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HollyFrontier Corporation (NYSE:HFC)

Q2 2011 Earnings Call

August 05, 2011, 10:00 a.m. ET

Executives

Neale Hickerson - VP, IR

Mike Jennings - CEO and President

Dave Lamp - EVP and COO

Doug Aron - EVP and CFO

Bruce Shaw - SVP, Strategy and Corporate Development

Scott Surplus - VP and Controller

Analysts

Jeff Dietert - Simmons and Company

Jacques Rousseau - RBC Capital Markets

Doug Leggate - Bank of America/Merrill Lynch

Chi Chow - Macquarie Capital

Paul Cheng - Barclays Capital

Evan Calio - Morgan Stanley

Operator

Welcome to the HollyFrontier Corporation Second Quarter Earnings Call. My name is Sandra and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Neale Hickerson. Mr. Hickerson, you may begin.

Neale Hickerson

Well good morning everyone. Today we are proud to present our second quarter 2011 results. I’m Neale Hickerson, Vice President of Investor Relations at HollyFrontier. With us for our call today are Mike Jennings, our CEO and President; Dave Lamp, our Chief Operating Officer; Doug Aron, our Executive Vice President and CFO. And we also have Bruce Shaw; Scott Surplus; and (inaudible), all senior officer at HollyFrontier to help us with the Q&A portion of our conference if need be.

We issued a press release this morning which announced results for a second quarter 2011. As I’m sure many of you have noted from our press release our results for the second quarter for legacy results for Holly Corporation as a merger with Frontier, however, was not complete until the start of the third quarter 2011. Our press release can be found at our website at www. HollyFrontier.com.

For our call this morning Mike, Dave and Doug will have prepared remarks and details around our operating and financial performance for the second quarter and year-to-date. After these remarks we will be ready to take your questions.

Before we move to our prepared remarks, please note the Safe Harbor disclosure statement that’s in our press release today. Statements today and in our press release were made under the Private Securities Litigation Reform Act of 1995. In summary, the Safe Harbor statement says that statements made regarding managements expectation, judgments or predictions are forward-looking statements and these statements are intended to be covered by the Safe Harbor provisions of federal securities laws. There are many factors that could cause actual results and outcomes including those we have described in our 10-K and other filings with the SEC to materially differ from what we say and believe at this point in time.

Today’s statements are not guarantees of future outcomes. This call may also include discussion of non-GAAP financial measures that we use in analyzing our financial results, please refer to today’s press release for required reconciliations to GAAP financial measures and other related disclosures including information on where you may find these reconciliations and disclosures. And lastly, please note that information on today’s call speaks only as of today August 5th, 2011. And any time sensitive information provided may no longer be accurate at the time of any webcast replay, or rereading of the transcript of our call.

And now I’d like to turn things over to Mike Jennings.

Mike Jennings

Thank you, Neale. Good morning and welcome to the debut earnings call of HollyFrontier Corporation. We have been busy for the past few months putting these two companies together and are extremely pleased with progress to-date. Before getting into the results for the quarter, I want to explain that SEC reporting rules provides the results we issued today are actually those of the legacy Holly Corporation which was the accounting acquirer in our merger. We will provide legacy Frontier Oil Corporation second quarter results for clarity in a separate 8-K filing and we will also provide summarize pro forma financials for the two companies in our HFC 10-Q filing for the quarter. The earnings report today are those generated by Holly Corporation during the second quarter of 2011.

Your second quarter net income attributable to HollyFrontier Corporation shareholder was $192 million or $3.58 per share, which compares very favorably to the 66 million or $1.24 per share posted in the second quarter of 2010. The six month numbers are 277 million in net income attributable to HollyFrontier shareholder were $5.16 per share. These second quarter results represent the best quarterly results ever for the legacy Holly Corporation. And to the former Holly employees I say well done.

On the legacy Frontier side, earnings were similarly strong despite a large turnaround at the Cheyenne refinery. Frontier generated net income for the quarter of $167 million which would have amounted to approximately $1.57 per legacy Frontier oil share. For the six months Frontier oil generated net income of $307 million or $2.90 or legacy Frontier share.

Again I took my hat to the former Frontier employees who made this possible. More relevant to our future is the combined effect of these two companies. For the second quarter based on simple addition, the combined Holly and Frontier operations generated EBITDA of $647 million and net income of 359 million. For the six months EBITDA again based on some of the parts would have been 1.08 billion and net income 584 million.

Note that we will include summarized pro forma financials in the HollyFrontier 10-Q which will also reflect certain adjusting entries related to acquisition accounting. The company’s combined cash balance stood at almost $1.4 billion on June 30th the day just prior to our closing. Combined long-term debt on that day was 1.19 billion including the Holly Energy Partner’s indebtedness and was 676 million excluding the HEP indebtedness which is non-recourse to HFC.

As advertized the merged company started with a clean balance sheet and a solid liquidity position which we are now supplementing with strong operating cash flows. Safe and reliable refining operations are pre-requisite for generating level of earnings we achieved in this quarter. And Dave Lamp, our EVP and Chief Operating Officer will speak about the refinery shortly.

The plant did a great job during the quarter and allowing us to capitalize on outstanding margin opportunities available to us. A large component of these margins are driven by the WTI differential versus coastal sweet crudes. This has been fairly well documented and it's fundamentally derived from inland crude production in excess of (inaudible).

There are many different viewpoints on how and when this situation will be resolved. My opinion is that the upstream producers based on a technology and capital they are employing will continue to grow inland crude and liquid production and the transportation alternatives will be developed to provide more efficient movement of this production from pushing to other markets. The key is that these (inaudible) will come overtime and at significant cost. Meaning there are Mid-Con, Southwest and Rockies refineries will have advantage crude access relative to most of the U.S. refining industry for a long time to come.

The current WTI LLS rig is now in excess of $20. Heavy crude differentials measured against WTI are also attractive, providing about a 20% discount off of TI at the trade (inaudible). We will be active as a company in seeking and contracting for advantage crude streams in situations where we can benefit from both our geographic location and the configuration of our refineries and logistical assets.

Recognizing the company’s strong cash generation and large liquidity position, our Board took a proactive step just 33 days into the merger of declaring a special dividend of $1 per share. This dollar relating to approximately 105 million HFC shares outstanding following the merger. I think this move recognizes our earnings capacity, the strength of our internal operations and our near-term prospects. The Board also moved as indicated in Wednesday’s press release to split our stock 2 per 1 via stock dividend. The record date for this will follow that of our special cash dividend.

To summarize, we have a lot of great work going on inside the company and that our plans are in our commercial organization. We also benefit from a blended margin environment and still in front of us are the benefits of size, scale, diversification and prospective growth that (inaudible) perceived when we initiated the process to merge Holly and Frontier 8 months ago. This week we received great endorsement from our Board in returning value to shareholders. I’m very pleased with our progress to-date and appreciative of the markets reception to our company. We believe the best still lies in front of us and we set our (inaudible).

So, with that let me ask Dave Lamp to address our operational performance for the quarter. Dave.

Dave Lamp

Thanks Mike and good morning. Going forward we report on our refinery operations as three regions; the Rockies, Mid-Continent and the Southwest. The Rockies region will include Cheyenne and the Woods Cross refineries. The Mid-Continent region will include Tulsa and El Dorado refineries. And the Southwest region will include the Navajo system as well as our Asphalt operations.

(Inaudible) for the second quarter was 392,000 barrels a day of crude and 421,000 barrels of total charge. The crude slate was 21% disadvantage crudes and 24% sour. When I refer to disadvantage crudes I’m really talking about black wax and WCS type crudes, heavy sour or sweet crudes.

Throughput for the second quarter in the Rockies regions was 69,000 barrels of crude and 72 of total charge. Disadvantage crudes were approximately 49% of the slate. Operating cost were approximately 627 a barrel or $41 million in terms of absolute cash. Cheyenne’s run rates were affected by its SEC turnaround during the quarter as Mike mentioned in his opening remarks.

Throughputs for the second quarter in the Mid-Continent region were 237,000 barrels a day of crude and 255 of total charge. Disadvantage crudes were approximately 15% of the slate and sour was 12. Operating cost were approximately 466 per barrel or $108 million in terms of absolute cash. [Other rates] were affected by an unscheduled outage of our large hydrogen plant and a sulfur plant. Tulsa rates were affected by unscheduled outage of the (inaudible).

Throughputs in the second quarter for the Southwest region were 86,000 barrels per day of crude and 94 total charge. Disadvantage crudes were approximately 60% of the slate and 81% of sour. Operating cost were 518 per barrel or 44 million in terms of absolute cash. [Asphalt] sales were 117,000 tons in the quarter and now those rates were affected by several unscheduled equipment outages during the quarter.

For the fourth quarter, we expect to run approximately 410,000 barrels a day of crude based on the strong margins received where 20% of the slate being disadvantaged heavy crudes and 20% being sour. The Cheyenne refinery will generate a (inaudible) in August and complete tie-ins for its LPG recovery project. No other and that will affect crude rates to some degree, no other down time is planned in the third quarter that will affect crude rates.

Turning to projects, Tulsa will complete its project t reduce benzene and gasoline in the third quarter and expect the startup and started up in September. Tulsa’s interconnect pipelines will be mechanically complete in the third quarter and should be well into startup by the end of the quarter. These interconnect lines will allow for reduced operating cost, improve yields, and higher total plant throughput when complete.

Turning to our pipeline project to Salt Lake to Las Vegas pipeline commonly called UNEV. We are scheduled to be mechanically complete by mid-October. We will be commissioning the line and starting up the line which we think will take about one month to complete. So, we are hoping the ship will be ready for shipments sometime in the fourth quarter. The total cost of the line is now estimated about 385 million. As a reminder the HollyFrontier portion of the project is 289 million.

With that I’ll turn it over to Doug for some closing remarks.

Doug Aron

Thanks Dave. Effective with our merger closing we entered into a new $1 billion credit facility which is led by Union Bank and BNP Paribas. This facility matures in 5 years and replaces Holly’s $400 million facility and Frontier’s $500 million facility. There were no borrowings under either company’s revolver as of June 30th.

On the capital spending front, for the first six month of 2011 Holly got $137 million on capital projects and Frontier has been about $42 million. Therefore, pro forma for the combined company total capital dollar spent in year-to-date total $179 million. As we look forward we expect to spend an additional $160 million for the balance of the year, including the completion of the (inaudible) pipeline, bringing our total estimated CapEx spending for 2011 to approximately $340 million.

Finally I’d like to update you on our quarter-to-date crack spreads which is you might expect are outstanding. As Dave mentioned before we are going to be reporting these going forward in three regions, the Rockies which will encompass the Woods Cross and Cheyenne refineries, the Mid-Continent which will encompass the Tulsa and El Dorado refineries, and the Southwest region which will for now encompass Navajo and our Asphalt operations.

Starting in the Rockies, the gasoline crack spread averaged about $28 per barrel for July and the diesel crack spread averaged $33.25 for July. In the Mid-Continent, the gasoline crack spread averaged about $30 for July and diesel averaged about $34.50 for July. Finally, (inaudible) spread in the Mid-Continent for July was just around $102 per barrel for July. And for the Southwest region the gasoline crack spread averaged $27 and the diesel crack spread averaged $30.25.

And with that Sandra, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Jeff Dietert from Simmons. Please go ahead.

Jeff Dietert - Simmons and Company

Mike or Dave I was hoping you could talk a little bit about WTI discounts just given how significant they are for your portfolio and what you see as the major factors influencing net discount as we go through the end of 2011.

Dave Lamp

We don’t see much change in the current situation as Mike mentioned in his opening remarks, the production in the area as well as the Bakken play and the Permian Basin they are still driving production up and the takeaway capacity just is not there and they really just doesn’t appear to be much on the plate, it's going to move that for any period of time.

Jeff Dietert - Simmons and Company

Could you update us on black wax at Woods Cross and what are your plans are potentially for increasing that. I know some of the producers are increasing drilling activity and have plans for higher production as we go into 2012?

Mike Jennings

The second quarter we ran about 8600 barrels of black wax and we also co-processed with that about 1400 barrels of WCS. We see that continue until we make a physical change to the asset of some sort to allow us to increase, because we are running as fast as much as we can.

Jeff Dietert - Simmons and Company

And is that capital intensive efforts?

Mike Jennings

It will be to make a meaningful change in it, that will require capital.

Jeff Dietert - Simmons and Company

Any indication on how significant that capital might be?

Mike Jennings

All we want is the project. Yes, we are working on that and it's totally exciting opportunity. We believe there is the production out there to support it and we are obviously working that side of it as well. The returns to that kind of investment are very, very strong but the project isn’t yet fully scoped and we are just not ready to talk about it.

Operator

Thank you. The next question is from Jacques Rousseau from RBC. Please go ahead.

Jacques Rousseau - RBC Capital Markets

One thing that really stuck out to me in the quarter was the very strong margins at the Navajo refinery and I imagined this is due to some of the improvement in the crude slate. Can you talk about where that stands right now?

Dave Lamp

In terms of the third quarter?

Jacques Rousseau - RBC Capital Markets

Well, just in the second and the third quarter in terms of the Canadian oil there?

Dave Lamp

Well, we are running at 16% heavy which is a new record for us for the quarter. We will probably not run a whole lot more than that, because the def on WCS to WTI really doesn’t justify much going into our second tier production. On the other hand the what’s happened in our product markets is we were extremely over long in the Phoenix market due to some of the length in the Californian market and that seems to be drying up a little bit just some refinery problems that happened at seem to be clearing that out. And we are starting to see the basis come back in that 73.

Jacques Rousseau - RBC Capital Markets

Great. And just one more in terms of the usages of cash, obviously the special dividend was a nice announcement, but you do have a lot of potential for capital projects and I believe a couple of that maybe on the forefront would be a Woods Cross expansion or Cheyenne expansion. Any thoughts on those projects?

Mike Jennings

We are probably going to be shy about just your crude rate expansion projects unless they are underpinned with crude economics and hopefully contracted crude deals that really justify the return at reasonably high levels. So, that what I say to that. The Woods Cross project clearly is in that camp. Cheyenne expansion we are working on is depended upon the production that was (inaudible). But beyond that we really organized our internal growth along four key themes. The first of which is liquid yield enhancement, and then that plays upon the difference between liquids and gas prices. And there are opportunities there in Tulsa, first based upon the interconnects and thereafter, to recover more propanes and butanes much like Frontier is just now completing in Cheyenne.

Second theme would be processing disadvantage or stranded crude sources crude supplies and that’s the really the Woods Cross type project. Third, is just leveraging logistical opportunities and that production in your backyard type opportunity we will be working closely with AGP effectively to create localized competitive advantage in procuring feedstock’s and marketing our products. Finally is increases in (inaudible) production long-term we see the middle of the barrel as being the most profitable and so we are going to be working projects or at least trying to develop those that relatively increase our (inaudible) production. But I think if you go through that list you don’t see sheer crude rate expansion other than accompanied by good crude supply in terms of economics.

Operator

Thank you. The next question is from Doug Leggate from Bank of America. Please go ahead.

Doug Leggate - Bank of America/Merrill Lynch

Just a couple of quick ones, can we talk about, there is something you actually mentioned there about potentially contract deals on crude. I wanted to layer this [inwards]. Just a general question about hedging, clearly these differentials are extraordinary right now. And I think if you look beyond well I say the next 6 months or so, there is no certain how they are going to remain. So, what is your ability to kind of walk some of that in as a (inaudible). And if you could elaborate on maybe some of the contract opportunities you might have as well, that would be a good starting point. Thanks.

Mike Jennings

I guess there are two components to your question and one is the (inaudible) differential is obviously manifesting our life product crack spreads and those are hedgeable to some degree. I think you have seen [Western] out there executing some hedges. The most liquid markets have some basis risk in them, but they are developing markets for those forwards in more on a local basis particularly in the Mid-Con and something that we are contemplating. It's not something that we have done a lot of in the past, so we are cautious about looking at those and insistent upon not taking a lot of basis risk. I think more likely is crude supply and that is the stranded crude sources and locking in crude differentials that support capital projects. And so far we are able to do that, we are obviously much more comfortable in committing large capital dollars to per unit expansions and things like that, because the economics are still well underwritten by crude.

Doug Leggate - Bank of America/Merrill Lynch

Mike with that, can be comprised of securing the volume or would there be some price elements (inaudible) prepared to take that to get some price guarantees as well on a relative basis?

Mike Jennings

It's the differential that we are most likely able to hedge with the producers. I don’t think either of us need to take WTI risk, they may be interested in hedging that independently but it's the differential that’s interesting to us.

Doug Leggate - Bank of America/Merrill Lynch

My follow-up is really just on the prepared remarks. I guess we are little surprised the throughput is the guidance is as low as it is in per quarter. Can you just walk us through EBIT what the turnaround effects are and perhaps if you could elaborate given the strength of this margin environment. How would you expect throughput to kind of trend over through next year. I guess I’m looking for some ideas that what your funds turnaround schedule would look like over the next 12 months.

Dave Lamp

The 410 is our prediction for the third quarter and the reason that is where it is of course, Navajo are estimating around 90,000 barrels a day which is we are still ramping that up. The Woods Cross runs typically its normal rate 27, 28. Tulsa is down a little bit just because the interconnects are not complete, once they are complete we will undoubtedly ramp that up some more. El Dorado run into typical and then Cheyenne has as I mentioned the third quarter outage of the reformer which will affect crude rate just in [due to an ample storage]. If you look forward on other turnarounds that we have, in 2011 we really don’t have anything but (inaudible) at El Dorado that we are going to have turnaround. And that may or may not affect crude rates, but in 2012 we have quite a big turnaround time, we have the CCR at Navajo will be down which takes down roughly half the plant which mean crude rate will probably be cut in half, that’s about a 30 day turnaround. And then we have at Tulsa a major turnaround on the West plant which basically brings a whole plant down, and then at the East plant at Tulsa we have a CCR turnaround that is scheduled which will probably affect crude rates to some degree, but not as much as what the West plant shutdown will. And then in Cheyenne we have some additional work on which will probably delay until ’13 on crude unit, we haven’t made that decision yet, but I’m anticipating we will play until ’13.

Doug Leggate - Bank of America/Merrill Lynch

Could you give little more specific in timing as our first half, second half and those planned units or inspect through the year?

Dave Lamp

It's through the year but it's mostly early in the year and late in the year, most all that work. Navajo will be in early ’12 and Tulsa will be in late ’12.

Operator

Thank you. The next question is from Evan Calio from Morgan Stanley. Please go ahead.

Evan Calio - Morgan Stanley

As utilization in the region running higher, lower demand. Can you talk me that your local market, product supply levels and you saw like Mexico, Wyoming markets really the ex-cushing market. And I was trying to get that, what’s the risk that you see out producing markets, are you cannibalizing the crack from that side?

Dave Lamp

We really haven’t seen much of any of that, we really don’t have trouble moving product at all, but the rates were running. And there was variety of reasons for that. Demand hasn’t been that bad in those areas and of course, most of these areas are fit from the Gulf Coast in form of fashion the alternative barrel. The area that has been hit the hardest is Phoenix as I mentioned earlier. There is really, really oversupply, but basically what the advantage of the WTI brand or LLS brand we are still very competitive in that market. So, all markets have been very liquid and really haven’t had any trouble moving the barrel. I don’t see that changing dramatically, there has been some refinery problems in the Mid-Continent that has helped keep that somewhat snug. But it doesn’t appear to be hitting us in any direction.

Evan Calio - Morgan Stanley

One of your big swing factors in a cushing balance model is clearly utilization. And so I mean assuming let’s assume the margins attractive for the next several quarter and you have economic incentive to run. I mean ex-turnarounds what’s a reasonable rate to think of how you can run your system. I know you had some unplanned outage in the most recent quarter.

Dave Lamp

(inaudible) as much crude as we can within the limitations we had. I kind of gave the operating rates there of Tulsa to be 120 range in the third quarter, El Dorado in 130 to 135 range, and we will be ramping Tulsa most likely as we get unleashed with the interconnect pipeline. Today we are kind of balance. We have excess crude unit there, that e could run on up if we can find a way to get it done.

Evan Calio - Morgan Stanley

And with ex-turnarounds, you think the region could (inaudible) 98% utilization (inaudible) quarters if the margin was there. Do you think that unplanned outages are somewhat symptomatic in the business and will keep utilizations maybe a little bit lower there.

Dave Lamp

The symptomatic of the business, you still have an import market there, that’s stretch from the Gulf Coast on the increment, so it have to shut off completely before you can see that (inaudible) 1 million barrels come in.

Evan Calio - Morgan Stanley

(inaudible) how do you think about the ideal structure, you mention to see that’s a but is it also something there will be shared investment, someone sharing the CapEx at the backend unit expansion. Is that how you think about it when you think about potentially working with an upstream company?

Dave Lamp

Evan, that’s clearly one of the leverage and it's one that we would like to use. We are not able today to share details of our commercial discussions but that’s clearly on the list. And the objective really is to get a stable crude supply with economics that justify the investment. And so whether that comes in larger differential on a capital recovery portion or payment, it's all just dollars right.

Operator

The next question is from Chi Chow from Macquarie Capital. Please go ahead.

Chi Chow - Macquarie Capital

Post-merger Mike, do have a target cash balance that you feel comfortable with in running the day-to-day business?

Mike Jennings

I think a number with current crude prices in the $500 million range feels very comfortable to me. We are still working internally on capital structure strategy, internal growth prospects and so what I’d tell you is that there is more to come on that front. Obviously, with the distribution announced couple days back that the Board has (inaudible) returning some cash to shareholders and I think that was a great move. But we have a lot more in terms of internal discussion to form up where we are going over the next 3 to 5 years and in what of liquidity that requires relative to the current 1.5 billion cash or whatever it is that we might have today.

Chi Chow - Macquarie Capital

(inaudible) internal project, but would you consider a increase in the regular dividend or can we see ongoing special dividend announcements beyond this past week.

Mike Jennings

Given the nature of the business I think that both of those tools are available to us. We are generating cash current day rate of probably free cash of $300 million or more per quarter. So, that’s well in excess of the $16 million of dividends on a regular way that we are paying out. As I said we will short-term down with the Board and consider both of those as well as other alternatives, but the point we interpret that cash to use widely and at high rates of return. Otherwise return that which we don’t need. And we are just not settled yet as to the relative proportions of those decisions.

Chi Chow - Macquarie Capital

Doug gave a cash balance at the end of July and I know gave us some on cracks.

Doug Aron

We do Chi, I think it was higher by probably 100, $150 million from what e saw at the end of June. It moves around a little bit depending on the days we pay for our crude oil but it's continuing to build given the crack spreads that we read and think that we will see that number continue to creep by the time we report our September 30 number.

Chi Chow - Macquarie Capital

And one final question on Tulsa, now that you are close to completing the interconnect. Can you give us more specific guidance on how the product yield might change and I think you mentioned that you see some cost savings as well.

Dave Lamp

Yes, we got cost savings because we don’t have to reprocess, what’s called the less stream, which is a mixture of gas, oil, LSR and diesel typically. So, we get direct operating cost savings from that not reprocessing 15,000 barrels a day. Secondly, we get the right molecule in the right place, today we are having new refractionate our LSR like straight run. And that cause the particular hardware we are doing it and doesn’t cut as well, it's the equipment at the west plant. And by moving it over their direct we get a better selection of the right molecule in the right place and that what that ends up doing as increase in the liquid volume yield. So, those are the two main pieces but more importantly in this high end margin environment, it allows us to actually raise crude rates even higher (inaudible) hydro skimming mode and make Asphalt gas oil, diesel and gasoline on the increment.

Chi Chow - Macquarie Capital

Dave, you report in the release, the yields of different products. Is there any way to say how that might shift going forward here at Tulsa?

Dave Lamp

Well, it mostly as I mentioned liquid volume yield, the shift will be just looking (inaudible).

Chi Chow - Macquarie Capital

LPG and other goes down (inaudible) and we get higher gasoline and diesel.

Dave Lamp

Right, it's more gasoline typically it's not diesel but it's more gasoline.

Operator

Thank you. The next question is from Paul Cheng from Barclays Capital. Please go ahead.

Paul Cheng - Barclays Capital

Number of quick question. Doug you gave the July average margin, do have on a pro forma basis for the second quarter?

Doug Aron

What I have is cracks by refinery, we think we may have, we got them by refinery here. I’m not sure when you take weighted average.

Paul Cheng - Barclays Capital

We can do that, yes you can give us on refinery.

Doug Aron

So, at Navajo for second quarter it was gross margin was about $22 per barrel, Woods Cross was about $28 per barrel, and Tulsa was about $19 per barrel, and then El Dorado about $24.50 and Cheyenne had gross margin of about $15.40. That number is going to look very strange to you as a result of some builds and inventory that caused the LIFO number to look strange, but otherwise would have looked very similar to Woods Cross.

Paul Cheng - Barclays Capital

That’s for gasoline, how about diesel.

Doug Aron

That’s actually the gross margin.

Paul Cheng - Barclays Capital

Okay, that’s gross margin. So, you don’t have it for the gasoline and diesel that they way that you (inaudible) on the July month.

Doug Aron

I haven’t for Cheyenne and El Dorado. For Cheyenne first gas crack for the quarter was $26.25, diesel crack $31 and El Dorado gas crack of $25.70, diesel crack $28.65. For Navajo gas crack was 32, diesel was 37, for Woods Cross gas crack was roughly $35, diesel was $44. And for Tulsa gas crack was $27, and diesel was 29. And (inaudible) was around 90.

Paul Cheng - Barclays Capital

And Doug can you give me some balance sheet data in terms of on a pro forma basis at the end of June. What’s the market inventory in excess (inaudible) and on the total (inaudible) how much is the long-term? And what was the working capital on the pro forma basis?

Doug Aron

First, let’s cover the inventory in excess of book value, but we have it on the Holly side it was about $456 million greater than what the book is, so market value of the inventory was about $900 million in total. And on the Frontier side, let’s see we had excess of market value by about 621 million. 621 was the total in excess of market value of $387 million.

Paul Cheng - Barclays Capital

So, together you are?

Doug Aron

So, in total it's about 1.5 billion of inventory.

Paul Cheng - Barclays Capital

Right, so in excess of 782 million.

Doug Aron

Yes, Paul, that’s correct.

Paul Cheng - Barclays Capital

So, do you have working capital and long-term debt?

Doug Aron

Yes, the long-term debt number is, if you are excluding ATP that’s basically all long-term debt, Paul, there was no revolver borrowings and working capital number on a pro forma basis I’ll be honest with you, we just don’t have at this point.

Paul Cheng - Barclays Capital

Dave, when you are talking about the interconnect pipeline in Tulsa I have to apologize, (inaudible) what is the saving on the per barrel basis that we expand and whether that’s saving when your (inaudible) is going to show up in the reduction in operating cost or it's an improvement in the gross margin.

Dave Lamp

There is a little bit of both, Paul, the operating cost savings were estimated around $0.25 a barrel. And it's related to this reprocessing those having to refractionate material from west to east in order to fill up the downstream units. And the interconnects we won’t have to do that. So, that’s how we saved on operating cost. The rest of it is really gross margin, and I’m estimating there is another $0.25 roughly in gross margin due to this liquid volume yield improvement.

Paul Cheng - Barclays Capital

What’s the percent of the reduction in the shrinkage, is it 0.5% or?

Dave Lamp

Yes, it's something less than 0.5% (inaudible).

Paul Cheng - Barclays Capital

Okay. Perfect. And on the special dividend that you just announced, Mike that I think is necessary but some of your other oil company (inaudible) they have a transparent and mechanical (inaudible) cash in excess of a certain amount, take talk (inaudible) special dividend and as such that the market get them a higher multiple so that treat it as a not totally special but (inaudible) dividend. Is something might that being consider or that will be consider or that you think this is too much of a mechanical pauses and you wanted that have more hot approach to (inaudible).

Mike Jennings

Well, Paul, I got to tell you we are all about higher multiples, so if that will get us in the promised land and we may sign up, but 3% we have work to do internally with our Board in order to really get toward anything that would approach (inaudible) my expectation is that we are going to want to maintain more flexibility than that. But again that conversation is still to be had. So, I got to punch that one forward to the future, I’d say look at the earnings, look at the cash flow, look at the track record of the two companies in terms of distributions to shareholders, they are very solid. But as well, we expect to put some money to work at some point if we can get right asset, right project at the right price. And so that’s the other side of it to we are charge with growing the company and its value and we are looking to try to find ways to do that.

Paul Cheng - Barclays Capital

Finally, talking about the growth to company, there seems to have higher organic investment opportunity internally. So, (inaudible) M&A and how important it as part of your strategy over the next 12 to 18 months or that your win is focusing the entire management team in the organic investment opportunity at this point?

Mike Jennings

Paul, practically speaking the returns to organic investment that we see are substantially higher than those that might be available to us in the current M&A market. So, our time and effort is mostly spent head down developing these projects, again they have not yet been in front of our Board. We do have an effort looking externally and we try to keep those contracts fresh but we have a great inventory of opportunity available to us because of the Tulsa acquisitions, the Frontier Holly merger and also some of the (inaudible) dynamics in the Mid-Continent Rockies. So, the internal stuff looks very push back to me at this time.

Operator

There are no further questions at this time.

Mike Jennings

Well, in terms of closing remarks we appreciate everyone listening today. We look forward to sharing our combined results with you for the third quarter, probably sometime in early November. I really appreciate everyone listening. Thanks a lot.

Operator

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

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