the crack spread that we're seeing is coming out of the LL premium right to WTI but on top of that, it seems like we're in fairly good shape going into the summertime.

Blake Fernandez - Howard Weil Incorporated

Are you seeing much demand destruction, so far this year, in this market?

Joey Purdy

I mean, I think nationwide, you've seen demand destruction right but it's offset by refinery utilization right particularly on the East Coast, right. And that just kind of cascades and dominoes back into the mid-con right?

Michael Jennings

And we are concerned about sort of the magic $4 level because it gets a lot of press. But frankly speaking, I think that employment, growth and personal income and basically, less fear of recession has improved consumer confidence and demand that 9.1 million barrels a day gasoline, is reasonably strong.

Operator

[Operator Instructions] Our next question comes from Daniel Burke from Johnson Rice.

Daniel Burke - Johnson Rice & Company, L.L.C.

Mike, I was curious with the crude disconnects that have evolved over the course of this year. Have you been able to use that to term up any incremental crude volumes over the last few months? I guess most specifically, would probably be around the Cheyenne refinery.

Michael Jennings

Yes. We haven't done much over the last couple of months. The crude differential of consequence right now is the LL-TI differential, as you know or Brent TI. In the early months of the year, January, February, there were opportunities around Canadian heavy and then we took advantage of some of those in small amounts. But currently, the Balkan crude is trading at $2 over TI out of the currency market and so it's difficult for us to get an attractive term deal done given those economics and given what we think of the market will go once these in-crude upgraders are back on stream and producing strong again. So right now, we're pretty much price-takers with respect to crude and as more Balkan production comes on during the course of the summer, during what I'd call cracking season. We expect the differentials to come back in toward our zone, and we'll be active again

Chi Chow - Macquarie Research

And then, the one I have was just a small one. The charge at El Dorado in Q1 was very strong, it looks like you're down just a hair here in Q2. What does that represent?

Michael Jennings

Jim, can you take that please?

James Stump

Yes. You bet. Mainly, we've ran stronger in a lot of crude with the crude advantage and we have a lot of inventory. And so, we're cutting crude throughput just a bit to liquidate some inventory. It's get back kind of into balance.

Operator

Our next question comes from Ed Westlake from Crédit Suisse.

Edward Westlake - Crédit Suisse AG

Some very interesting comments on expanding Cheyenne and looking for term deals because obviously, the cost of expansion would be quite significant. I mean, do you find that there are producers out there who'd be willing to do, I don't know, is it a 5-year or a 10-year term deal at a decent discount to justify the economics there? And does that imply, I guess, some skepticisms about some of these pipeline options from Cushing down to the Gulf?

Michael Jennings

Well, first, the geology has to be proved up, right? The Niobrara plays in its infancy and people are working with completions technology. I think there's a lot of bullishness about its potential. And then if you're a producer, you start thinking about markets and the Cheyenne refinery is an obvious market for that production. Getting that production to Cushing will cost somewhere in the neighborhood of probably $5, $6. And even then, you're adding to the problem in Cushing, right? So to answer your question succinctly, no. The production profiles and the quality of the play is not yet well-enough known by the producers to be willing to make 5-and 10-year sort of deals. But that's what we're going to be looking at right, in looking toward a plant expansion because we'd like to have the value of that refining capacity underwritten by the people who are going to benefit from it other than just our shareholders.

Edward Westlake - Crédit Suisse AG

Great. And then just a follow-up. I mean, obviously you are well-placed to observe trucks moving along the interstates. How is trucking demand at the moment in your region?

Michael Jennings

It's been strong. The Cheyenne plant, as you know, has most of its business going across the rack to -- this is a diesel business, sorry, to local truck stops. And the frequency of their fields has been good. I won't tell you that we've seen a lot of demand growth but it's been very active through the last 2 quarters, really. And oilfield activity in that region is helping to drive that.

Operator

Our next question comes from Jeff Dietert from Simmons.

Jeffrey Dietert - Simmons & Company International

Just following up on the Syncrude [sp] crude upgraders. I guess Husky is coming back up or is in the process of coming back up. But Suncor is bringing their unit down for 6 weeks of maintenance. And you still got a few months before horizons back up. So do you see that not having too much impact over the summer months? And that's more of a fall event as far as the upgraders all coming back up?

Michael Jennings

I think you've got the calendar right, yes.

Jeffrey Dietert - Simmons & Company International

And so that keeps heavy sours at wide discounts through the summer and prevents Syncrude [sp] crude from putting any pressure on WTI until the fall?

Michael Jennings

That may be offset by some incremental Balkan production, right? Because we expect that to be coming on stronger this summer.

Operator

[Operator Instructions] Our next question comes from Elizear Palacios [ph] from Maxim Group.

Unknown Analyst -

Just a couple of quick questions. How much of your cost per barrel is related to natural gas? And the other one is, given the increases in natural gasoline affecting the refining companies, how does this benefit your operations? Do you mind commenting on that.

Michael Jennings

Doug, do you have the nat gas numbers there.

Douglas Aron

I do. I'm not sure I have them broken out by what percentage they are of the cost. What I would tell you, our sensitivity to natural gas is that for every dollar change in natural gas price, it will affect our OpEx per barrel by about $0.09. And looking on our earnings per share basis, every dollar change is about $0.07 per share after tax.

Unknown Analyst -

Okay. And then your thoughts on the natural gasoline and NGLs have there, how does this benefiting your refining complex?

Michael Jennings

Joe, you want to take that?

Joey Purdy

Sure. We're seeing some very good natural gasoline in Nolidge Bridge [ph] in the mid-con and the El Dorado is very well placed right, we had direct connections, direct pipeline connections out of Connelly into El Dorado refinery. So we're seeing that in our El Dorado economics already. We also see it in our ethanol blending terminal outside of Denver where we blend natural gasoline and ethanol and other components. So we've seen some very good numbers year-to-date out of those blending operations. And we expect frankly, that to continue a lot of the gas place rider, the E&P companies rider concentrating on the wet gas plays, right, which is going to push natural gasoline into our marketplaces and we expect that those -- we expect to see robust natural to Nolidge spreads[ph] this year.

Michael Jennings

Yesterday's numbers in our staff meeting were about a $0.40 per gallon advantage in terms of natural gasoline versus unleaded regular. And we're at a purchase rate or blending rate of nearly 10,000 barrels per day. So that adds pretty substantially to our blending economics.

Douglas Aron

On the gas question, it equates about $0.70 per barrel for the first quarter. For gas purchase for fuel for the refinery. That doesn't include natural gas in speed stock or hydrogen production. So that's just an OpEx question.

Operator

We have no further questions at this time. I would now like to turn the call over to Mike Jennings.

Michael Jennings

Very good. Well, thank you for joining us on this call. Obviously, a great quarter for Frontier. And we look forward to more in the second quarter. Have a good day.

Operator

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

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