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Tesoro Corp. (NYSE:TSO)

Q3 2007 Earnings Call

November 01, 2007 10:30 am ET

Executives

Scott Phipps - Manager of Investor Relations

Bruce Smith - Chief Executive Officer

Greg Wright - Chief Administrative Officer

Bill Finnerty - Chief Operating Officer

Otto Schwethelm - Chief Financial Officer

Lynn Westfall - Economist.

Analysts

Doug Terreson - Morgan Stanley

Neil McMahon - Sanford & Bernstein

Doug Leggate - Citigroup

Chi Chow - Tristone Capital

Paul Steinke - Deutsche Bank

Roger Reed - Natexis Bleichroeder

Deepraj Pandey - Siemens & Company

Daniel Vetter - JPMorgan

Operator

Good morning. My name is Meg and I will be your conference operator today. At this time I would like to welcome everyone to the Tesoro Third Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session (Operator Instructions).

Thank you, and Mr. Phipps; you may begin your call now.

Scott Phipps

Thank you Meg. Good morning everyone and welcome to today's conference call to discuss our third quarter earnings. Joining me is Bruce Smith, our CEO, Greg Wright, our Chief Administrative Officer, Bill Finnerty, our COO, Otto Schwethelm, our CFO and Lynn Westfall, our Economist.

If you need a copy of the earnings release that we issued this morning, will give you the company’s supplemental quarterly data, you may obtain it from investor relation section of our website at tsocorp.com.

The earnings released contain additional information in the attached tables on our business. In addition, we have updated the other supplemental financials and operational information on our website that’s not included in the press release. After viewing this information please feel free to contact me with any questions about the material or otherwise following todays call.

I would like to remind everybody revenue statements made during the call that refer to management's expectations and or future predictions are forward-looking statements intend to be covered by Safe Harbor provisions of the Securities Act as there are many factors and which can cause of different from our expectations.

With that set up, I'll turn the call over to Bruce.

Bruce Smith

Okay. Thanks, Scott. And welcome to the third quarter earnings call. I'd like to thank everyone for taking time to participate today. I'm sure that, there are going to be many questions about the third quarter results and I know that a number of you want to ask about the recently announced tender offer by Tracinda.

We are going to answer any of the normal questions related to quarter or other factors that we normally talk about any of our projects, but we are not going to comment about Tracindas analysis tend to acquire 60% of Tesoros outstanding shares.

I want to just take a second here to quick overview of the earnings release. This morning we reported net income for the third quarter of $47 million or $0.34 a share which was significantly lower than earnings a year ago when we earned $247 million or almost $2 a share.

On competitive basis our results were disappointing. But they reflected an unusual margin environment. All these conditions affected the entire industry and the real impact on two of our refineries and condition were slightly worst on the west coast.

Lynn’s going to talk about the margin part later, but if you reduce it to a few words it would be. Power price lagged, rapidly rising crude prices and operational problems in Gulf Coast caused the west coast premium over Gulf Coast margins to contract.

Today we are also going to discuss other factors that affected our financial results and as promised we will report on the performance of our recent acquisitions. While the third quarter was operationally successful, we always look back on our performance to see what actions we can take to better optimize our system.

This has been particularly insightful this quarter, in part due to what we believe to be the unusual market condition, but also because we are still learning about the intricacies of our new assets of this system.

Or we don’t believe high crude price and historically, low track spared environment will be the norm in the future, it is important to understand what we can do to optimize our system and to maximize products, profits if and when this reoccurs.

I'm going to let Lynn elaborate on some of the profit improvement opportunities in few minutes. But before he does that I want to take a second and comment on the performance of our recent acquisitions.

After we assumed ownership of the refinery in May, our short-term objectives were first to assemble the best leadership talent available, form a team that has stabilize operations, proved reliability and safety and one that would work with our optimization area to capture synergies.

Secondly we assembled routine to begin a process of reviewing the capital permission will be necessary, to fully optimize our performance at southern California over the nest five years. I'm pleased to report that we have been successful in both of these objectives.

The new leadership team has quickly built trust and teamwork in the workforce that Los Angeles has made great progress in just one quarter. We set a record for throughput at better than expected yields our cost structure in line with expectations, and Los Angeles had a safety record that was aligned with the best in our system.

In summary, we're extreme pleased with the operational performance of Los Angeles, which we believe is fully meeting our expectations. The question is, how are we doing relative to our financial expectations.

After our acquisition, west coast crack spreads dropped from the mid-$30 range to low of $11 followed by an up tick that hovered in the $15 to $18 range. We announced three components of our acquisitions and we said that the acquisition economics assume the refinery generated, annual operating income of $365 million or about $90 million per quarter without seasonal adjustments.

We just reviewed the third quarter performance of the to Angeles refinery with Board and the major variance from our acquisition economics was a margin difference to the 2004, 2006 average we assumed in our acquisition economics.

Specifically, the ANS crude benchmark was up by about 50% while the gasoline and diesel benchmarks increased by only 25%. Additionally, this refinery produces a higher amount of coal, and the price of that product really lagged crude.

Looking at the two retail acquisitions, the acquisition economics assumed that annual operating income contribution of about $85 million or about $21 million a quarter. As we reconcile the performance for the board, it showed that the Shell assets had performed up to our expectations and that the U.S.A. petroleum assets have been in line with volume and margin expectations.

U.S.A. is now incurring additional and to some extent unanticipated expenses to improve operating standards and security and other store enhancements, which has and will negatively impact quarterly operating income by $7 million to $9 million for the next three quarters.

Turning to our capital program, we’ve completed the major income improvement projects associated with the 2007 capital budget with the exception of the Golden Eagle coke Mangosteen (ph) project. This is the first year we have departed from our buy versus build strategy and that we invested capital in projects that will have a meaningful impact on our base earnings.

And are assumed 2004-2006margins, these projects are expected to contribute $100 million of EBITDA. These include the Amorco crude flexibility and expansion projects, which were really two projects that we just completed in June.

In the past, we have talked about how our optimization team is focused on crude functionality and this project is an excellent example that how significant it is to be able to fully supply Golden Eagle by water. In the third quarter this $26 million project contributed EBITDA of $11 million. So on annualized basis this project pays out less than a year.

During the third quarter we completed the sulfur (ph) project Amorcos, which is enabled us to double our solid crude throughput. You remember that we canceled a large Coke project Amorco and of course it substituted a couple of smaller projects that should capture much of the target benefit of the Coker.

These are the type of low hanging Mangosteen fruit projects, which we think exist elsewhere in our system especially in Los Angeles. (inaudible) should expect the company to exercise the same capital discipline in the future as we identify solid return projects. I believe this will continue to be a key component of building shareholder value going forward.

Bill, will you make a few comments about the operating results or highlight some of the improvements you believe we can make?

Bill Finnerty

Thanks Bruce. I'd like to begin by making general statements on operations and then comment on each of our operating regions. We continue to operate our refining system at the high end of industry standards, which is the result of the numerous programs we have implemented over the past few years.

Our operating plan is to run reliably and safely with a continued focus on expenses and feedstocks cost. This is clearly a continuous learning process and we have a solid team to drive operational results.

On the marketing front, we have commenced the process of understand the new assets we acquired. We are endeavoring to take the best practices from across the marketing system to create value and we are excited about the opportunities we are uncovering.

Our supply and optimization team continues to extend its global reach in providing raw materials system, improves logistics capability and opening up new markets for product distribution. At the Los Angeles refinery, we are pleased with the third quarter operational performance.

The refinery is operating at near optimal rate consistent with the current configuration and more focus on reliability and safety and integration demonstrated by various functions of the refinery, as the refinery achieving throughputs above our early expectations.

We recognize that this is just the beginning and much work lies ahead. With each day we are learning more about the refinery, how it interfaces with the system, and identifying additional opportunities to drive value.

For example, we feel we can improve upon the crude contracts business at the time of transitions. These contracts, which comprise a major portion of the refinery supply today. We’ll begin to roll off in the first quarter of 2008.

As you know, expanding logistics at our facility to improve crude flexibility at each of our plants has been a theme we have strongly pursued over the past three years. Similar to what we accomplished at the Golden Eagle Refinery, we plan to phase in throughput enhancements at Los Angeles to increase foreign crude receipts.

We believe that this will facilitate arbitrates opportunities and access to a wider array of crude qualities. We are on track to achieve the synergies we targeted and are focusing on transportation, operational, turn around, and raw material opportunities.

On the capital front, we have developed a plan, which we will share with you in December that will provide lower cost, environmental benefits and improved product yields.

In the Pacific Northwest region, we were able to capitalize at the end of the quarter on the sulfur-handling project that is now outline. This enabled us to increase our throughput and open up additional blending opportunities.

On the operations side, we did experience unscheduled maintenance on the boiler units for the FCC and underwent planned maintenance on two hydrotreating units. In total these reduced the refinery gross margin by $12 million compared to a year ago.

In Hawaii we have three significant market elements negatively impacting refinery profitability compared to a year ago. First, lack in product price provisions on certainly product contracts did not offset rapid increases in crude costs. This is something, which is inherent in the industry pricing for these products and we have shared this with you previously.

Second, the Asian sweet crude realized a higher premium due to the strong demand for low sulfur fuel oil following the look to our France closes to Japan after the earthquake. Third, certain term supplies have higher than normal market adjustment factors resulting from the change in the market structure for WTI and Brent during the quarter.

The confluence of these market conditions took its Toll on Hawaii's performance. Some of these quarterly impact would continue into the fourth quarter end 2008. So we are evaluating alternative supply opportunities hedge options and product channel going forward.

The refining region experienced the highest spreads of our operating regions for the quarter and operating at full capacity to capture the market. Industry unplanned refinery additives and diesel demand supported the group three region and specifically the Mandan refinery.

The Salt Lake City ref margins did not follow the same strength as in the group three benchmark. On the feedstock side, we continue to see favorable economics for the regional high quality crude production, which as you note is a trading at a discount to WTI.

Going into the fourth quarter we continue to see high product demand, especially on the diesel side coupled with advantage free stock opportunities. Golden Eagle's operating income in this quarter was lower than last year as a result of the reduced tax price that ranged $6 a barrel.

Operationally, we experienced a temporary slowdown in the fluid coker and a few other downstream units. This reduced our throughput for merely guidance. The project modification project, part of this year's $900 million capital program is still scheduled to come online during the first part of 2008.

I'll now turn it over to Lynn for an update on market fundamentals.

Lynn Westfall

Thanks Bill. Margins in the third quarter were disappointing. While, the Gulf Coast crack year-over-year for the quarter was actually up by $0.74 a barrel. West coast crack, were down by almost $8 a barrel. With this in mind, I have concentrated my analysis and my comments on a particular weakness of the West coast early quarter.

While, few of you must saw an update as we entered into full analysis on this decline. It appeared good been due to both the demand and supply factors. The latest estimates for July against meet demand on west coast for year-over-year decline of about 60,000 barrels a day. Used decline was about 35,000 barrels a day.

We believe these are reactions to the steep retail price increases for the first half of the year. We saw gasoline prices rise by more than $0.70 per gallon. Retail prices reached an all time in high California $3.50 per gallon May of this year.

Recently release sale for August are, shows a slight increase in demand on year-over-year basis to recovery may be underway. On the supply side, crude price increases on the West Coast exceeded those on the Gulf Coast, with ANS up over $7.50 per barrel year-over-year versus WTI increase of just over $5 a barrel. We believe this is due to higher weakness on the North Slope which reduced crude production by about 8%.

In terms of product supply, California refinery grand successfully well in the quarter. We produced 3% more gasoline than in the same period of 2006. And July, August represented the two highest production months of the year so far. There is also excess product of the market from an inventory draw on the West Coast during the quarter of $3.2 million barrels. A record high third quarter inventory decline.

This contrasts to the same period last year when there is inventory build of 600,000 barrels. So the incremental supply year-over-year was of 41,000 barrels a year higher in higher port. This excessive draw was brought about by a second month accreditation on the future market was tripled from over $0.04 per gallon in June to $0.125 per gallon in July. Thus providing large incentive to reduce inventory levels.

In a market its typically only short about 50 to 60,000 barrels a day during this part of the year. combination of demand line increase production and large inventory draw had the effect on margins you would expect to see.

Looking forward, we see the fundamentals improving during the fourth quarter. The average West Coast crack for October now stands at $17.56 a barrel slightly above the same month last year has increased about $3.70 from September levels.

While the average WTI crude price for the month has increased by $5.29 barrel from September, ANS crude prices above the by $4.52 a barrel or about $0.77 barrel. The date for the month of October, California refineries are producing about 130,000 barrels a day less gasoline than in October 2006.

Also turn around activity in pipeline for the quarter is expected to be heavier than normal removing about 160,000 barrels a day for this capacity about a 100,000 barrel a day for converted capacity home production.

I'll now turn it over to Otto for fourth quarter guidance.

Otto Schwethelm

Thanks, Lynn. As mentioned earlier, total system throughput was 654,000 barrels a day which was at the high end of our third quarter guidance. I think the overall fourth quarter throughput guidance at the California region we expect throughput to average between 260 to 275,000 barrels per day.

Pacific Northwest 175 to 180, Mid Pacific 80 to 85, and Mid continent 105 to 110 bringing total system throughput somewhere between 620 to 650,000 barrels per day. Operating expenses were in line with guidance, except for Los Angeles where expenses were lower than we had forecast.

The variance was mainly due to a lag and the ramping up in expenses associated with the execution of our capital program. We expect expenses at Los Angeles to increase in the next few quarters as we match the expense needs with the capital program.

Other regions are expected to be in line with the third quarter. By region we expect California during the fourth quarter to average $6.60 per barrel, Pacific Northwest $2.75. Mid-Pacific $1.85, and Mid-Continent $2.80. Depreciation and amortization for refining is expected to be around $85 million while DNA for the retail system is now expected to be around $8 million for the fourth quarter.

Our corporate and unallocated expense is expected to be roughly $45 million in the fourth quarter. Interest expense before interest income is estimated to be around $25 million and we expect our tax rate to continue around 38%.

On a special note for those of you who have a model around our refinery we are currently reviewing our guidance around used of San Francisco crack spread for modeling LA and the appropriate capture rate. We expect report on this after we get a few more quarters under our belt. And with that I'll turn it over to you, Bruce.

Bruce Smith

Okay. Thanks Otto. Clearly the third quarter had some unique challenges, but we continue to believe that new incremental whole demand was support a long-term margin outlook exceed the historical five year average and they will better track the cost of crude.

As Lynn said, fourth quarter fundamentals have improved and the average West Coast spread crack 7th of October was slightly higher than the same month last year. But, still in line with the third quarter. The average ANS retrieves an increased in another $8.

So while West Coast premium as improved relationship between crude and products -- consequentially, plus we see a rapid throughout market conditions is going to be difficult for the company to improve on the third quarter results of fourth.

But the return of more rational markets we expect combination of income improvement projects and Golden Eagle coker project and the recent acquisitions that they will make a meaningful contribution to our shareholders.

When we acquired these Southern California assets, we expected both systems synergies and new investment opportunities. We are on track to capture the expected synergies and it's been said we are reviewing the capital projects that we initially identified as part of Los Angeles refinery acquisition.

We have in place a very talented team, one that's delivering better than expected operating performance and I'd like to congratulate that entire team today on this call. There's uncertainty in today's marketplace we believe our system has solid value and certainly it has an excellent historical earning power.

Nevertheless we realize a successful organization must adapt to the changing market conditions. As then said we are and will be making some near term changes to lower crude costs and better optimize our system.

Operator, I believe at this time we're finished with our comments and we're prepared to take questions.

Question-and-Answer Session

Operator

Okay. Your first question comes from Doug Terreson Morgan Stanley.

Bruce Smith

Hi, Doug

Doug Terreson - Morgan Stanley

Good morning, Bruce and team.

Bruce Smith

How are you?

Doug Terreson - Morgan Stanley

I'm doing fine.

Bruce Smith

Good.

Doug Terreson - Morgan Stanley

I think Dan talked about the differentials with the benchmark refining margin in Pacific refineries in Hawaii implements being weak and been weak and, my question regards the composition of that differential in the period.

And specifically how the weakness might have been segmented between crude, but I think you spend time on and products which relate benchmark. Do you guys have additional insight into how that benchmark traveled during the period? Or tracked rather?

Bruce Smith

Relative to the, benchmark relative to obviously versus capture rate what was put out. We had a much lower capture rate at Hawaii. I think the key thing gets back to what Bruce was mentioning before. And that was just the changes that we saw on the crude structure for that particular facility.

Doug Terreson - Morgan Stanley

Okay.

Bruce Smith

And those unusual events that we did witness in the third quarter, just as a reference if you take a look at typical patterns, your raging supply into the U.S. is typically a lower price and what you see into Europe and into Asia, but because of the various changes in the market, the unusual changes in the marketplace, that actually flipped during the third quarter.

Doug Terreson - Morgan Stanley

Okay. So, it's mostly on the crude side its sounds like...?

Bruce Smith

It's predominantly the crude side, yes.

Doug Terreson - Morgan Stanley

Okay. And also just quick update is it reasonable to assume that the Golden Eagle cocker (ph) is a Q2 '08 item? And Anacortes is a hydrogenation unit is Q3?

Bill Finnerty

Is that the unit coming on line of latter part of the first quarter so that would be a correct assumption.

Bruce Smith

That is so economic impact I think the bulk of that would be second quarter next the operational in March. But it’s by the time we got it ironed out significantly contributing in the third quarter.

Doug Terreson - Morgan Stanley

Okay. Thanks a lot, guys.

Bill Finnerty

Okay, Doug.

Operator

Your next question comes from Neil McMahon Sanford & Bernstein. Your line is open.

Neil McMahon - Sanford & Bernstein

Hi. Neil McMahon, Sanford & Bernstein. Just a few questions. First of all, could you tell us what potential you have to fast track the port plans at long beach to get greater flexibility into the L.A. refinery? You think there's the possibility of doing this.

Given the fact that you're crude contracts are running off at the refinery, but how soon can we expect anything to happen there? Especially after Shell was unsuccessful was doing at anything in that area.

Bill Finnerty

The plan that we have in place Neil addresses the second half of 2008 for the first phase of increments and the complete project won't be done until the latter part of 2009.

Bruce Smith

I think it would be fair to say that Shell wasn't really motivated early on to make investments at all, we’re certainly not to make investments here relative to the crude. That wasn't where they were focused. And so, again I'm not sure that was really a part of their strategy and when we inherited these contracts, we needed to have them for transition purposes, but its certainly when we look at how we would supply it relative to those contracts, we do filling in this market we would have done a better job.

Bill Finnerty

Clearly we'll have a higher utilization through the top even under current capacity just because of the profile of materials that we going into our system as a whole. And then we'll have the incremental adjustments once the capital projects are completed and as I indicated we've got two phases to that.

Neil McMahon - Sanford & Bernstein

Maybe just a quick follow-up. Would you benefit at all from the rolling off of these contracts over the next quarter at all in terms of writing even near term contracts before any port developments take place or pretty much we have to wait for the second half of '08 for any more flexibility at L.A.?

Bruce Smith

No. I clearly will benefit from writing off contracts we've already got a team that are addressing alternate supplies on a domestic basis. So, we see a benefit there. But as we talked so many times, the ability as we have at Golden Eagle now both on the domestic and the foreign side is the ultimate game and that will have two phases to achieve. But we will have benefits in the first half.

Neil McMahon - Sanford & Bernstein

I've just got two more quick ones. When you look at Hawaii and Anacortes, you mentioned that a number of issues, especially associated with the situation. I think you said one was it in Asia, was there anything to do with the logistical program between those refineries in the Pacific Northwest and Hawaii that may have resulted in the low margins? And just a second quick question. What the outlook for the blending component coming into the West Coast over the next six months?

Bruce Smith

Well, as far as the logistics go, Neil, I did not have any the activities that we are during the course as you know we’ve got U.S. Fuel (ph) Tonnage fleet that we operate to service our needs there. And on the export of fuel oil if you look at what was happening in Asia on fuel oil, the fuel oil prices were about where they were the previous year. So, there is nothing from a logistics perspective that hindered us. What did you refer going to you final question?

Neil McMahon - Sanford & Bernstein

The second question was just really to look at, as you look forward going into the start of next year, in terms of gasoline and blending components import into the west coast, what are you looking at in terms of, how tight the Californian market is likely to be?

Lynn Westfall

This is Lynn Westfall. I’ll try that one. I think we see a return some time soon or certainly by next year to normal levels of coast. This year they were extraordinarily high with reformulated import bugs 70,000 barrels a day. Total import over 100,000 barrels a day particularly because of the maintenance of both planned and unplanned in the first half of the year.

Because of the huge inventory draw we saw the third quarter of this year, import were down to the lowest level that’s going to do and bring in inventory you have to back our imports. I think, August was down only 7000 barrels a day. But taking those two events and assuming that neither one of them repeat next year we'd still expect to see reformulated imports in the California in the 30 to 35,000-barrel a day range.

Neil McMahon - Sanford & Bernstein

Great. Thank you.

Operator

Your next question comes from Doug Leggate with Citigroup. Your line is open.

Doug Leggate - Citigroup

Thanks, good morning. Hi, everybody.

Bruce Smith

Good Morning, Doug.

Doug Leggate - Citigroup

Couple of things from me. Just give some clarity on this $28 million hedging and by that’s included in the reported numbers right on the mid-Pacific.

Bruce Smith

We show that as a combined adjustment on the financials and Doug what it is. It's the program that we have on long haul crude and it's tracking the crude price only. It's looking at the crude at time of purchase and marrying it up with prices at the time of delivery and processing so that we can capture what we've talked about in the past as far as refining margin.

And when you look at our portfolio the amount of crude that we actually hedged is a relatively small percentage. But the dollar value was up because of the rapid rise that you have in crude oil market. Remember, that's just on the crude side.

Doug Leggate - Citigroup

Okay. So it's not all included in the realized margin?

Bruce Smith

That's correct. It spread and is recognized as you look at the margin for each of the refineries in the supplemental to the -- as well as the information we post on the website. If in the realized margin for those refining region they were impacted so that would be everybody with the exception of the Mid-Continents.

Doug Leggate - Citigroup

Right. So $28 million I guess, what I'm trying to figure out is should I be really stripping out to get an idea what your underlying capture looks like in those assets it's kind of a nonrecurring item?

Bruce Smith

It's part of an ongoing program. It's hard to strip it out and add it back in. I mean, it is what it is Doug and we've been working on our hedging for a while to really recognize they have refinery margin. And so we don't have any plans to change that at this time, so I mean, you could certainly take it out if you want but it's going to be part of a recurring program.

Doug Leggate - Citigroup

Okay. And declining oil price environment you probably get a benefit ends up here to say (inaudible).

Bruce Smith

That's what you saw in the third quarter of last year. As prices come down, that becomes a gain and you have an increasing market that the paper portion of it is a loss. I look at that in total.

Doug Leggate - Citigroup

We can't forecast that so I tend to treat it as a bit of a nonrecurring. Then everything I’ve is a I want to go back to one of the things, Neil is maybe referring to. You guys don't normally do too well in the back end of the year.

One of the things evident over the last couple of years is tightness in the high Octane will be the pressure market in the early parts of the year, when summer blending kicks in again. Is there a something I guess is it directed to Lynn any obstacles as to why that should not reoccur again in 2008? In other words, pay all market margin premiums lifting second quarter is that a reasonable outlook from here?

Bruce Smith

I at this point can't change to that law, I would expect that to reoccur just like it does every year.

Doug Leggate - Citigroup

Is some what exacerbated since ethanol came in there after?

Bruce Smith

Well, I mean, ethanol has been in California for many years now.

Doug Leggate - Citigroup

Sure.

Bruce Smith

Year-over-year there should be no retain. The only thing to watch for coming up in the first quarter of next year, we probably will not have the scheduled turn around that we had in the first quarter of '07. As may be little bit up.

Doug Leggate - Citigroup

Right.

Bruce Smith

So the quantity of imports may change but the quality will remain unchanged.

Doug Leggate - Citigroup

That's it for me, gentlemen.

Bruce Smith

Thanks, Doug.

Operator

Your next question comes from Chi Chow with Tristone Capital. Your line is open.

Chi Chow - Tristone Capital

Good morning, gentleman.

Bruce Smith

Good morning, Chi.

Chi Chow - Tristone Capital

Got a couple of questions, back on Wilmington. When I look at our yields year-over-year things haven't switched that much. You're producing jet now obviously. But in the heavy oil/RESID component and how has the mix changed year-over-year?

Bruce Smith

We see year-over-year….

Chi Chow - Tristone Capital

3Q '07 versus 3Q '06.

Bruce Smith

Compared to shell.

Chi Chow - Tristone Capital

Or you're showing 54,000 barrels a day of heavy oil reside category of 3Q '07 versus 31on yield percent -- it's percentage basis it's right around 17% to 19% of total yield. But how has the mix changed within that category?

Bruce Smith

You said Wilmington, you mean in the California in general.

Chi Chow - Tristone Capital

Yes. Sorry, California in general.

Bruce Smith

Okay. We were starting with the Wilmington part of it.

Chi Chow - Tristone Capital

Yes.

Bruce Smith

That’s all, I think just under third quarter, you can look at two things that would alter the structure of that. One is, we not made note that we had work underway for the fluid coker. So, obviously we had changes later in part of fluid coker operations.

And then, the second is that we ran higher fluids at Los Angeles, which would directly mean that your yield pattern on the incremental barrels is less. You got clean product yield.

Chi Chow - Tristone Capital

Okay. How much coke are you producing? I'm assuming coke falls into that 54,000 barrels a day category.

Bruce Smith

Yeah. I don't know, if we've shared that number, we directionally anywhere between the two facilities are about 20,000 barrels a day of coke, 18 to 20. It’s and I think again, the fact is that we've got Los Angeles on its yield pattern it's got a little larger percentage of coke and that certainly in a high margin environment coke prices are not moving is really going to hurt that facility.

Chi Chow - Tristone Capital

Yeah. I mean it seems like you've got an outside coker, at that plant 40,000 barrels a day. First, for the hundred thousand barrel a day facility. I mean is this going to be an ongoing problem at high crude prices going forward?

Bruce Smith

I don't know, but I think what it speaks to is that if you can't source your crudes in the right way, where there's a big enough discount around what really got there with heavy sulfur crudes.

Yeah. You've got a little bit of an issue and that really compounds what we've got today. We guess, we start with some other crudes that we can't maximize carefully optimize that facility.

Chi Chow - Tristone Capital

Okay. So, this is a problem with your current crude contracts really?

Bruce Smith

Well, Chi, I think you have to take a look at the structure of the market on coke pricing relative to other pricing structures and coke typically doesn't follow your pricing structures as rapidly as other products.

Exacerbated in the third quarter because of the huge surge in crude prices. So, it's going to take a while for that gap to narrow.

Chi Chow - Tristone Capital

The combination I think is really the right way to look at that.

Bruce Smith

But it is a factor and what goes on there, and I wouldn't say that we've got an oversized coker. I think, we have an under-optimized crude slate and then some of the same things product price problem right now, which is really imbedded in gasoline and diesel and everything else.

Chi Chow - Tristone Capital

Well, crude is obviously continue to surge in for queue (ph) so.

Bruce Smith

And that's why we point that out. Unless coke prices jump up, it's going to hurt that facility has those crude price…

Chi Chow - Tristone Capital

And what should we be using for a coke price? Do you have any guidance on that?

Bruce Smith

Chi, we'll work on that with guidance as we go forward.

Chi Chow - Tristone Capital

Okay.

Bruce Smith

We don't have any (inaudible) on that.

Chi Chow - Tristone Capital

Okay. And then, one final question. Bruce in your opening comments you mentioned that operating problems in the Gulf Coast impacted west coast margins during the quarter. Can you explain that dynamic?

Bruce Smith

I think he was addressing the differential.

Chi Chow - Tristone Capital

Right.

Bruce Smith

Between the Gulf Coast and the west coast squeezed in. The combination of oversupply on the west coast and some operating problems that reduced supplies in the Gulf Coast.

Bill Finnerty

Yes. That's what I was trying to say, sorry, I was trying to deal with the differential. As we edited this we decided it wasn't clear enough. It would have been better to talk about the differentials.

Chi Chow - Tristone Capital

Okay. Thanks a lot.

Bruce Smith

You're welcome.

Operator

Your next question comes from Paul Steinke of Deutsche Bank. Your line is open.

Bruce Smith

Paul?

Paul Steinke - Deutsche Bank

Yes, hi, sorry guys. I was asking a question on mute there.

Bruce Smith

Did you get an answer?

Paul Steinke - Deutsche Bank

Easy to answer that one. You've provided a tremendous amount of (inaudible) here in, in terms of operations, but when all is said and done what you're saying if the current market conditions persist you're going to make about the same amount in Q4 as you made in Q3 all things being equal. Is that a fair statement?

Bruce Smith

I think that's a fair statement.

Paul Steinke - Deutsche Bank

Great. Okay. That’s fine, thanks. You seem to open the door a little bit in your opening comments through the choosing the question so, I'll run it by you. What are the major considerations that you are taking to the Board regarding the offer? Thanks.

Bruce Smith

I didn’t think I opened the door at all, but the Board yesterday and obviously the Board by what we're required to do has got an obligation to respond after the tender offer is filed.

The Board is duly considered at this point. The information that is, its got hand to selecting some information and waiting for the offer to be formalized and filed, which to my knowledge has not occurred yet.

So there's not much more we can say about it at this point. The Board will in fact once it filed will consider it and it will respond appropriately.

Paul Steinke - Deutsche Bank

And that's obviously within the frame that you've outlined within your own news release on the subject.

Bruce Smith

At this the (inaudible) regulations required that we respond within 10 days of the tender offer, which has been made and of course we'll do that.

Bill Finnerty

There's a very strict guideline for what we need to do and we'll follow the guidelines and we'll provide appropriate information and it is 10 business days. And so once that's filed we'll within that 10-day period we’ll make an appropriate announcement.

Paul Steinke - Deutsche Bank

Okay. Great and finally from would you had direct contact with (inaudible) guys

Bruce Smith

I'm not going to comment on any of the other aspects of it. I just can't do that, Paul.

Bill Finnerty

I understand Bruce. Thanks a lot.

Bruce Smith

Thank you.

Operator

Your next question comes from Roger Reed of Natexis Bleichroeder. Your line is open.

Bruce Smith

Hi, Roger.

Roger Reed - Natexis Bleichroeder

Good morning. That is a tough name it is Bleichroeder but…

Bruce Smith

That is a tough name. You pronounced it very well.

Roger Reed - Natexis Bleichroeder

Well, I've had several years of practice now. I guess one the question here for you could you walk back through the west coast volume issues and in doing so on a year-over-year comparison. Do you believe this was due to just a different maintenance schedule?

Have we seen legitimate expansion of capacity on the west coast? Are we getting as an industry if not just inside solo better about operating in this clean fuel environment? Could you kind of help me out understanding that a little bit?

Bruce Smith

Yes, It's hard to say with two months of refinery utilizations in the quarter are here to stay. They were higher for this year, but they were not historical highs or July and August. So, certainly the production levels of California refineries didn't hit historical highs, which me to believe that they shouldn't deviate from that norm over a longer period of time.

So, I don't think there's been substantive changes in how well or poorly refineries operate on the west coast. As I said, I think the primary thing that defined the poor margins on the west coast, was that new gulf reporting of. Here in market total is shows 60,000 barrels a day, 40,000 barrels a day progress our order 20,000 barrels a day from inventory that has an effect that I would expect to see is poor margins. But I don't think you can see that kind of a record inventory draw often.

Roger Reed - Natexis Bleichroeder

Okay. And I know it's tough to separate a lot of these items. But if you were to see crude prices go from where they are now to back to where they were let say at the start of the second quarter or so a $20 plus is $25 reversal.

What would be the sort of stand-alone impact on your results and we are assuming your product prices remain I mean do you get the reversal of most of what we saw in the fourth quarter? Do you get a better situation when crude prices are going down and product prices hold or worse?

Bruce Smith

I think if your follow historical patterns there are a couple of things that happen. Part prices particularly the farther you get down the distribution change what we saw the wholesale to retail only always react with a time delay.

Either up ward tick or downward tick. So rather the plain market I think you can certainly expect the retail margins improve. Wholesale margin is improved whether the stock margins improve or not they're fairly reactive.

But the certainly thing that those two margin will improve dramatically and then as Bruce pin pointed we’re pointing out rapidly declining crude prices and your coke prices stay where they are you'll gain back over to dollar for crude oil on that amount of your production. Those would be the two primary of that (inaudible).

Bill Finnerty

And certainly why is one facility for benefits in the environment more additional portion leads to that pipeline and on the thin mix we have few contracts and why do we have to built in time line here. Loss over a benefit from a drop like that.

Roger Reed - Natexis Bleichroeder

Okay. So not much difference in an up market versus down market all things otherwise being equal on that approach.

Bruce Smith

We get back in a down market what we lose in an up market I guess is the short answer.

Roger Reed - Natexis Bleichroeder

That’s what I tried to figure out. All right thank you.

Bruce Smith

Thank you.

Operator

Your next question comes from Deepraj Pandey of Siemens & Company (ph). Your line is open.

Bruce Smith

Hi Debra.

Deepraj Pandey - Siemens & Company

Hey guys its Deepraj actually from Siemens.

Bruce Smith

Hi.

Deepraj Pandey - Siemens & Company

So, two quick questions and I apologize if you cover this. I had to step out for a second. Could you talk about your crude slate in 3Q and going to into 4Q we are able to reduce and as an run alternative crude.

And the second question could you give an update on the status of the dock project have you further fall permit one will you and how long will it take to get it done after filing? Thanks.

Bruce Smith

Well, I guess you mean by the dock that we are roaming to project and said Deepraj.

Deepraj Pandey - Siemens & Company

Yes.

Bruce Smith

Okay. We have relative to the footprint for the dock extension that's moving forward smoothly. Or relative to the portfolio of great that we had coming in now we talked a little bit about this. We continue on the path of diversifying.

We added two new grades, one from Angola and one from Brazil to the portfolio during the third quarter some of the other grades that we introduce to the system in prior quarters as we've now spread out to other plants.

The issue that we had that we eluded to was basically associated with unique market conditions that existed in Asia and there's a response time for any of these types of activities and you already have stuff in play when these type of events come up.

So, we had a short term hit relative to some of those events. As we move forward we feel confident that the programs that we had in play are going to be able to provide value into the system.

Deepraj Pandey - Siemens & Company

Thanks, guys.

Bruce Smith

And the next question comes from Daniel Vetter of JPMorgan. Your line is open.

Daniel Vetter - JPMorgan

Good morning.

Bruce Smith

Good morning Dan.

Daniel Vetter - JPMorgan

You mentioned in your opening remarks that operating expenses at the LA refinery might start to catch up a little bit in the coming quarters. My question is that guidance for the fourth quarter for the California region 660 per barrel is that going to creep higher in the coming quarters?

Bruce Smith

I think the guidance that we provided for that region takes into account the initial expenses we're anticipating as we proceed with things that we've identified earlier. The work that we need to do at the facility.

Daniel Vetter - JPMorgan

So I should use that as sort of a run rate for that region.

Bruce Smith

Yes I think if we can say with a little bit of exact but I mean we say the best I mean the best that we can you right now I think we’ve only got one full quarter at this point and so the best of our knowledge right now based on the facts that we've got we think that looks like a pretty good run rate.

Daniel Vetter - JPMorgan

Okay. My second question is with regards to the Los Angeles refinery, the five-year capital plan that you've talked about $1.1 billion over I suppose five years.

Can you give us a sense of the time allocation of that spending? Or you going to have more details in that regard at your upcoming annual update?

Bruce Smith

We'll have more detail and there's going to be an update in general in the Q, the numbers not surprisingly are up a little bit. But we’ll the update the guidance on those ranges that we gave you from everything, from maintenance to the regulatory spending, to the income projects.

What we want to do is try to sit down and put that in context with everything else in December. That there will be in the Q and so we want to give the ranges now. I mean it will be public information shortly on the reports.

I'm going to ask to take a look at the Q because that I think I remember what the numbers are but I don't have them right in front of me and I don't want to misquote them. I think, we had in the maintenance area we had it at 80 originally in our guidance and I think we’ve got 90 to 100 now is where we think the maintenance spending is going to be over the period of time.

Our regulatory, I think was down from that was 375.

Bill Finnerty

No 550 to 650.

Bruce Smith

550 to 650.

Bill Finnerty

550 to 650 and in the area of reliability throughput and production of clean products, 400 to 450.

Bruce Smith

Again, we're going to try to put that in context because we're reshaping a number of other things that again focusing on cost it's been said and that both our energy and our crude costs we really, I think that the primary focus continues to be crude costs particularly in this environment we see going forward where you're going to have this type of volatility.

We want to have as much optionality, so we're going to focus on energy and crude costs in our capital program. There will be something in Los Angeles that we talk about. We feel pretty good.

We're really, as we did at the sulfur plant with the certain changes in the end of quarters, we're focusing on how to get maximum value for minimum dollars. But we will review those with everyone in December.

We have not fully approved the budget. We had some other issues that we needed to talk about in the higher board meeting. So we will be able to get the budget approved by the board and then we’ll come back and discuss those in December.

Daniel Vetter - JPMorgan

So for now, until we receive more guidance at the analysts' meeting, is it reasonable to just spread out that depending over the next five years?

Bruce Smith

I think that's probably a reasonable assumption and I say that without looking at the detail right in front of me but I think that's reasonable. I don't think it's disproportionate in any one year just because most of those capital plans take pre-made indicate prime good to the plan.

And so I think, it's going to be somewhat equal over the year. So probably not as much in '08, as we might like to see, but some of the programs are already in place from what Shell had to do on the regulatory side.

So I still think it's on balance just going to be closer to spreading over the five-year period.

Daniel Vetter - JPMorgan

All right. Thank you.

Bruce Smith

You're welcome.

Operator

At this time, there are no further questions in the queue.

Bruce Smith

Well, I'd like to thank everybody for participating today, some excellent questions. I hope, we've done a good job of trying to provide some better detail and clearly around the different elements we continue to learn a lot about California as I said earlier.

We are very excited about it and we'll look forward to reviewing that capital program with everyone in December and then relative to the other announcement, which I do appreciate everybody's courtesy in restraining from asking questions so that I couldn't answer.

But as soon as we're in a position to do that we’ll be providing more information and we’ll look forward to see people in December. Thanks very much.

Operator

This concludes today's conference call and you may now disconnect.

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