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Tesoro (NYSE:TSO)

Q2 2012 Earnings Call

August 02, 2012 8:30 am ET

Executives

Louie Rubiola - Director of Investor Relations

Gregory J. Goff - Chief Executive Officer, President and Director

G. Scott Spendlove - Chief Financial Officer and Senior Vice President

Daniel J. Porter - Former Senior Vice President of Refining

Daniel Robert Romasko - Executive Vice President of Operations

Analysts

Paul Y. Cheng - Barclays Capital, Research Division

Jeffrey A. Dietert - Simmons & Company International, Research Division

Chi Chow - Macquarie Research

Douglas Terreson - ISI Group Inc., Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Fadel Gheit - Oppenheimer & Co. Inc., Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Sam Margolin - Dahlman Rose & Company, LLC, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Tesoro Corporation's Earnings Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Louie Rubiola, Director of Investor Relations. Please proceed, sir.

Louie Rubiola

Thank you, Catherine. Good morning, everyone, and welcome to today's conference call to discuss our second quarter 2012 earnings. Joining me today are Greg Goff, President and CEO; Dan Romasko, Executive Vice President of Operations; and Scott Spendlove, Senior Vice President and CFO. While we will not be referencing slides during the call, we do have a set of slides, which was filed with the SEC today. These slides, along with other financial disclosure and reconciliations for non-GAAP financial measures, should help you in analyzing our results and can be found on our website at tsocorp.com. Please refer to the forward-looking statement in the earnings slides, which says statements made during this call that refer to management's expectations and/or future predictions are forward-looking statements, intended to be covered by the Safe Harbor provisions of the Securities Act, as there are many factors which could cause results to differ from our expectations. With that, I'll turn the call over to Greg.

Gregory J. Goff

Thank you, Louie. Good morning, everyone and thanks for taking the time to join us on the call today. You have our earnings release, and Scott will go over some of the details of the results in a moment. But I'm going to start with an overview of some recent highlights.

Despite significant turnaround activity during the quarter, we delivered solid operating performance with refinery utilization of 87%. This allowed us to capture strong crack spreads and advantaged discounts on crude oil supply. We continued to reduce operating expenses with adjusted manufacturing costs of $4.69 per barrel. The combined result is reflected in our adjusted second quarter earnings of $2.87 per diluted share, and our quarter-end cash balance of over $1.3 billion.

We also made significant progress on several strategic fronts during the quarter. We completed our North Dakota refinery expansion. And today, that refinery is running full at 68,000 barrels per day. That $35 million project is expected to generate over $80 million of annual EBITDA using an average 2011 price environment. If we look at margin so far this year, the annual EBITDA potential increases to about $100 million. And we expect to begin loading the first unit train of price and quality advantage Bakken crude oil destined for our Anacortes, Washington, refinery later this month. Our rail and unloading facility, with permitted capacity of 50,000 barrels per day, is nearing the estimated early September completion.

We continue to expect the new vacuum tower at our Wilmington, California, refinery to be operational in the fourth quarter of this year, shifting just under 1 percentage point yield from low valued petroleum coke to light product production. These high return capital projects allow us to expand our advantage position in the Bakken and drive improvements in product yields. The end result is an enhanced competitive position for our refineries and the potential for significant growth in earnings and cash flow.

We also made meaningful progress on our refining and marketing integration with the addition of 165 stations in Southern California from Thrifty Oil Company.

In the third quarter, we intend to add the remaining 9 stations to our retail system, completing the Thrifty integration planned schedule for 2012. These additions, along with another 50 sites we expect to add in 2014, should provide between 20,000 and 25,000 barrels per day of ratable and profitable demand, allowing us to sustain high refinery utilization.

In addition, we completed the first IPO -- post-IPO asset sale to Tesoro Logistics early in the second quarter, generating $75 million of incremental value and demonstrating our commitment to capturing the full value of our logistics assets.

Yesterday, we announced our intent to sell the Long Beach marine terminal and pipeline assets to Tesoro Logistics in the third quarter. These assets support not only our Wilmington California refinery, but other third-party refineries as well. We also reaffirmed our intent to offer the Anacortes Washington rail and unloading facility to Tesoro Logistics. We expect that transaction to occur in the fourth quarter.

The transactions we announced yesterday, which add between $35 million and $45 million of annual logistics EBITDA, combined with organic growth already underway at TLLP, will continue to grow the value of Tesoro's investments in these assets, providing additional value to our shareholders.

The solid operating results and success on multiple strategic fronts continue to grow earnings and cash flow and further strengthen our balance sheet. Our strategic priorities for cash are to maintain a minimum cash balance of about $600 million to $750 million, maintain leverage of less than 30%, invest in growth opportunities to drive value creation and return excess cash to shareholders.

With $1.3 billion of cash on the balance sheet, leverage of 28% and significant growth capital spending underway, we're to the point now of beginning to return excess cash to shareholders.

The $500 million share repurchase program and $0.12 per share quarterly dividend approved by our Board of Directors and announced yesterday, represented significant commitment to return nearly 50% -- 15% of our current market capitalization to shareholders. This is in addition to delevering the balance sheet with our intention to redeem the remaining $299 million of 2012 senior notes.

Now turning to the results for the quarter. Product inventories below the 5-year average supported stronger crack spreads on the West Coast, while seasonally strong domestic crude oil production provided additional feedstock cost advantage in our Mid-Continent and Pacific Northwest region. As a result, the Tesoro Index in the second quarter averaged nearly $15 per barrel, up $2.75 from a year ago. However, the company's realized gross margin was up nearly $4 to $20.32 per barrel, driven by our strong operational reliability and feedstock advantage.

Refinery throughput rates during the quarter averaged 579,000 barrels per day or 87% utilization. If you exclude the Hawaiian and Alaskan operations, which were impacted by plant turnaround activity, utilization was 98%.

Manufacturing costs average $4.69 per barrel excluding special items, down both sequentially and year-over-year. We have made good progress reducing our operating expenses, primarily in our California region.

Our retail segment reported its most profitable quarter with $74 million in operating income. This was driven by higher fuel sales volumes, which were up 11% year-over-year as a result of the company's strategic focus on refining and marketing integration.

Retail marketing margins were strong during the quarter both sequentially and year-over-year. This is typical in a falling crude oil price environment.

Same-store fuel sales during the quarter were up about 2% relative to last year.

Capital spending for the second quarter was $148 million. Turnaround spending was $64 million. We continue to plan for 2012 capital spending of $670 million including regulatory, maintenance and income projects. We now expect about $260 million in turnaround spending for 2012. This $40 million reduction, relative to prior guidance, is driven predominantly by our decision to move some West Coast plant turnaround activity from the fourth quarter this year to early 2013.

With the completion of the work at our Alaska and Hawaii refineries, we have completed the majority of our planned spend for the year.

As we look forward, we remain cautiously optimistic about U.S. refining market conditions. Independent of the favorable market conditions, we are driving significant value from our existing asset base. As we shared with you in the past, we are focused on driving operational efficiency and effectiveness with a relentless focus on becoming a superior operator. Our balance sheet and cash flows are strong and we're investing in high return, short payback projects that will drive fundamental improvements in our business and deliver further cash flow growth.

Now we're well positioned to begin returning cash to our shareholders through share repurchases and a regular dividend.

With that, I'll turn the call over to Scott Spendlove, our CFO, for a more detailed discussion of the quarterly results and to provide guidance for the third quarter. Scott?

G. Scott Spendlove

Thanks, Greg. As we reported last night, second quarter net income was $387 million or $2.75 per diluted share. Adjusted for special items, we're reporting an adjusted net income of $404 million or $2.87 per diluted share. Special items that we're excluding from the quarterly results include after-tax, $11 million in legal matters, primarily the settlement of the claims arising from the April 2010 incident in our Anacortes, Washington refinery, partially offset by a receipt of pipeline tariff refunds and a $6 million after-tax accrual related to a benefit change for our retirement-eligible employees. That compares to adjusted net income in the second quarter of last year of $237 million or $1.65 per diluted share.

Special items last year included after-tax net expenses of $19 million related to business interruption and property damage insurance proceeds, the writeoff of expenses associated with the change in the scope of a project on our Wilmington, California, refinery and a one-time interest expense related to the repayment of debt during the quarter of last year.

We ended the quarter with a cash balance of $1.3 billion, up over $600 million during the quarter. This building cash reflects EBITDA of $765 million plus working capital and other sources of $110 million plus that revolver borrowings of $27 million, less capital and turnaround spending of $220 million, less cash interest and taxes of $53 million and less equity distributions and share repurchases of $25 million.

We remained undrawn on the corporate revolver with nearly $950 million of additional revolving credit capacity. Tesoro Panama and Tesoro Logistics ended the quarter with $50 million and $118 million borrowed on their separate revolving credit facilities.

This includes the $68 million Tesoro Logistics borrowed concurrent with April 1 purchase of the Martinez Crude Oil Marine Terminal. Partnership also exercises option to double the size of its revolving credit facility to $300 million.

We ended the quarter with total debt to total capitalization of 28%, down a percentage point from the end of the first quarter this year.

As we pointed out in our press release, in an effort to continue strengthening our balance sheet, we reaffirmed our intention to redeem the remaining $299 million of 2012 senior notes.

Turning to the third quarter. The third quarter typically sees a slight seasonal increase in demand for gasoline and distillates in PADD V. Recorded today, we've seen higher-than-average refinery utilization rates on the West Coast. This is likely driven by a general restocking of light products as inventories fell well below the 5-year range during the second quarter. These higher refinery run rates had put pressure on crack spreads quarter-to-date, which are down sequentially.

In the Mid-Continent, gasoline and the diesel crack spreads remain strong, driven by a continued feedstock cost advantage.

So far on this third quarter, the average discount of WTI to Brent remains above $14 per barrel. I'll close the guidance for the third quarter modeling purposes.

We estimate throughput to be in thousands of barrels per day for the third quarter: 150,000 to 160,000 barrels in the Pacific Northwest; 75,000 to 85,000 and the Mid-Pacific; 120,000 to 130,000 in the Mid-Continent; and 255,000 to 265,000 in the California region.

Manufacturing cost guidance for the third quarter in dollars per barrel is as follows: $4.65 in the Pacific Northwest; $3.20 in the Mid-Pacific; $3.75 in the Mid-Con; and $6.15 in the California region.

Throughput guidance for the Mid-Continent region include the impact of the recently completed expansion at our North Dakota refinery, that Greg mentioned earlier. Our depreciation for refining is estimated at $95 million for the quarter. Additional third quarter guidance items includes estimated corporate expense excluding depreciation of $39 million, and interest expense before interest income of $37 million. And with that, I'll turn the call back over to Greg for closing comments. Greg?

Gregory J. Goff

Thanks, Scott. We are very pleased with our second quarter results. With the bulk of the 2012 plant turnaround activity behind us, we look forward to driving higher refinery utilization in the third quarter, which based on our guidance, should be about 92%.

We are encouraged with our continued success in driving improvements in the business and delivering on the plan we laid out for our investors.

Before we close, I'd like to take just a minute and discuss the recent settlement agreement with the families of the employees who lost their lives as a result of the tragic incident at our Anacortes refinery in April of 2010.

The agreement settles all claims against the company brought by the families of our 7 fallen friends and coworkers. We believe the settlement is in the best interest of the families, our company and our employees.

And with that, we'll now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Paul Cheng from Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

A number of portfolio and store-related quick questions. The -- for the July same-store gasoline sales, do you guys have a number that you can share? You said flat, up or down?

Gregory J. Goff

July, Paul, are about flat right now. Year-on-year, flat.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And then a number of quick balance sheet items. Scott, do you have the working capital for the CCAB?

G. Scott Spendlove

I do, Paul. Working capital is $1.3 billion, including cash and debt. Excluding cash and debt, it's $323 million.

Paul Y. Cheng - Barclays Capital, Research Division

How about in the MLP, what is the working capital and long-term debt?

G. Scott Spendlove

We haven't published that and...

Gregory J. Goff

Next week.

G. Scott Spendlove

Next week, we'll publish those results.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And Greg, I think in the unit train, the rail car that you have at Bakken in addition to what you're going to use for in the quarter, you have probably some excess. I think, it's about 10,000 barrel per data you could potentially do to ship it out to the Gulf Coast. Is that something that you guys are looking into to take advantage on the spread to do that? Or that this is not really a consideration? And also, when you ramp it up, that -- what is the sequence that -- are we expecting the initial ratios trying to lower at 30,000 barrels per day, and by year-end, get to 50? Or what type of timing that we should expect?

Gregory J. Goff

The answer to your 3 questions are, in June, Paul, we began shipping Bakken crude oil to the Gulf Coast from just a pure utilization of our assets, which will now begin to shift over as we load the rail cars to go to Anacortes. The second question was on the -- I forgot now. What did you -- what was...

Paul Y. Cheng - Barclays Capital, Research Division

How quickly that you -- at what level of the $1 million you'll initially start up? And how quickly are you going to ramp to the 50,000 barrels per day?

Gregory J. Goff

Yes. We will ramp to the 50,000 barrels a day through the remainder of the year as we work out the logistics, particularly, with the railroad. We're just -- what we don't know is how easy it will be to get the unit trains in and out of there. Our projected rate of 50,000 barrels a day will be to take a unit train 6 out of 7 days of the week. And so there's just some uncertainty to that, but we'll ramp up gradually over time to get to the 50,000 barrels per day, though we should be up around 30,000 to start with.

And then the second thing is the extra 10,000 barrels a day, we just need to test the system and see what happens as we move the rate -- unit trains out to the Pacific Northwest and see what opportunity's there. We just have to wait and see whether we needed the rail cars to go to Anacortes, or we can do other movements to the Gulf Coast or other places.

Paul Y. Cheng - Barclays Capital, Research Division

Sure. And also tell me, I think your permit is up to 50,000 barrels per day. In theory, if you load it everyday, you can get to 60,000 barrels per day. Are you still in the process of getting the permit up to 60,000 barrels per day? Or that because it's already a 50,000, you are not going to be bothered by that?

Gregory J. Goff

At the present time, Paul, we're working on the 50,000 to get everything to work how it has, and we are pursuing other opportunities. And we may consider moving crude oil to California.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Two final questions. One on the timing of the buyback, do you have a target timing when that you're going to complete that $500 million? Secondly, that for the regular dividend, I think your shareholder love that. And at -- I mean comparing to your earning power, it's still at pretty low rate. Should we assume that even though you just initiate it, it doesn't mean that for the rest of the year, you will not reconsider the payout rate? Or that you're probably not going to consider until next year?

Gregory J. Goff

Regarding the dividend, your second question, we will periodically go back and relook at the performance of the business and our dividend rate and that, and then make those decisions as we go over time. And regarding the stock buyback, we have a program in place that we will execute over time, which will -- but without any definite, as we said in the press release, without a definite timeframe when we will complete the $500 million repurchase.

Operator

The next question is from the line of Jeff Dietert from Simmons.

Jeffrey A. Dietert - Simmons & Company International, Research Division

You've been successful with a number of your large capital program projects and those are moving towards completion, some of them are already completed. As you look forward, do you see another round of large capital programs? Do you think the $305 million of growth CapEx you've talked about for 2013 might have some upside with some additional projects?

Gregory J. Goff

It's just probably too early to comment on that, Jeff. We are -- we're right in the midst of preparing our plans for '13 and '14, and I mean, we are looking across -- like we have said in the past, we're looking at all the refineries as different ideas and opportunities. But right now, it's just premature to comment on that.

Jeffrey A. Dietert - Simmons & Company International, Research Division

All right. And secondly, on the refining integration with your acquisitions. You've made significant progress and moved from 30% integration to 72% integration. Can you talk about where you are in that progress? And how much more integration you see to hit an optimal level?

Daniel J. Porter

Yes, this is Dan. Let me take that one, Jeff. We're currently sitting at a normally 76% integration and expect to end the year close to 80%. I think our eventual target is to get close to 85% to 90%. And I think we'd be satisfied at that level.

Operator

The next question is from Chi Chow from MacQuarrie capital.

Chi Chow - Macquarie Research

I guess, a follow-up on Paul's question, on the buyback, just real quick. We've heard various strategies from your competitors on the utilization of buybacks, ranging from buying in the market daily to some sort of having certain formulas determine optimal buyback pricing. What is yours? Can you outline your strategy or philosophy on the timing?

Gregory J. Goff

Our intensions are to be -- to approach it opportunistically, as we go out into the market when we look at where valuations and the opportunities are to buy. So that's how we'll execute the strategy.

Chi Chow - Macquarie Research

Okay, great. In the Mid-Con, looks like you improved your capture rates relative to the published index, first couple of quarters this year, you made a little bit of mention on your prepared remarks. But can you talk about any specific operational or strategic changes you've made to cause that uptick in the capture?

Daniel Robert Romasko

Yes. I'll take that, this is Dan. Yes, it was a strong quarter for us from a reliability perspective and we expect that to continue. The real value that added force in the quarter is it allowed us to capture the Bakken relative to TI differentials. So if you looked at the trade months of March through May, which are the crude purchase months for the second quarter, you would see a clear book differential relative to TI close to the $8 to $9 barrel range. And we were able to capture that with a high reliability. So that's the BPs.

Chi Chow - Macquarie Research

Great. And final question, any updates on the progress at Hawaii?

Gregory J. Goff

Regarding Hawaii, Chi, we are actually targeting according to our plan. We have received indicative bids for Hawaii. They were -- it was encouraging to us, the level of interest on the Hawaii assets. We have a plan, as we stated, that we would hope to complete the transaction by -- at the end of this year and that looks very likely. And probably, the only other comment is that we have evaluated our working capital position, which was -- it's going to be higher than what we had previously said. And as of the end of the second quarter, the net working capital that we would expect to realize from the sale is in excess of $300 million, excluding those sale for the PP&A.

Operator

Your next question comes from the line of Doug Terreston from ISI.

Douglas Terreson - ISI Group Inc., Research Division

So most of my refining questions have been answered. But in marketing, results were obviously very strong, I think a quarterly record for you guys. And it looks like your sales volume seemed to be rising a lot faster than the rate at which you added stations, and I'm just comparing versus the year-ago period. And so I want to see if you could just provide some color on that result and some of the factors that might be driving the positive performance there?

Daniel Robert Romasko

Yes, I'll take that one. And that'd be -- year-on-year, our sales on same stores were up close to 2%. And I guess we'd like to just characterize that as strong brands well operated. The total volume improvement that we're seeing on year-on-year is the sum of, of course, the Shell volumes that have come and they're at full capacity; the SVU that we had the first full quarter of; and then the -- Thrifty did actually add probably between nominally 5,000 to 10,000 barrels a day on average during the second quarter. So we're about where we expected to be on our improvement in the refining and marketing integration.

Operator

Your next question comes from the line of Ed Westlake from Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Just a -- I guess on TLLP. So you -- if you look at sort of first half, I think you're running about $30 million of EBITDA, annualize that you get to $60 million. You drop down these assets and you get to $100 million, which is back in line with your guidance for 2013, at the time of the Analyst Day last year. I mean, what are your thoughts about further drop-downs and further growth. And any early indications of what the GP distribution might be for 2013?

Gregory J. Goff

Well, let me go back -- I think I need to clarify your comment. Our actual -- I think you're correct on our run rates on EBITDA so far. But with the organic growth that we already had going and the drop-down of the marine facility up at our Golden Eagle refinery, we expect it to be, which we have said, at $100 million of EBITDA run rate by the end of this year. Then in addition, you then need to add on what we just said regarding both the 2 drop-downs, the Anacortes rail and loading facility in the fourth quarter and the Long Beach marine terminal. And that additional EBITDA, which we gave guidance on between $35million and $45m million, gets you up approaching to $150 million of EBITDA by next year, which is higher than what we had previously said. So I just wanted to make sure I clarified that point about that. And then secondly, we have no further -- we'll reveal our plans for the logistics company in the fourth quarter like we do for Tesoro, where we look out for '13 and beyond. So we don't have any other guidance on that. And our distributions will just continue to grow as we've often said from standpoint, Ed.

Edward Westlake - Crédit Suisse AG, Research Division

Great. So I had it planned on the TLLP EBITDA. Just on the other projects, I mean obviously, you were doing this sort of ninja team going around each of the refineries, anything to report in terms of other ideas for the project CapEx?

Gregory J. Goff

No, I think it's goes back to an earlier question on the -- where we stand. We're -- I mean, we're just in the midst of doing that right now. And it's just too early to comment on that. And we'll be prepared to do that come the end of the year, but you're exactly right, we look at all our core facilities for the opportunities. And we'll share those fully in the fourth quarter.

Edward Westlake - Crédit Suisse AG, Research Division

Great. And then a final question, just a smaller question. Your Pacific Northwest throughputs are going up, yet your cost guidance on a per barrel basis is also going up for the third quarter. Just wondering why that might be the case?

Gregory J. Goff

Yes, it's a good question. I'm going to let Dan comment on that for you, Ed.

Daniel Robert Romasko

Yes, sure. What we're seeing in the Pacific Northwest specifically on operating costs is related to 2 items. The first is natural gas prices for the third quarter are a bit higher than second quarter, still well below historic averages, but up relative to Q2 so that's -- that has an impact. And then in Alaska, we have some -- a reformer work that's planned and is carried over from the turnaround work we did in the second quarter that has some fixed cost related to it.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. So those costs should come down after the -- I mean obviously, nat gas will -- we will have a view on. But after the reformer work's done, there should be some cost saving.

Daniel Robert Romasko

That's correct.

Operator

Your next question is from the line of Evan Calio from Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

Maybe just a higher level question. Can you run me through how you think about the priorities of the 5 cash flow usage with the -- you introduced new priorities last night, I mean we've -- you have maintenance CapEx, dividend growth, buyback and further debt repayment? So I mean -- meaning is, is the dividend just behind you're maintenance CapEx and the buybacks should be considered more the swing, based upon margins and differentials?

Gregory J. Goff

Yes. As we look out at -- into our cash management really, of the company, I mean we are -- if we stated our priorities, which you correctly went back and stated in, first and foremost, we are very focused on finding the opportunities that drive sustainable value and help competitive -- creates a competitive edge that we're trying to do. And witnessed by a couple of other questions earlier about our capital programs, we're out really focusing on trying to capture those things. So we believe the best value creation is by doing the things that we're doing. And for example, we -- our Salt Lake City project, which we expect to get permits on shortly, will be a significant improvement when it starts to come online in 2013. But we will -- our focus is to continue to do that. The dividends, we believe fit perfectly well in with our -- the way we change the capital structure of the company to significantly reduce the debt that we've talked about. So we see that working very effectively. And the swing will be share repurchases.

Evan Calio - Morgan Stanley, Research Division

Got you. And when -- within this kind of new reallocation of usage, I mean, should we -- I mean we assumed that refining acquisitions are a lower priority amongst the cash flow you see sitting in the portfolio and the focus to return cash to shareholders.

Gregory J. Goff

We have always maintained that our -- where we -- our footprint, the areas where we conduct business, we like that market area. We like the things that drive the business in that area. We've also said that we've looked at all the possibilities of things that would be of interest to us. And if those opportunities were to present themselves and fit in strategically with what we're trying to do, which allows us to create a stronger integrated business, where we can gain crude advantage and capture synergies within our system, we would pursue those acquisitions.

Evan Calio - Morgan Stanley, Research Division

Okay, I got you. The smaller question on Long Beach marine terminal and the rail and loading facility that you're going to offer to TLLP. I mean, can you give me an -- either an aggregate or just kind of separate tax basis on those assets?

Gregory J. Goff

No, we don't do that. But there's -- there will be no tax implications to the drop-down.

Evan Calio - Morgan Stanley, Research Division

Well, meaning -- okay, so you're -- the proceeds, your basis will equal what you estimate the sale proceeds are? I'm confused.

Gregory J. Goff

Yes. We -- as they're managed, so we can drop those down effectively.

Fadel Gheit - Oppenheimer & Co. Inc., Research Division

Okay, that's wonderful. And maybe even one last one, if I could. With the Northern Tier Energy MLP introduced really your refining MLP with a yield that represents a valuation lift versus cash flow and I know tax friction is a part of that, but as you see that structure as somewhat new and you think about that within your portfolio, do you have any comments on either the kind of suitability or kind of potential within your portfolio?

Gregory J. Goff

I think you've made some comments that probably pretty accurately captured how that market price is at. I think -- I mean we looked very seriously and made a very attractive offer to Northern Tier Energy to buy that business from them. And the -- we believe the market priced the variable-rate MLP, how much it should have. I mean, it is something that we don't see -- we'll look at it but we don't see it as an attractive vehicle. It's -- doesn't -- it's not consistent with what we're trying to do for our investors to create value over time, to commit to a distribution that's basically unknown, with potential cost for regulatory in that. And to be able to go out and do that, we believe we have an obligation to provide a better investment to our shareholders. So it's not something that we find attractive.

Operator

Your next question comes from the line of Arjun Murti from Goldman Sachs.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Actually, just a follow-up to your answer there, Greg, I thought it was an interesting answer. Is what you find unattractive the fact that, that structure makes you have to pay out all your free cash flow in terms of dividends, and therefore, it might impede investment opportunities or something else along those lines?

Gregory J. Goff

Right, that's a part of it, yes.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Yes, great. Separately, you've recently highlighted the value of retail integration. I guess, especially for California, one of your peers, of course, is announcing that they're going to separate and spin out retail and we'll see what they get for it. I think, as it pertains to your California business, given what you view as the value of integration, can we presume it's unlikely to sort of pursue the -- a similar type of strategy about separating that retail?

Gregory J. Goff

Yes. Arjun, our focus has been to grow the retail and -- retail and the marketing and refining integration. And we try to do that very capital light, so not investing in buying stations. In certain instances, like SUPERVALU, because of the market area, that was something that we chose to do. But our growth -- if you go back and look at -- our growth has been done extremely well without investing a lot of capital, and that's our intention to do that. Regarding our existing retail position of what the company owns, I mean we'd look at things over time. But right now, we have no intention to pursue that.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

That's great. And then just a final one on the overall California gasoline demand environment. I think I heard you say same-store sales were flat, I might have misheard that. But do you have any comments generally how things are trending in terms of California demand? It sounds like things have stabilized, but I'd be interested in your views.

Gregory J. Goff

The California demand is -- it's -- I mean, it -- we believe, as you -- you probably said it correctly, it has stabilized, the same-store sales, because we have a significant retail position in California up year-on-year. In July, we're flat. So we've consistently said that we think California has kind of hit the trowel and things may not be the Golden State, but it looks pretty good on a go-forward basis from what we see. And we've also said that -- last year, we delivered $0.5 billion of EBITDA out of our California operations and our continued focus there is paying off.

Operator

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

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Quick question. I guess, just stretching for things that haven't been asked yet. But exports, anything to report on that front? Or maybe a little off the reservation with Anacortes, is there any potential there to move things to other markets, other than California?

Gregory J. Goff

The export market continues to be good off at the West Coast. It looked -- and as we look forward, we think it will continue to maintain a pretty favorable position. We are active participants in the export market from wherever the economics tell us to come from, so it can come from Anacortes, or our California refinery. We just -- it just depends on how things are priced. So it's been good and it -- the outlook is good for exports off the West Coast.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Does Anacortes get any -- with the incremental crude coming from the Bakken presumably at a lower price on a sustained basis from what you've been using, does that make it more competitive? Should it make more competitive relative to other units on the West Coast, yours and others?

Gregory J. Goff

Yes, the Bakken crude definitely gives the -- has a big impact on the margin of the Anacortes refinery. I mean we've talked about the impact and prior guidance of what that does to the refinery, with the Bakken crude supply.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And then final question. The shift of the turnarounds in California from Q4 this year to Q1, what were sort of the drivers on that?

Gregory J. Goff

Well, it's not necessarily Q1, it's into the first part of 2013. So it's just typical management of the planned activity and that how we can move things around and just optimizing our turnaround activity.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Not a permitting challenge or anything like that?

Gregory J. Goff

No, no, no. Just pure -- we manage them and try to optimize as we go through the year.

Operator

Your next question comes from the line of Sam Margolin from Dahlman Rose.

Sam Margolin - Dahlman Rose & Company, LLC, Research Division

I just had a question, I guess most of the company-specific stuff has been answered and it all sounds great, but something more market-related. Your comments about Hawaii kind of align with some other things that sellers of assets have been talking about in just in terms of accelerating interest levels. Can you just speak to the M&A market as a seller? And just maybe generally, who's coming in here? Is it industry consolidation? Or is it -- do you think it's more outside or private money similar to what we've seen on the East Coast?

Gregory J. Goff

It's just a -- it's a good cross-section of all types of market participants.

Sam Margolin - Dahlman Rose & Company, LLC, Research Division

Okay, that's great. Yes, I mean I think that one of the reasons that everybody trades at 3x EBITDA is because there's been no real NAV metric. So if -- do you think -- are you getting a sense that just sort of underlying valuations where capacity are increasing with all this interest? Or is it really just more just the volume of it?

Gregory J. Goff

I think Hawaii is probably not an asset where you can make a generalization across like the rest of U.S. because of its location, but the valuations will be reasonable.

Operator

Your next question comes from the line of Doug Leggate from Bank of America.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

A couple of -- actually, a few quick ones, if I may. So you're pushing via maintenance into 2013. Can you give us a prognosis as to how the maintenance in the West Coast looks generally? It seems to us -- with a pretty heavy maintenance in the first half, I'm just trying to get an idea if you could expect the same kind of supply both on -- I guess, you could see in the second half? Any color you could give would be appreciated.

Gregory J. Goff

Are you talking about the second half of '12?

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Yes, basically for the industry generally on the West Coast.

Gregory J. Goff

I don't -- Doug, we don't know anything other than what you could already pick up by other parts of the media and that. There's no question the maintenance has been pretty light now after we completed the first half maintenance activity on the West Coast. And our information, which is just public sources, says the second half of '12 looks reasonably light.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

All right. That's what we are seeing as well, just wanted to check out if it's probably solid. Anacortes, even without the rail facility up and running, seem to have take a consistently very strong capture rates. Should we be resetting our kind of capture rate on a go-forward basis? Is there something structurally changing there? Or if you could give some color on what you think is behind that, that would be great.

Daniel Robert Romasko

Yes, let me give a shot at that, Doug. What we saw in the second quarter for the Pacific Northwest was extremely strong reliability, nearly perfect at Anacortes, and that allowed us to capture the strong Canadian differentials. So same thing that happened on Bakken, if you look at the Canadian light sweet differentials relative to WTI, we had -- industry-wide, the differentials were in that $8 per barrel range. And that gave us a really strong uptick in capture relative to our index crude. Similarly, we had some really well placed value, foreign sweet barrels that came into the full Pacific Northwest. And so that combination of those 2 factors gave us a real strong performance. I would expect that we're going to continue to show long-term improvement in PNW, but those unique factors are dependent upon the differentials relative to the TI.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Got it, just two final quick ones, if I may. The -- just a reminder, please, of how you price your Mid-Continent crude because obviously, the big spikes seem to take place in March. I'm guessing that, that helped the second quarter. Is -- can you just remind is what the lag is in terms of how you're pricing crude? And then I have just 1 final follow-up, please.

Daniel Robert Romasko

Just 1 month lag. So what you guys -- what you'll see in the differentials on March goes into the second quarter. And similarly, June goes into third.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Got it. My final one, I don't know if this was news to everybody else, Greg, but talking about Northern Tier and the fact that you might have been interested in that facility. Can you just give us an idea as to how you see the acquisition pipeline or the opportunity set? Obviously, you can't be specific, but just is there -- are there still things out there that are of interest to you? Or is it -- has it gone quiet? I'll leave it there.

Gregory J. Goff

Yes. In our -- just to reiterate, in our market areas, it's actually pretty quiet for things that we would be interested in. So it's -- not a lot of activity right now. I mean, we'll see what -- things can change over time -- but pretty quiet.

Operator

Your next question comes from the line of Faisel Khan from Citigroup.

Faisel Khan - Citigroup Inc, Research Division

I was wondering if you could help me -- it's a little bit of a far off question on the last one. But I'm looking at the first quarter to second quarter progression of margins in the Pacific Northwest and the Mid-Continent and also looking at the differentials, and I'm still struggling to understand the large sort of expansion of margins from the first quarter of this year to the second quarter, going from roughly $13 to $22 in the Mid-Continent. So is it -- I mean the -- is it just differentials or crude differentials? Or is there something else with product prices? And same thing in the Mid-Continent, where you've got basically a $15 uplift in margins, it doesn't equate -- the $8 to $9 number you talked about for Bakken are clear, but pricing wouldn't explain all of that.

Daniel Robert Romasko

Yes, I'll take that. On the Pacific Northwest, the Canadian light sweet differentials, in that $8 range, was a really big piece of it. But also, there is a piece you don't see and that I attempted to mention earlier, and that was the foreign sweet barrels that we brought that had a really strong benefit for PNW. There was one other factor that I didn't mention that won't carry forward and that is, we had the turnaround in Q1, Q2 and up north and there was some inventory management during that timeframe, conversion into clean products that gave us a benefit in the second quarter that won't replicate itself into the third quarter. And then the Mid-Continent, it is as simple as we've mentioned, we've got the strong differentials on Bakken relative to WTI in Mandan, and then we've got strong price-advantaged crude in Salt Lake City, too, the waxy crudes, and those priced a bit under WTI.

Faisel Khan - Citigroup Inc, Research Division

Does the pipelines that you guys control in the Bakken, does that enable you to get a better pricing than Clearbrook?

Daniel Robert Romasko

It swings. It can go either way on us, so we take a pricing strategy that gives us a blend of risks between the Bakken trade center and the lease. Now having said that, yes. Owning the -- and having access to the infrastructure in Bakken gives us a logistical advantage, a lower transportation cost, physically -- because we're physically closer to the barrel that's produced.

Faisel Khan - Citigroup Inc, Research Division

And was there any swing in the second quarter versus the first quarter that would've given you a benefit in that, in having that pipeline logistics?

Daniel Robert Romasko

No. No, not on -- purely on the logistics and transportation costs.

Faisel Khan - Citigroup Inc, Research Division

Okay, great. And then the OpEx, the overall OpEx of the company per barrel, operating in a basis coming down year-over-year, how much would you attribute that to kind of lower natural gas prices versus some of the improvements you've made across the entire system?

Daniel Robert Romasko

If you look at it on an absolute cost basis, the majority of the improvement is related to the natural car -- or the natural gas price. Fixed cost are actually holding flat and improving, actually, all the way back to almost a 2009-type level. And where we're gaining the advantage there is the strong reliability giving us additional throughput. So it's spreading across more barrels.

Faisel Khan - Citigroup Inc, Research Division

Okay great. And last question, on the -- after the sell down or drop-down of these assets from the S.E.A. Corp. into the MLP, that you guys have laid out your prepared remarks, how much more EBITDA is kind of left at the S.E.A. Corp. level that could be dropped into the MLP?

Gregory J. Goff

Yes, Khan, we haven't gone in and quantify that EBITDA. There are some remaining assets that we can drop down into the future but we haven't done that work.

Faisel Khan - Citigroup Inc, Research Division

Okay, got you.

Gregory J. Goff

Thank you. Thanks, everyone.

Operator

Your next question comes from the line of Cory Garcia from Raymond James.

Cory J. Garcia - Raymond James & Associates, Inc., Research Division

I guess just a quick follow-on to Faisel's last question. I hesitate to even ask this, ahead of sort of the Analyst Day, but is there a sort of target that you guys are looking at in terms -- on operating cost front, recognize, of course, that utilization is pretty key? And I'm kind of really focusing more on your Golden Eagle and LA refineries specifically, is there -- what are sort of the remaining leverage do you guys see for that?

Daniel Robert Romasko

Yes, I'll take that. I think we've been fairly public on our goal to target a $1 per barrel improvement in California. And the pricing reference period would be essentially a 3-year average, '09, '10, '11. And that's the challenge we've set for our teams. And we do that through a combination of reliability improvements, which are -- drive our whole fixed cost flat and spread the fixed cost across additional barrels, as well as synergy improvement and other variable cost target improvements. Thanks, Cory.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a very good day.

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