CVR Refining LP (NYSE:CVRR) Q2 2016 Earnings Conference Call July 28, 2016 1:00 PM ET
Jay Finks - Vice President of Finance
Jack Lipinski - Chief Executive Officer
Susan Ball - Chief Financial Officer
Johannes Van Der Tuin - Credit Suisse
Jeff Dietert - Simmons & Co
Spiro Dounis - UBS Securities
Chi Chow - Tudor Pickering Holt
Phil Gresh - JP Morgan
Greetings, and welcome to CVR Refining LP Second Quarter 2016 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Jay Finks, Vice President of Finance. Thank you, please go ahead, sir.
Thank you, Brenda, and good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Refining second quarter 2016 earnings call. With me are Jack Lipinski, our Chief Executive Officer; and Susan Ball, our Chief Financial Officer.
Prior to discussing our 2016 first quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words outlook, believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements.
You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.
This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2016 second quarter earnings release that we filed with the SEC this morning before the opening of the market.
With that said, I’ll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?
Thanks, Jay. Good afternoon everyone and thank you for joining our earnings call. This morning we reported net income of $78.1 million in the second quarter of 2016 and that compares to a net income of $227.8 million for the second quarter of 2015. Our second quarter 2016 adjusted EBITDA was $84.7 million and that compares to $194.3 million in the same period a year ago.
Operationally, our refineries ran well despite the previously announced crude reduction at Coffeyville due to the suspension of one of Magellan’s 8-inch pipeline. We ship approximately 30,000 barrels a day of products on this pipeline, which runs from Coffeyville to Kansas City. The impact of crude rates at Coffeyville due to the pipeline suspension was approximately 12,000 barrels a day in June.
Coffeyville returned to full rates on July 20 in anticipation of the Magellan pipeline coming back to full 100% repaired by the end of July. In the second quarter Coffeyville ran 128,000 barrels a day of crude and Wynnewood ran 75,000 barrels a day of crude, resulting in a combined crude throughput of 203,000 barrels a day. The overall crude rate was at the high end of our guidance of 190,000 to 205,000 barrels a day.
During the second quarter our gathering business performed very well setting a new quarterly record. We gathered approximately 73,500 barrels a day and that compares to 70,300 barrels a day in the same period last year. As the price of crude stabilizes, we’re seeing renewed activity in the basins in which we gather.
As discussed on our last earnings call, we’re optimistic for a strong rebound in crack spreads during the second quarter due to the anticipated strength of gasoline and distillate demand. However, crack spreads realized in the second quarter fell short of our earlier expectations as a result of continued high product inventories in the U.S. and in Group 3.
In the second quarter Magellan gasoline inventories averaged 1.8 million barrels higher than 2015, while distillate averaged 300,000 barrels below 2015. To date, the Magellan System gasoline inventories are 1.8 million barrels over the last year and distillate is 450,000 barrels over the last year.
The NYMEX 2-1-1 Crack Spread averaged $15.98 per barrel in the second quarter of 2015 as compared to $23.85 a barrel in the second quarter of 2015. The Group 3 2-1-1 product basis averaged a negative $3.34 a barrel in the 2016 second quarter as compared to a negative $4.94 per barrel in the second quarter of 2015. The negative product basis was primarily driven by gasoline.
The Group 3 gasoline basis averaged negative $5.49 per barrel, and the distillate basis averaged negative $1.18 per barrel. The Group 3 2-1-1 Crack Spread averaged $12.64 a barrel in the second quarter and that compares to $18.91 a barrel in the same period a year ago.
As a result of forecasted NYMEX crack spread and increased rinse expenses, we set aside cash for future operating needs. Therefore, CVR Refining will not have a distribution this quarter. This quarter’s reserve for future operating needs maybe returned to unitholders if margins improve or rinse expenses decline in the future.
At this point I’ll turn the call over to Susan. Susan?
Thank you, Jack, and good afternoon, everyone. As Jack previously mentioned, in the 2016 second quarter, our adjusted EBITDA was $84.7 million as compared to $194.3 million in the same quarter of 2015. This decrease was primarily driven by lower realized margins, increased rinse expenses and lower crude throughputs.
In the first quarter of 2016, the more significant adjustments to our net income of $78.1 million utilized to derive the adjusted EBITDA or adjustments related to favorable impacts under the first in, first out, or FIFO, inventory method of accounting of $46.2 million. A loss on derivatives not settled during the period of $9 million and major schedule turnaround expenses of $2.1 million.
Adjusted EBITDA is further adjusted for debt service, reserves needed for future for major scheduled turnaround expenses, environmental maintenance and capital expenditures and other future operating needs as determined by the Board.
As I discussed on our last call, each quarter we will continue to review remaining previously established reserves and evaluate future anticipated needs under our capital plans and upcoming turnarounds to determine what additional reserves are needed to ensure adequate levels are maintained. We also may reserve amounts for other future operating needs as determined by the Board.
After consideration of the reserves and establishment of future environment on maintenance CapEx, major schedule turnarounds, and setting aside approximately 20 million for future operating needs. There is no available cash for distribution. As a reminder, we are a variable distribution master limited partnership, and as a result, our quarterly distributions, if any, will vary from quarter-to-quarter due to several factors. For example, crude oil and feedstock prices, refined product prices, crude throughput rates, RINs expense and prices, capital needs and other reserves deemed necessary by the Board of Directors.
In the second quarter of 2016, our realized refining margin, adjusted for FIFO, was 176.3 million or $9.56 per barrel as compared to 332.2 million, or $17.22 per barrel in the same quarter of 2015. This decrease is primarily driven by lower Group 3 crack spreads, and increased RINs expense. The PADD II Group 3 2-1-1 crack spread did average $12.64 per barrel in the 2016 second quarter as compared to $18.91 in the same period of 2015. Our second quarter 2016 RINs expense was $5.51 million as compared to $37.5 million in the second quarter of 2015.
Our consumed crude oil discount to WTI for the 2016 second quarter was $3.07 per barrel as compared to a $3.35 per barrel in 2015. The Coffeyville refinery reported a refining margin, adjusted for the FIFO impact, of 117.1 million in the second quarter 2016, or $10.09 per crude throughput barrel, as compared to 312.4 million, or $17.83 per crude throughput barrel in 2015.
In the second quarter of 2016, the Wynnewood refinery reported a refining margin, adjusted for FIFO impact, of $58.1 million, or $8.51 per crude throughput barrel, as compared to $116.9 million, or $16.09 per crude throughput barrel in the second quarter of 2015. The decrease in our refining margin adjusted for FIFO for both Coffeyville and Wynnewood was primarily associated with the lower Group 3 crack spreads, the lower crude throughputs and the higher RINs expense.
Consolidated direct operating expenses, excluding turnaround expenses, were $4.25 per barrel of crude oil throughput in the second quarter of 2016 as compared to $4.62 in the second quarter of 2015. The decrease was primarily associated with lower environmental expenses, repair and maintenance costs, energy and utility expenses with a partial offset by increased labor costs.
At the refinery level, Coffeyville’s direct operating expenses excluding turnaround expense were $3.98 per barrel of crude throughput in the second quarter of 2016 as compared to $4.29 per barrel in the 2015 second quarter. This decrease was primarily associated with lower environmental expenses, repairs and maintenance and energy cost, partially offsetting these decreases were increased personnel cost.
Wynnewood’s direct operating expenses excluding turnaround expense were $5.24 per barrel of crude oil throughput for the second quarter of 2016 as compared to $5.16 per barrel in the second quarter of 2015. This increase was primarily associated with the lower crude and throughput rates in 2016.
We ended the 2016 second quarter with cash and cash equivalents of $159.3 million, we had availability under the AVL facility of $255.1 million. Our total long-term debt outstanding including the current portion was approximately $579.2 million, this was comprised of $500 million and 6.5% unsecured notes, approximately $47.7 million of capital leases and $31.5 million drawn against the intercompany revolver provided by our parent CVR Energy. At June 30, 2016, we had availability under the parent revolver of $218.5 million.
Second quarter 2016 capital expenditures totaled $24 million. Of the total capital expenditures in the second quarter, approximately $14 million was related to environmental and maintenance capital, $10 million was associated with growth capital. In 2016, we estimate total capital spending to be approximately $160 million of which $110 million is estimated to be environmental and maintenance capital with the remaining being growth capital primarily associated with the hydrogen plant at Coffeyville refinery.
With that, Jack, I will turn the call back over to you.
Okay, thank you, Susan. Let me spend a little bit of time talking about the third quarter and some other issues. So far in July, Group 3 crack spreads have been averaging approximately $12 per barrel, and similar to the second quarter inventories in the Group remain high. Magellan gasoline inventories are approximately 1.4 million barrels higher than last year and distillate stocks are about 450,000 barrels higher.
Inventories remain high in spite of good demand as the refining industry continues to turn a crude blood into a product blood. Topic on the hydrogen plant, we have achieved mechanical completion during July and we are currently in the commissioning of start-up process and expect to begin producing hydrogen in mid to late August. The total cost for this project is expected to be approximately $108 million.
The Wynnewood refinery suffered a power outage on July 17, resulting in a shutdown of the majority of the units. The power outage was caused by a failure at an Oklahoma gas and electric sub-station. Subsequent startup issues have resulted in operating rates at Wynnewood in July. And yesterday we were forced to enter one crude unit and one vacuum unit due to continued operational issues resulting from the power outage. We expect the repair to take between two and three weeks.
Additionally, the impact of crude rates at Coffeyville due to the continued restrictions on the Magellan pipeline will be about 4,000 barrels a day in July. As a result, we estimate our total crude throughput to the third quarter will range between 190,000 barrels and 205,000 barrels a day for both refineries in the quarter.
RINs continue to be an egregious tax on our business, and have become our single largest operating expense, exceeding labor, maintenance and energy cost. As a matter of fact, RINs have doubled our labor cost. Since 2013, we spent nearly $500 million on RINs, and we estimate our RINs exposure in 2016 to be approximately $200 million to $235 million.
CVR Refining cannot have long its RINs expenses because it’s competing a third party rack with exempt blenders who have no RIN obligation, and they control the blending and the downstream from there. We believe the basic tenants of the RFS are not being met due to the misplacement of the point of obligation, as a result of not placing the point of obligation on the appropriate party, renewable fuel blending is not reaching the levels issued by Congress, and the cost of RINs have skyrocketed.
Exempt blenders, large retailers and integrated refiners with substantial distribution in marketing are choosing to retain their RIN revenues as process. They should be investing these profits from RINs and necessary renewable fuel blending and distribution infrastructure. We believe renewable energy has a place in the market, and we also believe the manner in which the renewable fuel standard operates today is broken.
Everyone should clearly understand that we support the goals of the RFS. Our sister company CVR Partners provides nitrogen fertilizer to the Ag market. In fact, our refineries and fertilizer plants provide fuels and new transits in support of agriculture long before the RFS. Over the last 11 years, we have invested approximately $1.4 billion in our two refineries, to expand fuel production, improve safety and efficiency, all with the goal of making these plants competitive during periods of lower margin.
We achieved what we set out to do. While we make these capital spending decisions, we assume that CVR would be competing in an open transparent market with a level playing field for all participants. The EPA’s implementation of the RFS has upset the market and the transparency and fairness by favoring one group over another.
The RINs market represents one of the largest unregulated commodity markets in the U.S. The market is not transparent. Anyone can own a RIN, and the owners can hide behind the coat provided by the EPA, they are free to sell or not sell RINs, and they can manipulate the market and not be identified. Fundamentals don’t support RIN prices nearing a dollar.
Today ethanol is $0.15 to $0.20 over the price of gasoline. With a few pennies for transaction cost, 86 RINs have cost $0.20 to $0.25, not a dollar. The difference is price speculation. If a private or public company with distorted marking conditions, so one group receives windfall profit and another faced uncertainty they would have been investigated by the FTC and sued by every state Attorney General. However, as of today there have been no such investigations. I call on the FTC and CFTC to investigate this uncontrolled contrived market, and if I were the Inspector General of the EPA, I’d be looking into this as well.
Operator, I’m ready for questions.
[Operator Instructions] Our first question comes from the line of Ed Westlake with Credit Suisse. Please go ahead with your question.
Johannes Van Der Tuin
Hi, it’s Johannes here. Sorry the admin logged in as Ed. Thank you for taking the call today, a quick question to start off with well was on the subject of the RINs. There is what we would like to happen with RIN market and then there is what the current status of the RIN market is. And I guess my question is assuming that there are no changes made in short to medium term, are there things that your group can do to mitigate some of the costs associated with RINs, and if it doesn’t look like it’s going to be fixed on a more long term basis, are there different business decisions you are likely to make as a result of that?
Well let me answer the first one. Because of our location, we are located in Wynnewood, Oklahoma and Coffeyville, Kansas. And those are the only two own controlled racks that the company has, and those are the only two racks where we can force ethanol blending. We shipped the remainder of our product on the Magellan pipeline system, which also enters the NuStar system. And we are in numerous terminals throughout that area, but we compete with anywhere from six to 20 different sellers at those racks, and we cannot force the blending. And because of our location, it’s just not a simple matter of adding more racks. Everybody has to understand the market is fully supplied as it exists today. So going into retail is not an option for us. I mean we don’t want to be a retailer, and if you had to buy retail, you would be sitting in a situation of having to buy retailers, whose prices escalated because of the RIN, we would end up having to spend several times our market cap to buy a retail company, suitable in size for us to control the blending. So the shorter answer is there is not a lot more that we can do, we can’t export from where we are at, we are blending maximum amounts that we can, and this is [indiscernible] 00:03:36, I mean EPA needs to open its eyes and realize primarily that they are not achieving the goals of the RFS, because they have got the obligation on the wrong party. How can I force, how can CVR force more blending when the end users are not in our control. And long term that will be speculation on my part to say what we will be doing long term.
Johannes Van Der Tuin
Kind of then on a medium term basis because you took on some additional reserves for future operating needs. Is that going to be a sort of cost one would expect on a quarterly basis as long as the RIN market is inflated in the way that it has been?
I’d not expect that at this point, but one of the reasons is that we are uncertain of the power crack, we are uncertain of the RINs market but then also when we reserve, return around as well as this other issue, we now know that when we return around it will be more expensive, I don’t have definitive numbers right now. So we are putting aside reserve prudently to support the company in the medium term, but I would not expect that to be a quarterly recurring decision. But again the Board makes the decision as Susan said every quarter.
Johannes Van Der Tuin
And then if I could ask one last question, when it comes to diesel and gasoline markets, you noted how elevated the inventories are. In your mind and your experience of how the market is operating, in fact of your career, how do you see this playing out over the next two quarters in terms bringing those inventories down?
Well first of all, you are going to be going into maintenance, so that will bring some of the inventories down. And then I’d expect as margins tighten the weak sisters will have to start to coming around, and Europe is under a lot of pressure, and I still go back to comments I made on prior earnings call is that if you look at ‘14 versus ‘15, in 2015, European refineries ran a million barrels a day more crude than they did in ‘14. They are still running relatively high levels of crude and exporting the products in the United States. There is going to a come-to-Jesus moment when everybody sits there and takes a look and say, I am not making money on my incremental barrel and they decide to pull back. But at the moment, Gulf Coast refiners have good margins because of the crude differentials, and they continue to run and export, but we have Europe and the East Coast where I really believe some cult has to come.
Johannes Van Der Tuin
Okay, thank you very much for taking my calls, and I appreciate it.
Thank you. Our next question comes from the line of Jeff Dietert with Simmons & Co. Please proceed with your question.
Hey Jack, I appreciate your candor on the RINs discussion.
Oh thank you. You really want to know what I feel about it.
Well yeah, I appreciate you speaking out. Just trying to understand on the available cash distribution reserves, there is three components that hit the environmental and maintenance, the major schedule turnaround expense and the future operating needs. Just wanted to make sure I understood, is the $40 million environmental maintenance, I think that was previously running closer to $30 million, is that going to be sustained closer to $40 million similar on the major schedule turnaround, I think it would run in closer to $9 million and $15 million this quarter. Is that $15 million a good go-forward rate, and then I think the future operating needs have $20 million, it may be a one-time issue depending on how margins evolved from here, could you just clarify that for me?
Sure. I mean if you take a look at it, we ended up reserving a grand total I think of 65 million excluding the nominal 20 that we held in reserve. That on a long term basis would be a higher number. I’m not prepared to tell you what the number will be, that’s determined quarterly, but that was certainly a higher number than we would expect long term. Okay and some of it is due to just a brief comment I made a little while ago is that we saw certain enclave moving around as inside the company, and we also now know that the Wynnewood turnaround is higher than our expectations. If you go back to day one, and that would be in January of 2013 that we said that we would set reserve that we would try not to change for two years. And what we found is that we lived up to that and actually lived beyond that, but over those years we have seen increases in expenses and everything else. So it should be reasonable to assume that the reserve that we had previously will increase but I don’t believe that it will increase to the level that we have done this quarter and especially taking into account the special reserves.
Got you, got you, okay. Secondly on Coffeyville relative to the environment that you were in, let me point it ran well and margins were better than we had anticipated as well. Do you have an estimate on what the opportunity costs were associated with the Magellan pipeline outage? How negative was the hit from that pipe being down?
Let’s see, it’s about 370,000 barrels yeah times $11, so $5 million.
And you got to remember that when we give our estimates of the range, we try to anticipate some amount of unanticipated averages from problem and last year if you look at the run rates that we were able to achieve in the second quarter of last year, you will see that they were significantly higher than this quarter and there are quarters that we beat our estimates and there are quarters that we don’t, so we try to get in the low range.
Got you and as you explored alternative distribution outlets for some of the barrels, did you find any unexpected benefits, any pockets of markets that you previously hadn’t tested that might be provide some kind of advantage in the future.
Well if you are speaking about Magellan what they did is, they jumpered over to some of their other lines giving us access to other terminals that we normally don’t access. And while we didn’t reach 30,000 barrels a day, you know it took a little while to do that, we cut hard in the beginning just simply because, you know we just kind of fill up on the inventory and then we slowly raised rates as we were able to work those other pipeline connections, they are not without difficulty because of pumping rates and time between blending tanks and the like, but it is not a new market, it’s just basically we want to go back to the markets we have and don’t forget here shortly we are going to be able to access Arkansas, Little Rock through the states that we took on the Magellan systems, so that’s going to be an improved market for us.
Understand and Susan if I could get you to repeat the RINs cost number for the first quarter and the second quarter, I believe you stated it but I missed it.
Yeah, the first quarter was about 37.5 million, second quarter approximated 51 million.
All right, thanks for your comments.
Thank you, Jeff.
Our next question comes from the line of Spiro Dounis with UBS Securities. Please go ahead with your question.
Hey good afternoon everyone, thanks for taking the question, just maybe want to start of real quick maybe on the environment and [indiscernible], I guess when you are talking to your upstream people out there maybe what they are seeing right now, how they have positioned themselves given the pull back in the crude price, what is the economics there right now, what you are seeing?
Well I mean as we noted that we hit a new record on crude gathering and people make decisions based on whatever the crude prices at the moment and you know it’s fallen off about $8 to the recent high and that may or may not affect some of the players. What we are seeing though is that the areas that are the sweet spots are still producing and producing higher levels. And we are seeing docks drilled uncompleted wells coming on. So at the moment, we are not seeing a pull back if $40 becomes a new sustain number well you know we will have to look at that as time progresses, but a decision made today doesn’t really impact what happens to the next several weeks.
Got it, that’s helpful, and maybe just touching back again on the operating margin there sort of operating reserve, I was wondering just to give a little more color on maybe how you are defining it gets improvement and then NYMEX, our improvement in the RINs situation and I guess kind of what I am getting at is, when you do make the decision to or if you can make a decision early with the reserves again, is that basically been stacked on top of quarterly distribution or would that be a special distribution, not trying to too ahead of myself but just trying to see how you are thinking about that.
You know it will be very likely it would be added to a quarterly distribution and you know we are very hopeful that the margins will roll off the curve but if you just stare the NYMEX or the curve in the phase and you say suppose it doesn’t, prudence dictated of that we do this and quite honestly if RINs prices go much above the dollar I mean where they are sitting right now, I don’t imagine it but you know what it is a contrived market. Anybody can withhold RINs and as I pointed out in my comment, RINs for ethanol today should be $0.20 to $0.25, not a dollar, so if you can tell me where the other $0.75 went, I will give you an answer.
Got it, I can’t tell you unfortunately. And just last one real quick, sort of on this topic, in terms of how you are marked or those reserves either I guess distribution in the future or it’s a safety net and I guess what I am getting at is, can you theoretically users to use those to buy back units, just getting what you are trading right now?
I mean theoretically we could, we’d have to get Board approval, we’d have to go through that whole process but trust me, right now it is being held in reserve as a safety net.
Got it, appreciate the color. Thanks everyone.
Our next question comes from the line of Chi Chow with Tudor Pickering Holt. Please proceed with your questions.
Great thanks, also reiterate Jeff’s comment; Jack I appreciate all the color you have given on that end, it was very refreshing to hear these sorts of discussion.
I mean, fortunately my Board supports me, our owner support us and we could probably be a little bit more blunt than most people have been in the past, but this is the most egregious packs and we are being regulated by people who don’t understand our industry, don’t understand how the markets work physically and financially. And they are telling us how we should do it and quite honestly I have done this for 44 years. If there was a way for us to do something different, damn it, I’d be doing it right now.
Well the EPA obviously has its own agenda on the topic but I mean what do you think is really the reasonable outcome of the lawsuits and these other forms of pressure to change the point of obligation, is that really reasonable?
I believe it is reasonable; I believe we need to become more vocal, more people need to understand the inherent cost of the consumer and everybody involved. You have a refining industry that is highly capital intensive that spends hundreds of millions of dollars a year on each refinery, or tens of millions of dollars a year in each refinery just to keep it running and it’s been driven by retail and blending networks who have no capital requirements. And they are pocketing the money that should be put back into the refining infrastructure or their own blending infrastructure, if you move the blender above the obligation to the blender and EPAs as you meet the blunt axe and he controls the retail chain, they will do what is necessary to sell the product, I mean they have to go down and then send the customer or put in the facilities. I mean today we blend E85 at I believe 18 racks. I got an headline email that we sold a 1000 gallons two weeks ago, EPA is counting that E85 is the way out, E85 the consumer is not buying, they don’t like the mileage, they don’t like the cost, ethanol cost more than gasoline right now, so the market is in disarray and EPA failed to realize that last year, five billion gallons of gasoline were sold in the United States without ethanol, E0, and they stick their head in the sand and say that well next year it is going to be 200 million gallons, below. What they need to do is that they really believe this, the way that they will meet the law and the intent of the law is by moving the point of obligation to the party most able to impact blending. And that’s not the merchant refiner.
Yeah, all that makes sense, but thinking about just environment, how are you thinking about the competitive position of CVR as a mid time merchant refinery and do you see the need to change or extend the asset base at all again at a different position and I know you talked about it’s not realistic to get more terminals in your current position but what about buying into another region with refining and potentially more midstream terminal assets.
Okay and this really is the perfect segue into what CVR could do, the parent company CVR Energy. We have always said it that CVR Energy will be the acquisition vehicle for the underlying sister companies, CVR Partners in total and CVR Refining. To this day CVR Energy has no debt and has cash, it would be the vehicle that we would use to acquire and we all look at it. I mean there are - we are very well aware of that it would be nice to separate our exposure or to get exposure to other areas. So with that said Chi, I mean we had very good results as a mid-time refiner in the group and then over supplied market and I think some of that goes back to some of my comments about how much money we put into our plants to make them competitive in a lower margin environment. That was done for our shareholders, our employees, the communities we work, in the United States Energy portfolio at large, and what really, really gets my goat is the fact that we are not being able to realize the benefits from all that money we spent. As a matter of fact, wins cost through the end of this year will approximately half of all the capital expenditures we made over the last 11 years to upgrade our facilities with nothing to show for it.
Yeah I appreciate the performance. Yeah definitely this quarter, given the environment was very strong. I guess one final question on that, at Coffeyville, looks like you made some real improvements on operating costs last couple quarters. I know Susan you mentioned a couple of items, but is there anything specific that kind of improved the cost structure there.
Well you remember, we are at a turnaround now, and as you, we spent little bit more than we had originally anticipated, but you do the work that you see and need to do, and we fixed a lot of issues that Coffeyville had going into turnaround, and everything degrades over the four years between the turnaround cycles. So part of the reason is that we are running more efficiently, and energy cost is down but our energy efficiency is up, so we are getting the benefits of our turnaround.
Okay thanks Jack. I appreciate the color.
Thank you, Chi.
Our next question comes from the line of Phil Gresh with JP Morgan. Please proceed with your question.
Hey, good afternoon Jack. Couple of quick questions, I guess just looking at the new RINs cost guidance basically implies may be 130 million midpoint in the back half. Would you say that’s pretty indicative if the RINs stay where they are if you look at the 2017, they will be kind of 250 to 275 run rate there or -
Well to answer your first question, yes, you are right about the second half, just that a dollar RIN around numbers dollar for any number of different RINs. The estimates for 2017 will be fully determined after EPA comes out in November with their final [indiscernible] metric obligation. And so, we are somewhat hopeful that the EPA will realize that what they are asking for may not be realistic, and if you sit there, and I am going to get on the soapbox again because of the last question. If you sit and take a look at the parties that oppose moving the point of obligation. Well obviously, anybody who is getting win for a profit will oppose moving the point of obligation. They are those who don’t understand how the markets physically work and economically work, and so they are confused and basically they are saying well I don’t know what to do, this is it, don’t change it. And then you have got the renewable obligation, and again we are supportive of the RFS and I believe their fear is simply that if any part of the RFS gets opened it’s going to open the whole thing up. And if they simply realize that the simple fact of rulemaking moving the point of obligation doesn’t hurt them but will help them. I think if they thought long and hard, they just support this movement as well.
Okay. You were at our conference a couple weeks ago and we talked a lot about the macro environment. Obviously you have more cautious views than I guess what some others have been saying in terms of where we are right now on supply demand balancing, various paths and whatnot. I guess based on your experience, how are you thinking about how long this might take for the supply demand balances to have worked themselves out. And do you think this is a second half of 2016 story or do you think it will take longer than that?
Well just given the high inventory levels that we have in the United States right now, you kind of have to get in my view there is a point of speculation where refiners start cutting rent, okay it’s a refinery problem, it’s not a crude problem. Refiners are doing this for 44 years, I have hung on and systems generating dollars to stay alive, and what you are going to find is that the weaker heart will continue to run just because they think they have to, but the reality is you got to look in the mirror, you got to say to yourself, am I running and am I doing anything for myself, am I covering all my capital cost, not just your operating cost. But refineries are capital intensive, and I think if the Europe looks at themselves in the mirror right now, they would realize they should be cutting, and I think you can find the same thing in some of the weaker regions like the East Coast, and that’s not to say that there aren’t weaker refineries all over, but when you look at long term refinery health you have to generate not only the cash to run your business, but the cash to maintain your business, the sustaining capital. So I don’t think it’s a ‘16, I don’t think we will through it in ‘16 I think ‘17 may, and that’s one of the reasons why we are being cautious. And 44 years in this industry told me you are better to be cautious, and I’d rather come back and say, hey guys here is the more cash, a quarter two or three from now, than to take it and then struggle and say what do I do, and impair the equity.
That makes sense to me. I guess if you look ahead it might probably be a very tough fourth quarter, I mean the reserves you have taken here in the second quarter, the additional reserves I mean, do you feel like, like it’s positioned you to able to withstand what will be a really tough market at this point, or how do you think about that?
Well I can’t predict how bad the market will be or how good the market will be, I said a little earlier, I do believe, I probably be a buyer of the crack at what NYMEX is predicting rather than a seller because it always looks worse than it turns to be because somebody will fall over, some refinery will have a problem and generally the cracks will have the curve. I can’t tell you absolutely, I haven’t sat down and looked at each month and each in the quarter and say this is going to be a good one or this one going to be tough. The only thing I can say is that we positioned our plans to have relatively good or actually high margin capture even in lower margin environment. So I can’t answer your question but the thing is that Prudent says if I have cash in my pocket right now you ought to stay there.
Yeah. Okay I appreciate you taking the questions. Thank you.
Thank you. This concludes today’s question-and-answer session. I’d like to turn the floor back over to management.
Thank you, Brenda. I’d like to thank everyone for listening to our conference call today. As a reminder, our conference call will be available for replay over the next 14 days. You can visit our website at cvrrefining.com or contact Investor Relations for additional information. Thank you.
Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time and thank you for your participation.
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