Executives
Doug Aron - VP, Corporate Finance
James R. Gibbs - President and CEO
Michael C. Jennings - EVP and CFO
Paul Eisman - EVP, Refining & Marketing Operations
Analysts
Jeff Dietert - Simmons and Company
Chi Chow - Tristone Capital
Rich Voliva - Deutsche Bank
Daniel Burke - Johnson Rice
Daniel Vetter - JPMorgan
David Anderson - Palo Alto Investors
Nikki Decker - Bear, Stearns
Frontier Oil Corporation (FTO) Q3 2007 Earnings Call November 7, 2007 11:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Earnings Conference Call Hosted by Frontier Oil Corporation. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions]. As a remainder, this call is being recorded.
I would now like to introduce your host for today's conference call, Vice President of Corporate Finance, Mr. Doug Aron, you may begin your conference, sir.
Doug Aron - Vice President, Corporate Finance
Thank you, Rachael. Good morning. Thanks very much for all of you that are joining us this morning. Before we get started, we would like to read our Safe Harbor statement. The primary purpose of this conference call is to describe the assets, operations, and certain current and historical financial conditions associated with Frontier Oil Corporation. This information and associated comments made during the course of this conference call may include forward-looking statements concerning the company. These may include statements of plans and objectives for future operations, statements of future economic performance or assumptions or estimates. The accuracy of these forward-looking statements is subject to a wide range of business risks and changes and circumstances that are described in the company's reports that are filed from time to time with the Securities and Exchange Commission. Actual results and outcomes often differ from expectations.
With that, it's now my pleasure to turn the call over to our Chairman, President, and CEO, Jim Gibbs.
James R. Gibbs - President and Chief Executive Officer
Thank you, Doug. First of all, I want to thank you for listening in today on our earnings call and everybody is busy, has more important things to do, but we appreciate your time and hope that you enjoy what you hear.
I'm not going to give you the same type of presentation we typical do, I’ve changed the format substantially and I'm doing that for a reason. I want to give you sort of Gibbs' view of the world during the third quarter, why we did well and why a lot of our competitors didn't do so well. So, bear with me, I'll try to be very efficient with the time that you have allocated to me and try and get through this very quickly.
But the bottom line is, we reported earnings of $1.28 for the quarter. We had a lot of unusual items during that quarter and we've done our best to try to get that down to a comparable number that you more… probably more frequently see, and that's $1.26. So, I think the consensus for the third quarter was $1.20. So, according to this revised number, get down to what, it is comparable to consensus, will beat consensus by about $0.06 per share. I think we are the only independent to do so that's reported so far, Doug?
Doug Aron – Vice President, Corporate Finance
That's correct.
James R. Gibbs - President and Chief Executive Officer
So, we are very happy with that, lot of work went into it. The folks at the plant in Denver did an incredibly good job. I'd like to thank them very much.
But I consistently ask, why we should have a higher multiple than a lot of the people in our peer groups? I'm going to explain to you why we command a higher earnings multiple. If you go back to June 2007, by and large, gas cracks peaked and for us in Cheyenne there was a relatively high peak. I think we averaged $44 a barrel and certain times we hit… we saw $55 gasoline price, but from there they consistently declined through the third quarter. The peak came a little bit later El Dorado, started in… I think it peaked early July, nonetheless it declined through the entire quarter as well. So, you had sort of a twin-edged sword here working on results. One, the crack spread of gasoline particularly was declining from the area $40, $45 down on to areas that were below the long-term, the five-year average during the month of September.
Diesel did not get nearly as high as gasoline. I think we saw $35 crack spreads in diesel. That too declined, but that was about $25 and then around $15 in September. And you also had the fact that your feedstock cost was going up. Oil prices went up during the entire time. So, you had declining crack spreads, declining… increasing feedstock costs. If you're a sweet crude oil refiner somewhere out in the mid-con, what you saw was a severe squeeze on your margins, and if you had 85 byproducts, most notably asphalt, you are really getting squeezed. We calculated about the end of September, the first of October people were loosing about $50 per barrel for every asphalt barrel that they had to sell.
Why was Frontier unique, because we make our money not only on the crack spreads, but on the differential. And while the differentials… while the crack spreads were going down fairly consistently the differentials were going up fairly consistently from about $15 up to about $25 by the end of the third quarter. So, we're able to compensate for decline in cracks by taking advantage of the higher differentials in particularly Canadian crude. And the same thing happened to all of the crude differentials, but I want to just focus on Canada for a reason.
We had real good month in July, we had a very good August, we had a fairly good September, not as good as we had wanted, but nonetheless we were very profitable during the entire three months, and we turned in I think very interesting third quarter earnings. August… not August, but October was an absolute catastrophe for the industry because you had… crack spreads went down way below the five-year averages, we actually saw $2 and $3 crack spreads on gasoline during this time… their entire time period of August. At the same time, you saw crude continue to go up and asphalt prices continuing… they either go down or not… have anything whatsoever to go up.
So, if you were a sweet crude refiner clearing off of gasoline and sweet crude, you absolutely got crushed in October. We didn't, it was a mediocre year… quarter, but because we're able to take advantage of again the differentials, we did quite well.
Now, going forward, fourth quarter of I think we are going to have a good quarter. It’s way too early in the game to say we are going to have a wonderful quarter, outstanding quarter, record quarter, or whether it is just going to be a good quarter. But I feel comfortable at this point in time saying we're going to have a good quarter now on. We’ve seen some relief and gasoline cracks have gone up in the $3 or $4 area up to about $7. The difference of the crack on diesel is still very good, $15 to $20, although I don't know if that's going to stay. We are going to make money because we are going to run every single barrel of heavy Canadian crude that we can get our hands on. And why is that? Well, we started out the quarter buying Canadian crude for about $25 oil. That number has now gone up to about $30 oil for the month of November and we are actually filling out our slate at somewhere on $36 per barrel oil. We are buying our December crudes for Cheyenne and El Dorado and we’ve actually started picking up our January crudes for Cheyenne and El Dorado. We then bought crude for December delivery at 20… to $45.25 to $45.75 of WTI. I just found out about 30 minutes ago that our first batches of January crude, I think we've bought 8000 barrels per day, were above WTI more than $50 up. So, what we have is a seller’s time going on. In Canada, they have to get rid of the crude and we are going to try and take advantage of that.
That is why you might want to pay a little bit for Frontier, because we are setting this company up so we can make money in any type of an environment. If we can’t make it on the cracks, we will make it on the differentials. If we can’t make it on the differentials, we’ll make it on the cracks. And we're a little bit greedy, we like to make it on both of them at very big crack spreads to very large differentials.
I think the truth of matter is what you pay for when you invest in Frontier is a company that has incredible crude flexibility and we take advantage of it. We can change our slate at about two or three days and we have done so and we're doing so now. So, I think for the fourth quarter, it’s going to be a good quarter for us and I'm afraid to even think about the first quarter because I think we have not seen differentials in this area. Technically, a differential of Canadian crude is somewhere around 65% to 70% of WTI. What we are seeing now is a differential ranging about 50% or more of the WTI price and I think this is sort of outstanding good opportunity for Frontier and we're going to try take advantage of it.
That's all I have to say. I’d like for Mike just go back and try to reconcile the $1.28 to $1.26 and then will open it up to Q&A.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Thanks, Jim. We did have four items of pretty substantial consequence in this quarter that I think are worth talking about prior to the Q&A because they would otherwise come up. First off is our hedging loss, $31.8 million. We've spoken about this on previous conference calls, but our hedging strategy is frankly quite simple. We have set a base level of inventories and anything above that we’ll tend to hedge typically with NYMEX crude oil contracts, the reason being primarily that we are looking to deliver to our owners current month or otherwise run month, in refinery jargon, crack spreads, and our crude supply strategy now has very long lead times in that we are injecting barrels in Hardisty or otherwise Edmonton for running in January, typically a 45 to 60-day trip through the pipe, through which we would otherwise have price risk. Had we not hedged during this period of running up sweet crude prices, certainly we would have a higher result. On the other hand, our strategies around risk mitigation and trying to deliver the cracks spread in the run month, recognizing that crude prices go both ways, we will tend to have around 2 million to 2.5 million barrels hedged through any particular quarter. The effect of that again in this quarter was $31.8 million loss, crude ran up about $11 per barrel during the quarter.
Looking forward into the fourth quarter, September 30 crude pricing was at about $82 on the NYMEX. We currently see $97. So, if we want to extrapolate I think it'd be fair to say that we will have a similar loss, possibly larger, but recognize we are making it up on the flip side in terms of product sales.
That leads to the second item, the FIFO gain. Our inventory valuation methodology is FIFO as opposed to LIFO. The analyst community has become comfortable with this and has typically made an adjustment to eliminate our FIFO gains and losses in order to put us on an apples-to-apples basis with other independent refiners. That FIFO gain for this quarter was $25 million, not surprising, it is the other side of the crude oil run-up.
In addition to that, we had frankly pretty good news, which we put on a press release few weeks back, the Beverly Hills lawsuit was one where we received settlement in principle with the plaintiffs and we are still at the point of executing individual settlement agreements with all of the various plaintiffs of which there are something like 1000. So, that process will take some time, but again agreement in principle at a cost to Frontier of $6.3 million, very good news in avoiding that protracted litigation and the associated cost.
Finally, we had a sale of a surplus asset, that being the Centennial pipeline and associated tankage, which served us from Wyoming to Cheyenne. We have since replaced that line with a line that will serve us better and avoid the truck crude needs that we had at that plant historically. The gain on that sale was $17.3 million.
So, the net of all those items, $4.2 million pre-tax gain, $2.6 million after-tax, equates to earnings per share of a gain extraordinary, unusual gain of about $0.02 a share. Jim?
James R. Gibbs - President and Chief Executive Officer
Gives us back the $1.26. Okay, we hope you have some questions.
Question and Answer
Operator
[Operator Instructions]. And we will take our first question from Jeff Dietert from Simmons.
Jeff Dietert - Simmons and Company
Hi. It's Jeff Dietert with Simmons. Good morning.
James R. Gibbs - President and Chief Executive Officer
Good morning, Jeff.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Good morning, Jeff.
Jeff Dietert - Simmons and Company
You guys picked a good time to have an expansion at Cheyenne and take advantage of some heavier barrels and avoid some asphalt. You talked about adding 8,000 barrels a day of heavy and reducing asphalt by about 4,000 barrels a day. It looks like from your operating statistics that you may have done better than that. Could you talk about how Cheyenne is performing and what you think is a good run rate for Canadian heavies going forward?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
This is Paul Eisman, I’m going to take that question. We have completed most of the projects in Cheyenne in terms of the coker expansion, it is not fully completed at this point. We did set a coker run rate record in the month of October, but we do lack a couple of things that are going to be done later this month, that’s a compressor that needs to be installed and some coke handling equipment that will also be installed. At that point, we expect to be able to reach the 13,500-barrel per day rate that was projected in the project. So, that… we haven't fully realized the value of that project at this point, but we will do so soon.
In terms of heavy crude rates, looking forward to the fourth quarter, as Jim mentioned, we are maximizing those. From a comparison standpoint, during the third quarter we ran just shy of 32% heavy crude in our two refineries and for the fourth quarter we are projecting that to be almost 44%. So, that's another 17,000 barrels per day when you do the math of heavy crude in the fourth quarter versus the third quarter.
Jeff Dietert - Simmons and Company
Very good.
James R. Gibbs - President and Chief Executive Officer
Jeff, also, we run more if we can get our hands on it, capacity in the pipe is now completely absorbed, we can't… we just… it's hard, hard, hard to get the additional heavy crudes down into Cushing as of right now.
Jeff Dietert - Simmons and Company
So, you're taking advantage of your capacity, but it's difficult to get incremental?
James R. Gibbs - President and Chief Executive Officer
We would run more if we could get any hands on it, we are trying to get our hands on it. Okay.
Jeff Dietert - Simmons and Company
Okay. Good. And now on the El Dorado crude back in cocking project, could you update us as far as timing and cost on that big project?
James R. Gibbs - President and Chief Executive Officer
The vacuum crudes should be done first quarter… end of the first quarter. Too bad this is not going to be done the end of the third quarter of 2007 or we can run even more crude… heavy crude, that's a hell of a good project, it’s on time, under budget. We're pretty happy about that crude. The cocker unit is pretty much on budget for sure. Time is a little iffy. We may have to do that… there is not really… time is not critical in that unit because we'll just finish it out when we can and then take a short outage and plug it into the rest of the unit. But we're still looking at the first quarter that might actually slide to the second quarter, and possibly of course third quarter.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Jeff, the effect of that is the loss of potential coking capacity of about 2500, 3000 a day until we get that project complete and get the additional capacity. So, it's not life and death, but a lost opportunity to the extent we don't get it done quickly.
Jeff Dietert - Simmons and Company
Very good. Thank you.
Operator
And we will take our next question from George Ratliff [ph], a private investor.
Unidentified Analyst – Private Investor
Yes. I buy… I speculate in your company because of the quality of the management and geographical locations and so forth. I don’t…
James R. Gibbs - President and Chief Executive Officer
If you are speculating on management, you have got a lot of exposure.
Unidentified Analyst – Private Investor
But I don't [inaudible] to speculate in commodities. I could do that myself. My question is, it seems to me that companies like yours hedge for the purpose of smoothing out their earnings curve and to me that's unimportant. Could you explain why hedging is necessary?
James R. Gibbs - President and Chief Executive Officer
Yes, we're not in business to speculate. We leave that to you, George.
Unidentified Analyst – Private Investor
Okay.
James R. Gibbs - President and Chief Executive Officer
What we do is for a long… crude oil for example, because it takes too much to get from Edmonton down to our plant, we don't want to take that exposure. What we want to do is make money for you in refineries, whether the price will go up… goes up or down, on its way down to El Dorado. So, we hedge it when we inject it in the pipe and then we take off that hedge whenever it goes into the plant. And what does that is it tells you that we don’t use the price that we bought it for in Edmonton, we take the price delivered in El Dorado as our feedstock cost and we take the refining margin or the differential, we don't take the up or down in the crude price over that two months.
Same way with inventories, if we get real long on inventories we know we are not going to be able to sell those for a month. We'll go ahead and hedge them as of that point. That way we take out the price exposure during that one-month period. So, we only hedge in order to take out any type of price exposure, which we in fact… we consider to be speculation and we have a very strict policy that does not allow us to do that, we'll leave that to you.
Unidentified Analyst – Private Investor
Okay. And in the past you've said the quality of engineering you buy is not very good, is that still the case?
James R. Gibbs - President and Chief Executive Officer
In the past it has been quite good, but because the industry is so busy right now we found that most of the engineering firms are absolutely full and they can't expand their capacity as an industry very quickly, it has to come from the universities. The only way they can expand their individual capacity is go steal from the other engineering firms. So, there is a lot of movement about and it’s very difficult to get A teams or the B teams in these engineering firms unless, you’ve had a really, really long relationship with them. And even that tends to… overall this cycle has tended not to be an effective means to get the very best engineering, even out of the various firms. So, it’s an industry problem, it's not their intent, but the net affect is that the engineering is not nearly as good as it was before the boom in the expansion of all these plants. So, we're disappointed.
We have had several exceptions to that and got some very good engineering, but we've also been the subject of some very… I guess the victim of some very poor engineering out of some other firms. So, it’s not… you can’t count on consistency, you have to expect the worst than hope for the best and we've experienced both.
Unidentified Analyst – Private Investor
Thank you.
James R. Gibbs - President and Chief Executive Officer
You're welcome.
Operator
And our next question comes from Chi Chow from Tristone Capital.
James R. Gibbs - President and Chief Executive Officer
Hi, Chi.
Chi Chow - Tristone Capital
How are you?
James R. Gibbs - President and Chief Executive Officer
Good. How are you?
Chi Chow - Tristone Capital
Good. Hi, I see you guys are still pretty much hemorrhaging cash right now, so as part of the use of that free cash, it looks like your projects are going to finish up more or less on time next year. Are there additional projects that you see at the two refineries… organic projects that you see right now you can undertake?
James R. Gibbs - President and Chief Executive Officer
Right now, we’re beginning to see the next phase. We've got the [inaudible] at El Dorado and then the question is where do we go from there. So, we've just started sort of a master plan for the next five years after these are completed and we’ve got some pretty interesting ideas, but we are not ready to share them with anyone yet because we don't know what the cost is, what the likelihood of us pursuing it would be, and what… we want to plan actually it will looks like in ten years, so sort of long term and then sort of intermediate term. And the thoughts are coming together, but the engineering is not. So, we're not ready to talk about it yet, but some pretty interesting expansion possibilities at both of the plants.
Chi Chow - Tristone Capital
So, I guess with the current capacity of both plants, are things going to be fairly well optimized once you get done next year?
James R. Gibbs - President and Chief Executive Officer
Well, once we get done in 2009, they'll be. We will have some certain places where we'll be… well, one place where we are going to the sort of out I sink. I think one thing you can pretty well bet your bottom dollar on is the fact that the next turnaround in the coker and El Dorado bringing about 100% expansion in that particular unit.
Chi Chow - Tristone Capital
And of course share repurchases, are you going to be finishing up your $300 program here in the fourth quarter? What are your thoughts on that?
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Chi, our intention is certainly to finish that before we talk to you guys next time. So, depending on some timing, I'd say it would be between now and our February call, which will be for fourth quarter earnings.
Chi Chow - Tristone Capital
Okay. Thanks a lot.
James R. Gibbs - President and Chief Executive Officer
Thanks, Chi.
Operator
And we'll take our next question from Richard Voliva with Deutsche Bank.
Rich Voliva - Deutsche Bank
Thanks. Good morning, guys.
James R. Gibbs - President and Chief Executive Officer
Hi, Rich.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Hi, Rich.
Rich Voliva - Deutsche Bank
I just had a quick… couple of quick ones. One is, if you could kind of give us an update on what kind of margins you're seeing so far at both the plants?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Okay. Crack spreads first for the month of October, as Jim alluded to, they were very poor and we were thankful that we were not a sweet crude refiner in that time period. Gasoline at the Cheyenne refinery for October was $5.56 per barrel. El Dorado gasoline, $4.61 a barrel. Diesel significantly better, in Cheyenne it was $18.20 per barrel in October and $14.68 in El Dorado for the month of October. We have seen some improvement since then. The month to date average for November on gasoline in Cheyenne is about $6.50, about $8.75 for El Dorado thus far in November. Diesel, we're seeing a monthly average of about $23.40 in Cheyenne and about $15 in El Dorado. And I'll tell you that the month started sort of the way they finished in October and current correct spreads on gasoline are even a little bit higher than what I just read for the monthly average. So, the trend seems to be up, hard to say where that's going especially with WTI's rapid moment. But again, they are certainly improving and we think the crude story and crude differentials will really be the differentiator for Frontier in the fourth quarter.
James R. Gibbs - President and Chief Executive Officer
Hey, Richard, let me expand on that just a little bit.
Rich Voliva - Deutsche Bank
Sure.
James R. Gibbs - President and Chief Executive Officer
I'm looking over the month of October and I see some periods here for gasoline crack in Cheyenne was less than $2. As a matter of fact, it is closer to $1 than it was $2. And at El Dorado, there are several examples when it was less than $2. So, if you were to put in [inaudible] month of October, you lost big time.
Rich Voliva - Deutsche Bank
Fair enough. If the… I mean the ethanol linked part of that because obviously… especially with El Dorado you are kind of... it's a mid-continent area and conventional gasoline, is that having any impact now that we are in winter season or…?
James R. Gibbs - President and Chief Executive Officer
I don't know, we're still making a lot of money out of ethanol, but we’ve blended in the regular ready for gasoline and spot on that can be $0.60 less per gallon than regular gasoline. So, we are making $0.60 on every gallon of ethanol, big wonder [ph]. That's little bit… that gap has quite narrowed now down to about $0.25 to $0.30, but in the early fall we made a lot of money on blending ethanol.
Rich Voliva - Deutsche Bank
Fair enough. And just one last one, can you give an update on the M&A situation, what you're seeing, what you're thinking there? Thanks.
James R. Gibbs - President and Chief Executive Officer
That's a good lead and thank you very much. I think everybody was surprised when at the last call I said that we were beginning to look because we anticipated a few things might come out on the market. A few things have come out on the market, not anything that we’ve really been very interested in. So, we continue to believe we haven't been lucky, don't promise anything, but we are not going to pay much, you know that. So, chances of us making anything, getting things done between that and the year are just about zero.
Rich Voliva - Deutsche Bank
Fair enough. Thanks very much.
James R. Gibbs - President and Chief Executive Officer
Thank you.
Operator
[Operator Instructions]. And our next question comes from Irey Ravi [ph] from Bank of America.
Unidentified Analyst - Bank of America
Hi, how are you?
James R. Gibbs - President and Chief Executive Officer
Good. How are you doing?
Unidentified Analyst - Bank of America
Pretty good. Just a question on the follow-up on the hedging strategy. So, if you’re hedging barrels that comes from Edmonton, but you are hedging with a NYMEX price, it seems that on those barrels you hedge you'd lose any widening of the differential during that period of time. So, just wondering whether you ever considered basis hedging there to really reflect the price that you paid at the time for those barrels?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Irey, that market is incredibly thin, and yes, you are right, we are locking in the differential at the time we buy the barrel and are using that through our optimization models to assess the value of that barrel. To date, we haven't the used basis hedge and then we are unlikely to do so anytime soon. The WTS market goes a month or two forward, but it hasn't been a very well developed market, so not a real viable alternative for us.
Unidentified Analyst - Bank of America
Okay.
James R. Gibbs - President and Chief Executive Officer
At $50 I don't mind locking that [expletive] in.
Unidentified Analyst - Bank of America
Okay, and a just quick follow-up on the ethanol. I was wondering if you had a sense of what the blending facility that you purchased contributed to earnings this quarter?
James R. Gibbs - President and Chief Executive Officer
We paid $3 million for it and it paid itself out… paid itself out every month.
Unidentified Analyst - Bank of America
$3 million a month?
James R. Gibbs - President and Chief Executive Officer
Per month, yes.
Unidentified Analyst - Bank of America
Okay, pretty good investment.
James R. Gibbs - President and Chief Executive Officer
That's the kind of ROI we enjoy.
Unidentified Analyst - Bank of America
Okay. Great. Thanks.
James R. Gibbs - President and Chief Executive Officer
Bye, Irey.
Operator
Our next question comes from Daniel Burke with Johnson Rice.
James R. Gibbs - President and Chief Executive Officer
Good morning, Danny.
Daniel Burke - Johnson Rice
Jim, question for you. Earlier, you were talking about the diesel market, you said diesel frac is still $15 to $20 per barrel, but I think you didn't see the market staying there. What's your outlook for diesel here as we head into winter?
James R. Gibbs - President and Chief Executive Officer
I didn't say… didn't take it as necessarily going to go down. I said that we were nervous that it would, and the only reason that we are nervous about diesel is we are nervous about the weather. Weather hadn't shown any inclination in our markets to get cold, and we sort of needed to get cold to burn off some [inaudible]. That's our… but the commercial side has been very good.
Daniel Burke - Johnson Rice
Okay. So, you are not seeing any softening and any type of demand trends on the diesel side of your market?
James R. Gibbs - President and Chief Executive Officer
No, too much. We are not having problems on the volume, are we?
Michael C. Jennings - Executive Vice President and Chief Financial Officer
No, we are not having any trouble moving our diesel volumes right now at all. Jim is right though, cold weather on the East Coast getting heating oil volume to move and a little bit of cold weather here getting our one oil volume to move out of El Dorado. The price right now though showing in November still is good. We're getting a really good differential for that ultra low sulfur kerosene when we made it at that refinery… is a very good price. Cold weather though would help us though on our… to sustain a higher difficult margin.
Daniel Burke - Johnson Rice
Okay, fair enough. And then another question, Jim, you mentioned I think that spearhead was effectively full. Are you seeing a portion then on some of the lines out of Canada right now or is it more--?
James R. Gibbs - President and Chief Executive Officer
All of them.
Daniel Burke - Johnson Rice
They're all prorated at this point?
James R. Gibbs - President and Chief Executive Officer
Yes.
Daniel Burke - Johnson Rice
Okay, this early?
James R. Gibbs - President and Chief Executive Officer
Yes, but $15 differential is a good point.
Daniel Burke - Johnson Rice
Now understood. And then, I guess the last--.
James R. Gibbs - President and Chief Executive Officer
Are you there?
Doug Aron - Vice President, Corporate Finance
Danny?
Daniel Burke - Johnson Rice
Your total throughput volumes, I assume they'll be down somewhat from the levels we've seen over the last couple of quarters.
James R. Gibbs - President and Chief Executive Officer
We missed you somewhere in there, can you repeat that question?
Daniel Burke - Johnson Rice
Yes, sure. The question was, maxing out the heavy runs, I was wondering what effect that was going to have on your aggregate throughput?
James R. Gibbs - President and Chief Executive Officer
Yes. It will reduce our aggregate a little.
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Jim, we do expect to run lower rates as a result of trying to maximize the heavy crude rates. Where in the third quarter in terms of crude chart we ran about 150… little over 151,000 barrels per day, we are projecting running almost 146,000 in the fourth quarter. Again, most of that is a result of running the heavy crude and trying to maximize heavy crude rates.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Paul, do you have that broken down by plant, so everybody have that for their models?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Yes. I do. We are showing… at El Dorado, we ran in the third quarter 105,000 barrels per day. We are showing running about 98,000 in the fourth quarter. And at Cheyenne we're pretty much holding constant, it's 46,000 to 47,000 barrels per day. There is not much impact at Cheyenne. I mean that refinery is designed to run 80% to 90% heavy sour crude anyway. So, the big impact is at El Dorado.
Daniel Burke - Johnson Rice
Sure. I understand.
James R. Gibbs - President and Chief Executive Officer
Thank you, Paul.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Of 98,000, Paul, how much is heavy?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
About 25%.
James R. Gibbs - President and Chief Executive Officer
Which is all we can get.
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Yes.
James R. Gibbs - President and Chief Executive Officer
It's all we can buy.
James R. Gibbs - President and Chief Executive Officer
Or get down the line.
Paul Eisman - Executive Vice President, Refining & Marketing Operations
It’s all we can get into right now.
Daniel Burke - Johnson Rice
I understand. Thank you all.
James R. Gibbs - President and Chief Executive Officer
Okay.
Operator
Our next question comes from Daniel Vetter with JPMorgan.
Daniel Vetter - JPMorgan
I was wondering if you could comment on the market dynamics that are contributing to the slight heavy crude differentials, and whether you expect these market dynamics to persist well into the future? Thank you.
James R. Gibbs - President and Chief Executive Officer
I will give you my view. I’m sure Paul will have another view or something to add to it or subtract something. We have got a situation in Canada where production from the fields essentially called up and now surpassed the ability to take off capacity. So, if you’ve got crude up there and you had to sell it, if you don't have committed capacity through the lines, you have to sell it to somebody that has committed capacity through the lines. So, you've got a lot more of crude that can't get out of there and you have people willing to buy it and run it through the pipes. So, trying ahead of that needle. Some of that crude is going to get stuck up there for a while, and Cushing happens to have a lot of it available right now as well. So, when is that going to resolve itself, next time we have pipeline expansion, I think that's into 2009, isn’t it? That is what we say yesterday. Is that right, Paul?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Yes. I agree with everything Jim said. I think there is one other comment that I'd like to make regarding that and that's… we referred to this earlier in the conference call and that is asphalt pricing. What we seen is we've seen a big run-up on WTI pricing approaching $100, but we haven't seen asphalt move, in fact it's gone down to some degree. So, you’ve got this big black hole to crude oil spread that is impacting that differential. And what you see are coking refineries now are just making out really well, but if you've got, as Jim mentioned, the sweet crude oil refinery making asphalt, you are really getting hammered. And so, to support… to get people run the crude you’ve got to have pretty big differentials just to cover this low asphalt price. And so, that is where coking… our coking economics are very, very strong.
Daniel Vetter - JPMorgan
Thank you.
James R. Gibbs - President and Chief Executive Officer
And there is one other thing I guess. Just basically, heavy [inaudible] 65% or 70% WTI, so a $100 WTI is going to give you naturally just a much higher diff, but that's not $50. The $50 is going to be driven by sort of the natural dip plus all of the seasonal or technical variables that you face in the market concurrently.
Operator
Our next question comes from Jeff Davis with Waterstone Capital.
Unidentified Analyst - Waterstone Capital
Thanks. Good morning.
James R. Gibbs - President and Chief Executive Officer
Good morning.
Unidentified Analyst - Waterstone Capital
Curious if you can refresh me on the '08 turnaround schedule?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Very quiet at Cheyenne. We have basic plan to reform regenerations, and then late in the year we do have a distillate [inaudible] turnaround and that's the only significant advantage at Cheyenne. Cheyenne just completed two very busy years as you may be aware. El Dorado is where we get busy next year. Crude coker turnaround in the spring is the big event for 2008. So, that will consume quite a bit of our time and our plant and our work. And as I think we've alluded to in this call, we've two significant projects that will finish up to be implemented in the spring along with that turnaround, and two will come out of that with a significantly revamped crude unit able to run more capacity and significantly improve the yields with that crude unit. So, we're very exited about that project along with the coker drum replacement, which, I'll argue we still have a 50/50 chance. They’re having those drums done by the time cokers starts up. So, we're fighting hard to get that project done.
Unidentified Analyst - Waterstone Capital
Okay. And where is your restricted payment capacity right now?
Michael C. Jennings - Executive Vice President and Chief Financial Officer
$267 million right now.
Unidentified Analyst - Waterstone Capital
$267 million. And I am curious, I guess just in general, curious what your natural gas usage is and I guess specific to Cheyenne, we saw ridiculously low natural gas prices in Wyoming this past quarter, just curious if that helped you on the cost side at all, and then if so any thoughts on how '08 on going forward may play out with Rex coming online?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
In Cheyenne, we actually don't consume a lot of natural gas. To the extent we do consume natural gas, obviously we've been the beneficiary of those low prices in Wyoming. We consume more gas in El Dorado that quarterly we benefited some from the disconnect in prices between crude prices and natural gas prices, which we see continuing. But in Cheyenne, we've had marginal benefit from these extremely low prices.
Unidentified Analyst - Waterstone Capital
Okay. And again, just curious, is there any financial impact for you guys buying Canadian crude, which is what is going with the loonie and the US dollar?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Our crude is priced in U.S. dollars, so not any direct impact.
Unidentified Analyst - Waterstone Capital
Okay. Thank you.
James R. Gibbs - President and Chief Executive Officer
What do you call it, the loonie? The $1 coin? I haven’t heard of that.
Operator
Our next question comes from David Anderson with Palo Alto Investors.
David Anderson - Palo Alto Investors
Good morning, gentlemen. Great quarter. And curious, Jim, you're talking about obviously great differentials on the Canadian crude, heavy stuff. Is there a long-term view you have on what's going on up north with regard to Alberta royalty regime and centers were upgrading capacity, and for that matter other things going on north of you, for example, in the Bakken Play, that might have some long-term impacts on your differentials? Thanks.
James R. Gibbs - President and Chief Executive Officer
The easy one first, these Bakken, there has been no takeout capacity there to speak of. So, that's one reason why the differentials between WTI and Canadian… no, not Canadian, but Rocky Mountain sweets have got very high from $1 to up to $15 last year. Right now, they are currently around $10. So, that sweet crude is selling at $10 discount in the Rockies.
EnCana has announced an expansion on their pipe, take away their Bakken crude, back take it back to east and that is under construction now and they have just announced another expansion. So, I think a lot of this has resulted a lot of drilling going on in one place. Probably, you will see a new big deal discovered there as well. I think that differential is probably going to go away once those two pipeline expansions are complete. We don't need the sweet crude anyway, but it is nice to be able to get a $15 differential on sweet crude whenever we can fill up our plant with it, just sort of top it all.
In Canada, I think we’ve got a different situation entirely, that is the play there. And our conventional oil has nothing anymore, and gas is getting harder and harder to find and export. TCPL is shutting down one of their main lines and turning it into a crude line to take heavy crude down to Cushing and Illinois. There was a great deal of gnashing of the teeth whenever the Alberta, [inaudible] what they call themselves, but there was a committee to reevaluate whether energy royalties came out with some very harsh treatment for the industry. And I think there was great deal of discussion in Alberta about the fairness of that, what it might do. They came back with a follow-up meeting after they asked for comments, and they didn’t get a lot of comments. And they moderated that new royalty structure quite a bit. I really haven't heard too much as a result of that. I think that may have at least changed the tone and tenor of the complaints, but I don't anticipate that the new royalty schedule is going to have a very dramatic impact. It looked fairly reasonably to me, particularly when you look at some of the returns these fellows are making on those oil sands projects. So, I think that they have eliminated a lot of the real onerous parts of that proposal, and what they came up with even more expense that is probably going to be accommodated till the industry you're going to not see too much of a slowdown in those tar sands projects.
David Anderson - Palo Alto Investors
Okay. Great. Thanks.
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Jim, one thing to add. David, what we do continue to see is cost over-runs and schedule delays in terms of the both commercial upgraders and integrated upgraders. And so, it is less clear to us that that aspect of the project makes us much sense than the actual development of the resource. For that reason, we are still have the opinion that coking refineries in the mid-con are really the way to treat this asset, convert this resource into something usable. But those cost increases and project construction delays continue to plague the Canadians.
James R. Gibbs - President and Chief Executive Officer
You may have noticed the last… you probably didn’t, but you may have, the last project had a revision in their scheduling cost and had the current estimate of upgrading capacity at $85,000 a barrel. And I will repeat that, $85,000 a barrel, and now whether you are taking about the dollar or the loonie, pretty much the same number, about $85,000, it is ridiculous.
Operator
And our final question comes from Nikki Decker with Bear, Stearns.
Nikki Decker - Bear, Stearns
Good morning, I'm late to the party. I was wondering if you could comment on your diesel yields for the quarter, they look to be a little bit lower than historical run rates?
James R. Gibbs - President and Chief Executive Officer
Paul?
Michael C. Jennings - Executive Vice President and Chief Financial Officer
I will take that. Nikki, there is a year-to-year variance that is easily explainable at El Dorado. Last year, we came out of the second quarter following our ultra low sulfur diesel revamp projects. And so, following those revamps, units has been down last year and so we’ve built quite a bit of inventory in the second quarter last year. And so, what we had was we had a raw distillate that was available to run off, that was not available this year. And so… I would call it artificial, if that makes sense to you, especially at El Dorado where we are currently crude running constraint. And so, essentially, we just had extra diesel last year in 2006 that was available to turn into finished product, that this year in 2007 was just simply not available because we didn't have unit outages this year. Does that make sense?
Nikki Decker - Bear, Stearns
It makes sense, but I'm still puzzled by the fact that yields are below, say, where they have been in the year-to-date?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Yes, I mean I am showing… the numbers I showing shows about the same diesel production in the second and third quarter, a little bit less than the first quarter.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
We did run in the third quarter a bit heavier, we did heavy up some at El Dorado, that could be part of the yield as well. So… but certainly the inventory issue is the big explainer in the third quarter.
Nikki Decker - Bear, Stearns
Okay. And could you break down your diesel production between low sulfur diesel and ultra low sulfur diesel?
Paul Eisman - Executive Vice President, Refining & Marketing Operations
Absolutely. At Cheyenne, the answer is very easy. At Cheyenne, we make only one product and that is ultra low sulfur diesel. That is the only product we make at Cheyenne. El Dorado, the production is… we have swing capacity at El Dorado, but in a typical quarter, when you see diesel, it is broken down into about 7000 barrels of jet fuel and the remaining is ultra low sulfur diesel. We do not make low sulfur diesel nor high sulfur diesel at El Dorado. And then, when we get into the winter, we do make some ultra low sulfur kerosene, which is a very high premium price product and it will just vary depending on the market, typically no more than about 2000 or 3000 barrels a day. We make that simply because it carries a very high price premium. Does that help?
Nikki Decker - Bear, Stearns
Yes, it does. Thank you so much. And just a final one from me, you've got the Beverly Hills lawsuit behind you, congratulations. I'm just wondering if there were some costs that where kind of uncovered and making their way into your SG&A that might go away going forward?
Michael C. Jennings - Executive Vice President and Chief Financial Officer
One of the costs that we are uncovered, we were spending this year maybe a couple of hundred thousand dollars a quarter and then this quarter we had the big write-off associated with the settlement itself. If the question is toward, are there still costs creeping around in the system that we expect to receive invoices for, the answer is no. But otherwise, not having to defend ourselves will save considerable money. This year was not big expenditures. Last year, we were spending at a rate sometimes $1 million a quarter, so nice to have that one off our back.
Nikki Decker - Bear, Stearns
Yes. So, what is a good run rate for your SG&A going forward?
Michael C. Jennings - Executive Vice President and Chief Financial Officer
Well, our SG&A in a good year tends to ramp up through the course of the year on account of we start accruing for bonuses at mid-year. Fourth quarter is probably a $15 million number, $15 million, $16 million range. And then, next year, we are back to accruing normal course SG&A without a bonus until June type time frame. And so, this year is probably as good an indicator as any.
Nikki Decker - Bear, Stearns
Okay. Great. Thank you.
James R. Gibbs - President and Chief Executive Officer
Nikki, one of our biggest expenses is for our long-term incentive plan, which is equity based.
Nikki Decker - Bear, Stearns
Okay.
James R. Gibbs - President and Chief Executive Officer
You are not supposed to look at that. Remember, back about three years ago when we were going through this entire stock option, restricted shares and analysts won’t even look at that because… it is just because we need to disclose, but they won't include that in their models. Guess what. You haven’t taken it out of your model yet.
Michael C. Jennings - Executive Vice President and Chief Financial Officer
And importantly, that equity plan at Frontier is not a Christmas turkey, it is a performance-based plan. We have got to hit targets. You can look in our proxy statements to get more detail on that, but it is very much performance-based. If we don't produce, we don't get paid.
Nikki Decker - Bear, Stearns
Sure.
James R. Gibbs - President and Chief Executive Officer
Hey, it's 11 o'clock, we had no anticipation or expectations at all that we would take so much of your time up. So, unless there is just someone who is dying to ask a question, I want to thank you all. I want to thank your patience in listening to all of our stuff for a lot long than you probably wanted to, and if you are still here we really appreciate it. And the only thing you can count on we are trying to do the best we can and make as much money for you all and return what we can use.
Operator
And that conclude today's conference. Thank you for your participation and have a great day.
Doug Aron - Vice President, Corporate Finance
Thank you.
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