Western Refining's (WNR) CEO Jeff Stevens on Q2 2016 Results - Earnings Call Transcript

| About: Western Refining, (WNR)

Western Refining, Inc. (NYSE:WNR)

Q2 2016 Earnings Conference Call

August 02, 2016 11:00 AM ET

Executives

Jeff Beyersdorfer - Treasurer and Director, IR

Jeff Stevens - CEO

Dave Lamp - President and COO

Gary Dalke - CFO

Analysts

Brad Heffern - RBC Capital Markets

Paul Cheng - Barclays

Paul Sankey - Wolfe Research

Johannes Van Der Tuin - Credit Suisse

Jeff Dietert - Simmons

Phil Gresh - J.P. Morgan

Roger Read - Wells Fargo

Chi Chow - Tudor Pickering Holt

Neil Mehta - Goldman Sachs

Operator

Good morning and welcome to the Second Quarter of 2016 Western Refining Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a remainder, ladies and gentlemen, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the call over to Jeff Beyersdorfer, Treasurer and Director of Investor Relations of Western Refining. Mr. Beyersdorfer, please go ahead.

Jeff Beyersdorfer

Thanks, Marie. Good morning and welcome to the second quarter of Western Refining earnings call. Joining me for today’s call are Jeff Stevens, our CEO; Dave Lamp, President and COO; Gary Dalke, our CFO, and other members of our senior management team.

We will be referencing our earnings call slides throughout the call this morning. The slide presentation, in addition to our earnings release, can be found in the Investor Relations section of our website at wnr.com.

This is our first earnings call post the Northern Tier transaction. As a result, Jeff will continue to have comments on the market and outlook, but beginning with this quarter, Dave will comment on operations, Gary will take us through the financials as he has done historically, and Jeff will provide some concluding remarks.

Today’s presentation will contain forward-looking statements and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results which can be found in the press release, which is posted in the IR section of our website.

As a reminder, Western Refining Logistics will be conducting its earnings calls at 4 p.m. Eastern Time today.

I’ll now turn the call over to Jeff.

Jeff Stevens

Thanks Jeff. And welcome to Western’s second quarter 2016 earnings call. This was a milestone quarter for Western as we completed the purchase of the remaining units of NTI. We are very excited to have NTI assets as part of the Western portfolio and welcome the Northern Tier employees to the Western family.

We have been successful in the first phase of integrating NTI into Western over the past two and a half years, and we look forward to fully completing the integration as two public companies will now operate as one.

There are several initiatives we will be undertaking over the next 12 months to enhance our profitability through more direct sales to end users. For example, similar to Western Southwest marketing business, we believe we have the opportunity to expand our integrated retail and wholesale marketing distribution network in the upper Midwest. Also we have mentioned in the past, NTI has logistic assets that can dropped down to WNRL over the next few years. The NTI acquisition also provides a new platform for organic growth in our logistic business as we expand crude oil gathering capabilities, storage facilities and terminals similar to what we’ve done in the Delaware basin. We’ll be recording on these initiatives and their progress in future quarters.

For the second quarter, we reported EPS of $0.72 excluding special items. This result demonstrates the value of our highly integrated refining and marketing model, even in a more challenging refinery environment. Given the location of our refineries, we continue to benefit from direct pipeline access to advantage crude oil. Additionally, we benefited from strong demand for gasoline in the Southwest. Our retail business continues to show strong quarter-to-quarter volume growth. And finally, our high level of retail and wholesale integration allows us mitigate the increased cost of rents. We’re happy with the second quarter results and we continue to focus on operating our refineries in a safe, reliable and cost efficient manner.

I’ll ask Dave to comment on operations during the quarter.

Dave Lamp

Thanks, Jeff. Operationally, it was a very good quarter for Western. Total refinery throughput was approximately 259,000 barrels per day, which represents overall capacity utilization for Western of 99%. The blended refinery gross margin was $13.13 per barrel for our three refineries. the Gulf Coast 3-2-1 benchmark crack was $13.15 per barrel, up $2.30 per barrel versus the first quarter and the group 3 6-3-2-1 benchmark crack was $8.50 a barrel, up $2.21 from the first quarter. Crude differentials were tight due to the fires in Canada and excess pipeline capacity out of Midland. The exception was Western Canadian Select, which averaged the $11.75 per barrel under WTI.

At St. Paul Park, we commissioned a new desalter on a number one crude unit in April, which enabled us to run a record setting of 27,000 barrels per day of WTCs and take advantage of the spread. Realized premium gasoline spreads for the quarter were $0.26 per gallon and we produced 23,000 barrels per day of premium or 17% of our gasoline pool. Margin capture was above 100% at all refineries with the St. Paul Park leading the pack at a 130% of the benchmark crack.

Total operating costs for the quarter were $4.76 per barrel. All three refineries had reformer catalyst regenerations during the quarter and Gallup changed out catalysts in its distillate hydrotreater.

In our retail business, fuel volumes were up 7% in the Southwest on same-store sales basis and total volume for SuperAmerica was up 5% including both company-owned and franchise locations compared to the second quarter of 2015. The strong growth was primarily driven by low gas prices and the resulting increase in consumer demand. We will look to grow same-store sales and continue to look for opportunities to increase our retail footprint in both regions.

Crude oil production continues to increase in the Delaware Basin. The gathered crude volume has also increased. We have completed the crude oil terminals at both Mason station and Wink, and are now connected to Midland via the third-party pipeline. As a result our volumes on the new Bobcat pipeline and the terminal grew significantly. We delivered approximately 23,000 barrels per day to Wink in the second quarter through volume shipped on Bobcat and locally gathered barrel volumes at Wink. As crude oil production continues to grow in the Delaware Basin, we should see increasing volumes on the Bobcat line. Bakken crude production continues to slowly decline but our gathered barrels are up based on poor rail economics.

Turning to the third quarter, St. Paul Park has a planned second -- number two crude unit turnaround, which will result in about 40 days of downtime and cost approximately $45 million. During the turnaround, we will complete the revamp of the number two crude unit distillate hydrotreater, which we expect will increase our crude capacity by 4,000 barrels per day, increase diesel recovery by 2% and continue to increase crude optionality with the tie-in of another new crude desalter. Construction is continuing on the relocated solvent de-asphalter unit, which is approximately 50% complete as of the end of July. We are projecting the startup in the second quarter of 2017.

Our Clearbrook tankage is approximately 80% complete and should be in service by the end of the first quarter of 2017. No other significant work is planned for any of our refineries for the remainder of the year. We continue to see good demand gasoline and diesel, particularly in Southwest. And with the recent drop in crude prices, retail margins have improved significantly since the end of second quarter. Asphalt margins also continue to be good.

Finally, as you should recall, we have approximately 22,000 barrel per day wholesale marketing business through a third-party alliance on the East Coast, utilizing Western’s historical line time on Colonial Pipeline. Starting in January of 2017, we will assume full control of the supply and marketing business, and intend to maximize profitability and grow our wholesale capability. In addition to increasing profitability, we’ll now capture 100% of the RIN value generated by this business.

I’ll now turn the call over to Gary.

Gary Dalke

Thank you, Dave. On a GAAP basis the Company reported Q2 net income attributable to Western of $65.4 million or $0.70 per diluted share, this compares to Q2 2015 net income of $133.9 million or $1.40 per diluted share. Excluding special items, the Company had net income of $66.5 million or $0.72 per diluted share in Q2 2016 which compares to net income $138 million or $1.44 per diluted share in Q2 2015. A reconciliation of our net earnings to earnings excluding special items is included in our press release.

Adjusted EBITDA for the quarter was $200.9 million which includes $78.7 million in adjusted EBITDA from WNRL and NTI. Total capital expenditures for the quarter were $78 million of which $43.2 million was for Western’s standalone, $26.5 million was legacy NTI and $8.1 million was for WNRL. We expect to spend approximately $140 million to $145 million for the remainder of the year.

NTI became a wholly-owned subsidiary of Western on June 23, 2016. However, NTI will continue to have certain SEC reporting requirements as long as its publicly traded debt remains outstanding. As such, starting with the second quarter, we will file a combined Form 10-Q for Western and NTI. This combined 10-Q will include Western’s consolidated financial statements and MD&A and will also include standalone financial statements for NTI.

Starting with June 23rd, there will no longer be an adjustment to net income for NTI’s earnings attributable to non-controlling interest. Also in connection with the merger, 100% of NTI’s taxable income will be subject to income taxes at the Western consolidated level. Also with the completion of the NTI transaction, the NTI capital structure consisting of $500 million revolver and $350 million in and 7.125% to note remains intact, and Western is not a guarantor on NTI’s debt obligations. We will look to opportunistically refinance the NTI bonds at the Western which will result in a more efficient capital structure.

Cash excluding WNRL was about $182 million at the end of June and is currently averaging around $280 million. Q2 ending cash is lower versus Q1 as a result of using approximately $385 million in cash for the NTI acquisition. However, we’re generating cash from operations and we’ve been adjusting inventory levels to targets, so we expect to see a cash build through Q3. A bridge from Q1 2016 to Q2 20016 ending cash position can be found on page five of our slides.

Wrapping up, you can find our third quarter operating guidance on page seven of our slides. The planned maintenance turnaround at St. Paul Park is reflected in both the throughput and operating expense guidance.

I’ll now turn the call back over to Jeff.

Jeff Stevens

Thank you, Gary. As you can see, Western had a operational and financial quarter. Again, we believe we are well-positioned for continued profitability due to the location of our refineries, which source advantaged crude oil via pipelines, the area in which we sell finished products, and the integrated nature of our retail and wholesale distribution networks.

With the closing of the NIT traction, our near-term priorities are debt reduction, returning cash to shareholders, fully integrating NT, and investing in high return growth projects. With the $500 million term loan issued in June to complete the NTI production, leverage is about two times. We are committed to return the leverage back to one times with cash generation from operation, asset sales of Western Refinery Logistics, and distributions Western receives from WNRL while maintaining our regular dividend.

As we have mentioned previously, Western expects to complete the sale of selected NTI logistic assets to WNRL during the third quarter. Annual EBITDA from these assets is approximately $25 million. During the quarter, we paid a $0.38 per share dividend and also announced Q3 dividend of $0.38. We will continue to maintain our dividend policy, which is to be in the top quartile of our peer group in terms of divided yield.

Finally, I want to thank Gary for his many years of service to Western. While we’re also welcoming Karen Davis as our new CFO. As many of you know, Karen has serviced as CFO of Northern Tier for the last couple of years. Gay has been a valued member of our leadership team and an important part of Western’s success over the years. His dedication and commitment have set a great example for all of us. I am pleased that he has agreed to remain on in an advisory role.

Marie, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instruction] Our first question comes from the line of Brad Heffern of RBC Capital Markets.

Brad Heffern

Jeff, just I was hoping that you could expand a little bit on your commentary around the dividends. The goal of having a top quartile dividend obviously has been with you for a while, but there is also a good amount of room between where the stock is trading right now or the yield is trading at in what would be considered top quartile. So, what makes you want to keep the dividend where it is rather than using some of that to take down the debt levels?

Jeff Stevens

Sure, Brad. Obviously the Board evaluates the dividend every quarter. And as we look out for today, we believe we have sufficient liquidity and plenty of cash on hand, and we believe the cash generation is going to continue. And at this point, we just don’t see change in that policy. We are going to continue to work hard to do the things to add value to the equity as we move forward.

Brad Heffern

And then, speaking specifically about the quarter, maybe for Dave, it’s the highest capture quarter you’ve had in quite a while, I think part of that was probably due to Arizona doing better than the West Coast benchmarks. Is that what the strong capture is attributable to, and how sustainable do you see that being? Is there something unique that’s going on in the Arizona market?

Dave Lump

Well, that it’s part of the story, but I don’t think it was a record capture rate for us, we have had higher. But Arizona margins were strong and still are to some degree, although LA has fallen off. But, it’s part of the story. And the other part is the Midwest and ability to capture the premium spreads that we did.

Operator

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

Paul Cheng

Several quick questions, the first one for Dave. Dave, can you elaborate a little bit more about El Paso and Gallup. Comparing to the benchmark sequentially that the benchmark, as you indicated, up $2 or $3, but that the contango market has come down or that narrow and then the crude events have worsened a bit. So, your improvement versus the first quarter was phenomenon. Is there anything unique in terms of inventory or that any other kind of one-off that we should be aware?

Dave Lump

I don’t think so, Paul. I think you captured it well. I don’t think there is anything special in there, it’s just margins were what they were.

Jeff Stevens

Hey Paul, this is Jeff. I might add to that. As you recall on Q1, we built some gasoline inventory that we decided not to sell in Q1 because margins were still low in Phoenix. So, we carried that gas, I think we guided to about 500,000 barrels in mostly the Southwest. And obviously the market became much stronger in April as we guided you to. So, we were able to take advantage of that. But I think really what we are seeing here is strong demand for our products. As we guided, the retail volume in the Southwest is up 7%, and I think we’re seeing it reflected in the racks, in the market, in the Southwest that we sell to.

Paul Cheng

Jeff, do you have a rough estimate that that 0.5 million barrel of the gasoline inventory that you sold from the first quarter versus the top line [ph] contribution?

Jeff Stevens

I think the way to look at it is, I think we picked up about $5 to $6 a barrel.

Paul Cheng

$5 to $6 per barrel, per barrel of -- on that 500,000 barrels, or on your overall?

Jeff Stevens

Well, the way to think about it is that the gasoline crack in the first quarter was around $10 to $12 in the southwest, and it was probably closer to $16 to $17 in Q2. So, by delaying the sale of the gas, it probably added about $3 million of EBITDA to really affect El Paso’s overall gross margin.

Paul Cheng

I see, okay. And just from a modeling standpoint going forward, should we assume the reporting format is that you are going to put St. Paul, El Paso, and Gallup as an all-in refining, and then put the retail from NTI and your own legacy retail all in one or do you still have two separate retail, how should we look at it?

Jeff Stevens

So, I think looking forward, you’ll see the three refineries in one segment, and the retail in another segment.

Paul Cheng

So, that you would not -- within the retail, you would not have separate between say, NTI operation and legacy Western, everything would be just one lump sum number, right?

Jeff Stevens

Well, I don’t have separate stats Paul but they’ll be reported as one segment.

Paul Cheng

And is there a lot of synergy potentially that we can drive by consolidating the two retail operations into one?

Jeff Stevens

Well, I think there are certainly synergies relative to doing that. We’ve highlighted some of the synergies as we said on the previous call. We believe just combining the two public companies into one is about $10 million in annual synergies. But we’re going to start highlighting some of these other synergies, Paul, as we get down the road. We’re going from two accounting systems, two IT systems to one system. We’re going to continue to grow the retail and the wholesale and move the barrel directly to the end-user, which historically has got us a higher margin, and then really the third thing is we’re going to continue to grow the logistics platform utilizing the footprint from NTI.

Paul Cheng

Two final ones, A, do you have any preliminary 2017 CapEx number that you can share? And secondly, on the dropdown, should we assume roughly eight time multiple?

Jeff Stevens

So, Paul as far as 2017, we’ll be giving more guidance on that obviously on the next call. We’ll be focused on high return growth projects. And so much of the spend in 2017 would be focused on discretionary projects. And then as far as the dropdown, we’re obviously in the middle of negotiations with that. I think the way to think of it is that it’d be relative to what has traded in the market recently.

Operator

Our next question comes from the line of Paul Sankey of Wolfe Research.

Paul Sankey

So, next year’s CapEx, is that going to be a step down number for you to prioritize debt reduction?

Jeff Stevens

Paul, probably it will be. It just depends upon the projects that we see laid out in front of us. We obviously don’t want to pass on projects that have high returns and things that can be monetized quickly. But as we said in our call, we’re going to focus on debt reduction here in the near-term and work towards getting back to that one times where we were prior to the acquisition.

Paul Sankey

Yes, the projects that you’d still go ahead with, I assume -- is that sort of logistics; can you just talk a little bit more about what kind of things would be irresistible, I guess partly because you could draw them down and generate cash that way fairly quickly, right?

Jeff Stevens

I would say a significant amount of discretionary capital in 2017 and 2018 would be towards logistics. I think that’s a fair point.

Paul Sankey

On the demand side of -- we’re hearing that your demand is good, perhaps things have fallen off a little bit in LA. Do you think that’s more an unemployment or a low unemployment thing or more of a low price thing?

Jeff Stevens

I think in the Southwest, it’s a combination of both of those things. I think the low price is obviously contributing to it. Our retail group is doing a good job of marketing their product. The interesting thing is, we’ve told you in Q2 we had 7% same-store growth in the Southwest, we saw just as strong in July. We haven’t seen any drop-off relatively to our gasoline sales for our retail or through our wholesale network in July, and we expect that to continue in the August. Now, obviously LA is a different story. I believe we had a situation out there where Torrance sat out there and nobody really knew for sure when the transition was going to take place. There were rumors about how it was operating. And my feelings is that we just had cargos continue to come in, in July and PBF was able to take over the operation and stabilize them. And it’s just a matter of working through those last few cargos. Our belief is that we’ll see a cleanup on the West Coast over the next 30 days similar to what saw in February. The Arb is closed for cargoes now. And I think the fundamentals that we talked about, demand in the Southwest, demand in California still look very strong.

Paul Sankey

There isn’t anything distorting about your pricing, is there? It’s just a very strong number; I just wonder, are you aggressive on pricing or is that something [multiple speakers]

Jeff Stevens

Our pricing has been consistent, the philosophy that we have. And in fact with the price -- crude coming down and prices coming down, July is also going to be one of our highest cents per gallon, not only at the Southwest but in the SuperAmerica chain too. So, margins remain very robust. And I think, we’re seeing strong demand and we’re also seeing it inside the stores. I want to say that merchandise sales were up 5% or 6% on a same-store basis in the Southwest too. So, we’re seeing it across the board. I think it’s partly call it hot here, and a lot of people are trying to escape the heat. And our stores are very strategically located for people to go into the mountains and do certain amount of driving that we’re seeing.

Operator

Our next question comes from Johannes Van Der Tuin of Credit Suisse.

Johannes Van Der Tuin

Thank you for taking my call. Quick question, just starting off, on our screen, we can of course see what the Midland prices are. But you gathered barrels in the Delaware for a lower price. Could you give a sense as to how wide that spread has been in the past and where it is today?

Jeff Stevens

That spread is really just a function of transportation. And depending on the volumes in the Delaware, it’s moved out a little bit; it’s just a matter of splitting that with the producers. We have seen that spread anywhere from $1 to $1.50 in that market. And like I said, it’s just really an alternative transportation spread.

Johannes Van Der Tuin

And where would it be today and how has it been affected possibly by drilling?

Jeff Stevens

It’s not really been affected by drilling, it’s been more affected by pipelines coming on line. We used to be competing for a barrel going from Delaware to Midland by trucks; now, it’s being piped. So it’s come off $0.25 to $0.30. It just depends upon where the wells are located and what their alternatives are for transpiration.

Johannes Van Der Tuin

And then, just I noticed working capital went down to about $730 million. Are there key drivers for that working capital; is it just oil price increases and decreases or is there anything else that’s been affecting it?

Jeff Stevens

Well, one of the things obviously that we talked about in Q2, there was some market structure out there that we were able to take advantage of higher inventories during the quarter. As we guided, we said what the contango going from $1.30 to $1.25 down to $0.70, we started to more normalize those inventories. So, you will see it come out of inventories into cash.

Johannes Van Der Tuin

Is there a good point to look back in history just to get a sense for what more normalized level would be?

Jeff Stevens

Well, it just depends upon as we look at the structure and the opportunities to take advantage of differentials, but we are still probably elevated a couple of million barrels today than we would normally target.

Johannes Van Der Tuin

And if I may, just one last question on CapEx. I know you’d mentioned this previously, but what is the 2H CapEx expectation for the Group now as a whole? And also just a sense of what is the sustaining level of CapEx, if you really had to go to bare-minimum?

Jeff Stevens

Sure. The remaining is about a 140 to 145 for the whole Company. And then, if you look at sustaining for the three refineries, just around $50 million a year.

Operator

Our next question comes from line of Jeff Dietert of Simmons.

Jeff Dietert

Dave, you mentioned the improvement in Canadian heavy crude at St. Paul up 27,000 barrels a day. I didn’t see the disclosure in your press release. Could you share what light crude and synthetic crude volumes were as well for the quarter?

Dave Lump

We typically run a slate of the mix of Bakken and synthetic crudes of Canadian, so that could be a mixture of MSW, all sorts of different types of crudes, and then the rest is WCS. So we have been creeping the rate of WCS as our new desalter came on line, and we continue to push that as far as the unit can take because it is typically our best crude. So the other mixes we ran as low as 3,000 barrels of syn during the quarter, rest being Bakken and others, and just tried to take advantage of market structure as the syn blew out for a while with the Canadian fires and we backed out and sold what we had and ran other crudes to substitute with it.

Jeff Dietert

And so, you are looking at ultimately replacing about 10,000 barrels a day of syn crude with a Bakken heavy mix as you ramp up the desalter and the hydrotreater modifications, is that?

Dave Lamp

Yes, that’s pretty much it. The way I’d say it is we’re going to take full optionality of crude whatever the market offers us, we’re going to have the ability to capture it and the best value for the Company.

Jeff Dietert

And is that 10,000 barrel…

Dave Lamp

Sometimes that’s syn, sometimes it’s not.

Jeff Dietert

Secondly, I was going to ask about asphalt, you guys have talked about demand strengthening. Could you talk about what kind of margins you experienced in the second quarter when we had the oil price run-up there? And then, what it looked like in July as crude prices were coming off? Just give us a feel for your asphalt business.

Jeff Stevens

So, Jeff when you look at it for Q2 and the Southwest retail net backs on asphalt were about $60 in the Southwest and then at St. Paul Park were about $45. And then for Q3 for the whole quarter, we’re looking at similar type netbacks, Southwest probably about that $60 and we’ve got a little bit of increase at St. Paul Park as their paving season has really got into full gear and it’s probably close to $47 netback. So, relative to crude, very strong net backs.

Operator

Our next question comes from the line of Phil Gresh of J.P. Morgan.

Phil Gresh

First question, I just want to come back to the balance sheet target that you mentioned in the prepared remarks, one times leverage target, two times leverage now, but I guess if we look to the back half of this year and kind of continue the trends we’ve been seeing in 2016 that that leverage naturally could go higher given that we had -- 3Q of last year for example was a good quarter. My numbers show, it might be more like three times leverage by the end of the year. So, I am just trying to kind of put that profile against the 1 times target, considering CFO minus CapEx minus dividend is maybe a modest generator of cash, given how high the dividend is. So, could you help me maybe bridge the way back down to the leverage target over the next two to three years?

Jeff Stevens

Sure, Phil. As we’ve talked about we have a fairly substantial dropdown inventory at Western and NTI that we’re going to drop these assets down over the next 24 months. And there’s probably out there still about $125 million to $130 million of EBITDA out there. And we’ve already been clear that we’re going to make a drop in the third quarter of about $25 million of NTI this year. And the proceeds from that will likely go to help pay down debt. And as we work our way through these dropdowns and we work our way through our free cash flow, we really think it’s a goal that we can obtain in the next two years. And so, if we’re disciplined with our cost and run our business the way we need to run it, we think that it’s a reasonable target considering the dropdowns that we have in front of us.

Phil Gresh

So, $125 million times eight, maybe you could get $1 billion of cash out of WNRL, round numbers?

Jeff Stevens

Yes. And then, you’ve got to add the free cash flow in and then the distributions that we receive from WNRL, and that’s how we get there.

Phil Gresh

And now that you’ve completed the NTI transaction, help simplify the corporate structure a bit, how do you think about the strategy moving forward now? Obviously deleveraging is a target, but generally the corporate strategy -- do you want to continue to grow the refining business through M&A, or just thoughts on the broader strategy?

Jeff Stevens

We think that, Phil, over the next couple of years, our real focus needs to be on paying down the debt and continuing with these high-return logistic projects. And because of the location of our assets in both the Delaware and the Bakken, I think we’ve got some good work in front of us to do both organic and some other projects to enhance not just our logistics portfolio but by being able to control the crude that comes into the refinery that just enhances our yield profile. And we’ve got a lot of good work ahead of us there, and we think we can continue to build on what we’ve got. But once again, the focus is going to be on debt repayment.

Operator

Our next question comes from the line of Roger Read of Wells Fargo.

Roger Read

I guess kind of going along the lines of what Phil was asking there, just kind of a rough two-year period of dropdowns to generate cash, get debt down to say roughly $1 billion, any tax implications we need to think about that? And then, I guess that would bring in a certain element of risk of just market conditions, which as we’ve seen the last couple years can range from favorable to unfavorable. So, can you give us an idea of maybe what you think you would generate from a free cash flow standpoint on a say, roughly $1 billion EBITDA number, which is obviously kind of where we’re targeting to go -- just to help me understand what some of the other risk factors are or maybe offsets to those risk factors.

Jeff Stevens

So, when we look at the drops as we move forward with them, we’re going to do them in the past tax sufficient way, so there will probably be a small equity component in order to mitigate the timing of paying taxes. So, we’ll continue that strategy that we’ve done in the past. When you look at the free cash flow, obviously the market is going to give us what it’s going to give. But right now in the third quarter, what we saw in July was very similar to Q2; what we’re seeing right now in August, we’re seeing probably the highest group gas crack we’ve seen all year. We’ve seen a widening of differentials in St. Paul’s crude slate moving forward to August. We still have strong sales in the Southwest. Obviously, the West Coast will be somewhat of a headwind in August, but we believe that that should clean up in September. So, we’re just -- we believe that we can do well in a lower margin environment. And so when we model things, we take a lower approach, a mid-cycle type approach when we are looking at our free cash flow. And that’s how we get to our ultimate goal. And I think we’ve demonstrated in the quarter that there is a market for WNRL units. And so obviously, we have sufficient capital without going to the capital markets to make the drop this year. And then, we will be strategic next year with one or two drops and hit the market when it’s right, and we think we will be able to execute.

Roger Read

I guess the other question I would have, going back to the comment about -- I think it was $50 million of maintenance CapEx for the three refineries, and I thought that meant all three together, not $50 million each. Can you give us also an idea of any pending turnarounds, remainder of this year or next across the three units?

Jeff Stevens

So, when you look at that sustaining maintenance, that’s for all three assets. And next year, we have one turnaround in the fall in El Paso. So, as Dave said, we’ve got the turnaround at St. Paul in September of 2016, and then next year, we have got the refinery in El Paso. So, relatively work that we can manage around and continue to generate free cash flow.

Operator

[Operator Instruction] Our next question comes from line of Chi Chow of Tudor Pickering Holt.

Chi Chow

So, back on the dropdowns, what’s your sense on the openness of the MLP capital markets to finance these transactions right now at Western and maybe into next year, and how are you thinking about the financing mix at the WNRL level?

Jeff Stevens

So, Chi, obviously, we did our first equity raise during the quarter, and it was just an overnight equity raise. And we thought it went really well. It was competitive with what the market rates were done for other MLPs and we were able to raise our goal of just under our $100 million to position ourselves to standard that four times levered for WNRL. And we will continue to be opportunistic going to the market, when it makes sense. And we think we can get the most value to move forward. But we feel confident after what we have done so far. We went into the bond market earlier in the year and were able to successfully do a bond deal for WNRL when the market conditions were not ideal. And we think we will continue to move through a challenging market. I think we are realistic that the market does open and close. But like I said this first drop that we are going to do here in the third quarter, we have got sufficient capacity to do without going to the market. And if it make sense to go to market, we will; and if not, we will just go ahead and close it with the revolver that we have today.

Chi Chow

And so, the first drop of these NTI assets, did those assets receive a step-up in basis through the merger transaction?

Gary Dalke

Chi, this is Gary. Yes, they received a step up and basis on June 23rd. So that actually helps to medicate any taxable gain from that transaction. And there is a little bit, but it’s going to be deferred over 10-year period. So, taxes are pretty well mitigated on that transaction.

Chi Chow

So, by extension, does that mean that you’re going to be taking mostly all cash back at the WNR level on the first drop?

Jeff Stevens

We’ll take a significant amount of cash back.

Chi Chow

And then, on working capital, if I heard you right, did you say you expect working capital to be a source of cash in Q3? And if so, how is that dynamic playing out with commodity prices moving down so far in the quarter by the use of cash?

Jeff Stevens

So Chi, when you look at our inventory levels in Q2, we had elevated inventory levels because of market structure that we were taking advantage of at both NTI and at WNR. And as that structure has changed, we started to unwind those differentials. And as we unwind them in June, we don’t necessarily receive the proceeds until July. So, we’ve got some inventory liquidation coming that is shown up in July, and that’s why Gary gave you the numbers that July’s been averaging close to $280 million of cash. So that number in June was a lower point number June 30th. That cash continues to build as the timing of liquidating inventories and the cash coming in.

Chi Chow

The $280 million, does that incorporate most of the liquidation process or is there still more to go?

A - Jeff Stevens

Part of it.

Chi Chow

One final question here. It looks like at St. Paul Park the sales volumes were meaningfully higher than refinery production versus historical levels. What was the reason for that; and is that one-time issue or is there something similar going through the back half of the year there?

Jeff Stevens

So, part of that was we -- as we said in the call at the NTI level, we built inventories for two reasons from Q1 to Q2 finished product. One was to help another refiner with a turnaround during Q2; and two, we just thought the margin environment would improve from Q2 to -- I’m sorry from Q1 to Q2. So, we probably went into Q2 with about an extra 800,000 barrels of finished product that we elected not to sell in Q1 but we marketed it in Q2. So that’s a one event, Chi.

Operator

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

Neil Mehta

Jeff, I wanted your outlook on the RINs expenses. I know, we talked about this earlier this year at our conference. But given the Company as unlimited earning sensitivity, we appreciate your review on this, do you think RINs prices are likely to continue to move higher here? And what is the mechanism by which D6 prices will stop going up?

Jeff Stevens

Well, I think there’s obviously there’s been a lot of discussion on call so far this quarter relative to RINs. We’ve come to the conclusion that this program’s probably here to stay for a while. And what we try to do is mitigate any costs that we’ve had. So, we’ve continued to focus on retail and wholesale assets essentially controlling the RIN and the RIN expense and being able to blend the majority of the RINs. In Dave’s prepared remarks he talked about this East Coast wholesale business, this is a business that we kept from the legacy ownership, the Yorktown asset. And one of the reasons we kept this business was we saw this RIN issue becoming a bigger and bigger problem. And so, we’ve been able to leverage that business that we’re going to take over and help mitigate any additional cost that we may have relatively to RINs. I think that the problem has been very well articulated relative to the transparency of the RIN program and how RINs are traded and marketed; it’s not transparent. There is people in there with good intentions and there is people in there without good intension. So, as I talked about in your conference, Neil, my belief is that as the blending requirement continues to go up, this can only become a bigger issues. And at some point, the cost of this program has to be reflected in the crack spreads, and I think we’re going to see that over time.

Neil Mehta

I appreciate those comments. And then, just in terms of the yield mix, at this point, given the strength of the gasoline cracks that you’re seeing in your region, are you still running at maximum gasoline mode?

Jeff Stevens

Absolutely, at all three refineries, we still enjoy a much higher gasoline margin than distillate and so, we’re continuing to take advantage of that.

Neil Mehta

And last question from me is -- and I think I know the answer to this, but you are trading at a 7% dividend yield. As you think about the right dividend yield level or the dividend level, can you just confirm that this is a level that you are comfortable with in terms of the dividend and the security of it, and then confirm that there’s no need to issue equity as you see it over the course of the next year.

Jeff Stevens

Neil, we obviously can’t control the yield from that standpoint. We look at it more what is liquidity position, what is cash generation and where do we want to be from a policy standpoint. So, I think the way I’d leave it is that we’re very comfortable where the dividend is. And we’re going to continue to watch it like every other refinery. But, I think the way to think about Western moving forward is, we want to remain in that top quartile.

Operator

And we have time for one more question. Our final question is a follow-up from Paul Cheng of Barclays.

Paul Cheng

Dave, when you are talking about the East Coast business that you would be able to keep all the RIN, can you tell us that how big is that exposure?

Dave Lamp

It’s about 22,000 barrel a day business, Paul. And if you -- today, we get about half of those, and we’ll get the rest. So, if you do the math, I think you can figure it out from there. They are little bit dependent on where all those barrels are sourced from too. If we do any kind of blending, we get the obligation for the RIN, but are buying components and then re-blending but the bulk that comes off Colonial, so, where it’s RIN free.

Paul Cheng

So, you are talking about roughly about 17 million gallon of the RIN?

Dave Lamp

Yes, so, which we get half of today.

Paul Cheng

No, this is already half?

Dave Lamp

Right, today we get half. So, you’re talking about maybe 8 million RIN, somewhere in that neighborhood.

Paul Cheng

And Jeff, earlier that you’re talking about the 800,000 barrel of additional inventory. Is that -- in the first quarter, is that the total Company or just for St. Paul, which is on top of what WNR legacy, just trying to clarify?

Jeff Stevens

No, about 500,000 was at WNR and about 800,000 was in the St. Paul system.

Paul Cheng

So, 500 is in WNR now, and another 800 in St. Paul?

Jeff Stevens

Correct.

Paul Cheng

So together that total Company from that standpoint is 1.3 million barrel higher than usual?

Jeff Stevens

Correct.

Paul Cheng

And then, in the second quarter, typically asphalt sales volume is higher than production. Did you sell higher asphalt in the second quarter from inventory also?

Jeff Stevens

I think we sold about what the production was, Paul. We really -- in the Southwest, which is our largest market, we sell pretty much year around out here. And Q2 is a little bit higher and Q3 is even a little bit higher, particularly Q3 at St. Paul Park, but our sales are pretty steady relative to the retail markets in the Southwest.

Paul Cheng

I see. And then, on the St. Paul turnaround, 40 days, should we resume it’s about 20-day in September, 20-day in October or that the shift is a little bit more skewed towards one month or the other?

Jeff Stevens

That’s pretty close, Paul.

Paul Cheng

And then, wondering if you guys have a rough estimate, what is the El Paso turnaround cost going to look like for next year; is it a $50 million or $70 million turnaround cost?

Jeff Stevens

Yes. Paul, as you recall, in El Paso, we just take half of the plant down, so it will be a north side; it will be in the $30 million to $40 million range. We will give you more detail in the third quarter.

Paul Cheng

And, Jeff, I presume that at this point the expansion plan for El Paso is being delayed or postponed indefinitely?

Jeff Stevens

Well, what I would say is El Paso continues to work plans to increase their creep. I would say that the biggest increase that we would make there anything like that has been tabled. But we continue to look for project that pick up 3,000 to 4,000 barrels here and there. I mean, remember Paul, since we announced the first expansion, we were doing about 125, now we are averaging about 135. So, in a sense, we got about half of that expansion already for free. And I am hoping we can get the second half for free too, so.

Operator

That was our final question. I would now like to turn the floor back over to Jeff Stevens for any additional or closing remarks.

Jeff Stevens

Thanks, Marie. I would just like to close by thanking our employees for their continued focused on our safety and reliability. Have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.

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