HollyFrontier (HFC) Q1 2018 Results - Earnings Call Transcript

HollyFrontier Corp. (HFC) Q1 2018 Earnings Call May 2, 2018 8:30 AM ET

Executives

Jared Harding - HollyFrontier Corp.

George J. Damiris - HollyFrontier Corp.

James M. Stump - HollyFrontier Corp.

Thomas G. Creery - HollyFrontier Corp.

Richard Lawrence Voliva - HollyFrontier Corp.

Doug Leggate - Bank of America Merrill Lynch

Analysts

Brad Heffern - RBC Capital Markets LLC

Manav Gupta - Credit Suisse Securities (USA) LLC

Roger D. Read - Wells Fargo Securities LLC

Ryan Todd - Deutsche Bank Securities, Inc.

Paul Cheng - Barclays Capital, Inc.

Neil Mehta - Goldman Sachs & Co. LLC

Phil M. Gresh - JPMorgan Securities LLC

Matthew Blair - Tudor, Pickering, Holt & Co. Securities, Inc.

Operator

Welcome to HollyFrontier's First Quarter 2018 Conference Call and Webcast. Hosting the call today from HollyFrontier is George Damiris, President and Chief Executive Officer. He is joined by Rich Voliva, Executive Vice President and Chief Financial Officer; Jim Stump, Senior Vice President of Refinery Operations; and Tom Creery, President, Refining & Marketing.

At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. Please note that this conference is being recorded.

It is now my pleasure to turn the floor over to Jared Harding, Investor Relations. Jared, you may begin.

Jared Harding - HollyFrontier Corp.

Thank you, Luke. Good morning, everyone, and welcome to HollyFrontier's first quarter 2018 earnings call. I am Jared Harding with Investor Relations for HollyFrontier. This morning we issued a press release announcing results for the quarter ending March 31, 2018. If you'd like a copy of the press release, you may find one on our website at hollyfrontier.com.

Before we proceed with prepared remarks, please note the Safe Harbor disclosure statement in today's press release. In summary, it says statements made regarding management expectations, judgments or predictions are forward-looking statements. These statements are intended to be covered under the Safe Harbor provisions of Federal Securities Laws. There're many factors that could cause results to differ from expectations, including those noted in our SEC filings. Today's statements are not guarantees of future outcomes.

The call also may include discussion of non-GAAP measures and please see the press release for reconciliation to GAAP financial measures. Also, please note that information presented on today's call speaks only as of today, May 2, 2018. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or reading of the transcript.

And with that, I'll turn the call over to George.

George J. Damiris - HollyFrontier Corp.

Thanks, Jared. Good morning, everyone. Today, we reported first quarter net income attributable to HollyFrontier shareholders of $268 million or $1.50 per diluted share. Certain items detailed in our earnings release increased net income by $131 million on an after-tax basis. Excluding these items, net income was $137 million or $0.77 per diluted share versus a net loss of $33 million or $0.19 per diluted share for the same period in 2017.

Adjusted EBITDA for the period was $316 million, an increase of $230 million compared to the first quarter of last year. This increase was principally driven by our Refining & Marketing segment, where we were able to capitalize on favorable crude differentials and strong product crack spreads in our markets.

Our Lubricants and Specialty Products business reported EBITDA of $41 million, driven by strong rack forward sales volumes and margins. Rack forward posted adjusted EBITDA of $56 million, representing a 14% EBITDA margin and had operating cost of $36 million. HollyFrontier continues to expect rack forward EBITDA of $180 million to $200 million for 2018 with an EBITDA margin of 10% to 15% of sales.

Lower base oil cracks combined with the lumbering impact of our feedstock supply issues hurt rack back earnings in the first quarter. With our feedstock supply issues behind us, we expect significant improvement in rack back as we enter the seasonally strong second quarter and third quarters. We do have plant maintenance at our Mississauga facility in the second quarter, which will impact both rack forward and rack back volumes.

Holly Energy Partners reported EBITDA of $89 million for the first quarter compared to $70 million in the first quarter of last year. This growth was driven by the acquisition of the Salt Lake City and Frontier Pipelines as well as volume growth in HEP's crude gathering system. Distributable cash flow came in at $69 million delivering a distribution coverage ratio of 1.04x.

During the quarter, we repurchased $25 million worth of HFC shares. This demonstrates our disciplined capital allocation strategy of first maintaining our current assets and balance sheet strength; second, sustaining a competitive dividend; third, growing our business both organically and through transactions; and fourth, returning excess cash to shareholders. Going into the summer, we're optimistic about light product and lubricant markets as well as the sustainability of crude differentials.

Now, I'll turn the call over to Jim for an update on our operations.

James M. Stump - HollyFrontier Corp.

Thank you, George. For the first quarter, our crude throughput was 415,000 barrels per day in line with our guidance of 410,000 barrels per day to 420,000 barrels per day. While our crude throughput was impacted by our Tulsa turnaround and unplanned maintenance at Woods Cross, our refining system as a whole performed very well. Our consolidated operating cost of $5.86 per throughput barrel was a 16% improvement versus the $6.97 in the same period last year.

The improvement was driven by increased throughputs along with operating cost reductions across our refining system. In the Rockies, operating expenses were $9.62 per throughput barrel, a steady improvement over the $9.87 recorded in the first quarter of 2017. This was led by the continued focus on improving operational reliability and operating costs at our Cheyenne Refinery.

Our Navajo plant ran approximately 106,000 barrels per day in the first quarter. We continue to see the benefits of higher crude throughputs since the completion of our debottleneck project in the first quarter of 2017. In the Mid-Con, despite the turnaround at Tulsa, our operating expenses per throughput barrel of $5.28 cents improved by $0.52 per barrel versus the first quarter of last year. We have completed all the turnaround work at Tulsa safely and we have resumed normal operating rates there.

Our Woods Cross Refinery experienced a fire in mid-March. We're still in the process of repairing the number one crude unit and expect Woods Cross to run at reduced rates for the balance of the quarter. During the quarter, we also have planned maintenance schedule at our El Dorado Refinery that will slightly impact our sales volumes. For the second quarter of 2018, we expect to run between 440,000 barrels per day and 450,000 barrels per day of crude oil.

I will now turn the call over to Tom for an update on our commercial operations.

Thomas G. Creery - HollyFrontier Corp.

Thanks, Jim and good morning, everyone. For the first quarter of 2018, the 415,000 barrels a day of crude throughput was composed of 32% sour and 22% WCS and black wax crude oil. Our average laid in crude cost was under WTI by $8.47 in the Rockies, $2.80 in the Mid-Con and flat versus WTI in the Southwest. In the first quarter of 2018, we witnessed global and U.S. product inventories to continue to be rebalanced, signaling global economies are continuing to grow and increasing the demand for refined products.

Gasoline inventories in the Magellan system ended the quarter at 9.8 million barrels, which was similar to last year's first quarter ending inventories. Diesel inventories remain static as compared to the fourth quarter of 2017 and approximately 0.5 million barrels lower than last year levels. First quarter cracks in the Mid-Con were $15.56, $13.70 in the Southwest, and $15.66 in the Rockies. And compared to 2017, first quarter cracks were higher in the Mid-Con and lower in both the Rockies and Southwest. Crude differentials widened across heavy and sour slates during the first quarter. In the Canadian heavy market, first quarter crude differentials at Hardisty averaged over $24.25 per barrel compared to a fourth quarter differential of $12.25 per barrel.

HFC with its firm space commitments on various pipelines was able to purchase and deliver adequate volumes of price advantaged heavy crude from Canada to meet our refining needs. Our Canadian heavy and sour runs averaged 86,000 barrels per day at our plants in the Mid-Con and Rocky regions. We also refined approximately 174,000 barrels a day of Permian crude in our refining system, composed of 106,000 barrels per day at our Navajo complex and 68,000 barrels a day at our El Dorado Refinery delivered by the Centurion Pipeline. Increased Permian-based crudes will allow us to take advantage of the widening differentials for Midland price based oils.

First quarter consolidated gross margin was $12.83 produced barrels sold. This was a 70% increase over the $7.54 recorded in the first quarter of 2017. This increase was driven by improved laid in crude cost in the Mid-Con and Rocky regions and the small refinery exemptions at our Cheyenne Refinery. With widening Permian differentials and consistent discounts for WCS and black wax crude oils, we anticipate continued margins across our refining system in the second quarter. RINs expense in the quarter was $6 million which is net of the $72 million cost reduction resulting from the Cheyenne 2015 and 2017 small refinery exemptions received during the quarter.

And with that, let me turn the call over to Rich.

Richard Lawrence Voliva - HollyFrontier Corp.

Thanks, Tom. As George mentioned, the first quarter included a few unusual items. Pre-tax earnings were positively impacted by a $104 million lower cost to market benefit as well the $72 million reduction in RINs costs as a result of our Cheyenne Refinery's small refinery exemptions. These positives were partially offset by $4 million of PCLI integration related charges. A table detailing these items can be found in our press release and I'm pleased to report we completed the integration of PCLI in the first quarter.

For the first quarter of 2018 cash flow provided by operations was $334 million including turnaround spending of $57 million. And HollyFrontier's standalone capital expenditures totaled $57 million. As of March 31st, our total cash and marketable securities balance stood at $782 million, an increase of $151 million over the balance on December 31st of 2017. This increase was driven by our strong earnings and supplemented by a drawdown of inventory we had built in preparation for the first quarter turnaround at our Tulsa Refinery.

During the quarter, we returned a total of $84 million of cash to shareholders comprised of a $0.33 regular dividend totaling $59 million as well as the repurchase of approximately 550,000 shares of common stock totaling $25 million. As of March 31st, we had $152 million remaining on our existing stock repurchase authorization. As of March 31st, HollyFrontier has $1 billion of standalone debt outstanding and no drawings on our $1.35 billion credit facility. This puts our liquidity at a healthy $2.1 billion and debt-to-capital at a modest 15%.

HEP distributions received by HFC during the first quarter totaled $36 million, a 20% increase over the same period in 2017. HollyFrontier now owns $59.6 million HEP limited partnering units, representing 57% of HEP's LP (00:13:32) units with a market value of $1.7 billion as of last night's close. For the full year of 2018, we've slightly increased our CapEx guidance, driven by a higher turnaround scope and costs. We now expect to spend between $380 million and $440 million for both standalone capital and turnarounds at HollyFrontier Refining & Marketing, $70 million to $90 million at HollyFrontier Lubes & Specialties. This includes our scheduled turnaround at the Mississauga base oil plant and $50 million to $60 million of capital for HEP.

And with that, Luke, we're ready to take questions.

Question-and-Answer Session

Operator

The floor is now open for questions Thank you. Our first question comes from the line of Doug Leggate from Bank of America. Your line is open.

Doug Leggate - Bank of America Merrill Lynch

Thanks guys. Good morning, everybody and congrats on a really terrific quarter. George, I wonder if you could just give some prognosis as to how you see the spread outlook. Obviously, you are probably the primary beneficiary both from Canadian heavy and inland discounts. So I'm just curious, at your Analyst Day, you laid out what now looks like a relatively conservative view about a $4 run rate for TI or for your realized margin under TI – realized crude under TI, I'm just curious if that's changed. And I got a quick follow-up, please.

George J. Damiris - HollyFrontier Corp.

Yeah. I think, Doug, the best way to answer that question, those differences we covered in the Analyst Day we view as the long-term trend. It's going to bounce around above and below that depending on the timing of crude production and pipeline capacity. Right now obviously things are getting tight out of the Permian from a pipeline perspective and you're seeing the dips in the $6 per barrel to $7 per barrel range and perhaps even spiking up a little bit above that recently. In Canada, we saw dips blow out to as wide as $25-ish and now settle back into the $16, $17 range. So that's going to be a function of how much crude can be taken out by rail in the interim here until the next incremental pipeline capacity is added.

Doug Leggate - Bank of America Merrill Lynch

Well better operation's obviously done a great job of capturing our margins, so congrats on turning that around George. I guess my follow-up is also at your Analyst Day and again you know there's a lot of moving parts in the assumptions. You kind of laid out what your view was of mid-cycle value for Holly and you're pretty much there. So I'm just wondering how that alters your view of share buybacks relative to other uses of cash specifically stepping up the dividend on a more sustainable basis. And I'll leave it there. Thanks.

George J. Damiris - HollyFrontier Corp.

Yeah. Doug, I don't think our current stock price impacts our capital allocation strategy. We're going to get money back to shareholders to the extent that we have excess cash above our other priorities as I laid out in my prepared remarks.

Doug Leggate - Bank of America Merrill Lynch

So you're pretty agnostic to the share price on buybacks?

George J. Damiris - HollyFrontier Corp.

Again I just view it as a way of getting money back to shareholders.

Doug Leggate - Bank of America Merrill Lynch

Got it. Okay. Thanks guys. Appreciate it.

Operator

Your next question comes from the line of Brad Heffern from RBC Capital Markets. Your line is open.

Brad Heffern - RBC Capital Markets LLC

Hey good morning, everyone.

George J. Damiris - HollyFrontier Corp.

Good morning, Brad.

Brad Heffern - RBC Capital Markets LLC

A couple of questions the RFS. You know obviously you've gotten the Cheyenne waivers for 2015 and 2017 here. No mention of Woods Cross. Is that application still outstanding and additionally is there a chance that you could get a retroactive 2015 exemption as well for Woods Cross?

George J. Damiris - HollyFrontier Corp.

Yeah. I would say that we're in the process of working through all that, Brad. We haven't heard anything back yet, otherwise we'd have reported it.

Brad Heffern - RBC Capital Markets LLC

Okay. And then I guess on the RFS in general. Any thoughts you have George about the tax that the EPA seems to be taking of giving out a lot more small refiner exemptions and how that impacts the potential for broader reform?

George J. Damiris - HollyFrontier Corp.

Yeah. I think the D.C Appellate Court (00:18:33) finding late last year, they founded the previous EPA had erred in their review of applications for small refinery exemptions. So I think that was the key change from previous that opened up the door for what's provided for in the Clean Air Act to allow the EPA to exempt small refiners from the RFS from disproportionate economic arm and obviously we view high RIN cost market as disproportionate economic arm. Longer-term, we're pleased by what we're seeing coming out of Washington. We applaud both of our senators from the great State of Texas for their efforts in this area. Senator Cruz has gotten very involved in this effort and has been very involved through the Philadelphia Energy Solutions' bankruptcy.

Senator Cornyn is working on a legislative fix. We're also encouraged by what we're hearing from Congressmen Flores and Shimkus working similar legislative action on the House side. So, you never know what's going to come out of Washington, but we're pleased with the direction things are going and fully recognize there's still a lot of work to be done here.

Brad Heffern - RBC Capital Markets LLC

Okay. Appreciate all the color. Thanks.

George J. Damiris - HollyFrontier Corp.

Thanks, Brad.

Operator

Your next question comes from the line of Manav Gupta from Credit Suisse. Your line is open.

Manav Gupta - Credit Suisse Securities (USA) LLC

Hey, guys. Thanks for taking my question. My first question is, can you talk about HFC's role in the Delaware Diesel project?

George J. Damiris - HollyFrontier Corp.

It's a little bit premature to talk too much about it, but what we can tell you is we expect HFC to be the major customer for that facility and we view it as a great opportunity to sell more diesel into the growing Delaware Basin market at improved netbacks to HollyFrontier versus our other alternatives for that product.

Manav Gupta - Credit Suisse Securities (USA) LLC

So, I mean going ahead, do you envision HEP growing such businesses like HFC is growing the Lubes business. Is this the kind of the growth that you have in plan for HEP going ahead, projects like this?

George J. Damiris - HollyFrontier Corp.

Absolutely. These are exactly the type of projects that we view HEP as being a key part of our overall strategy.

Manav Gupta - Credit Suisse Securities (USA) LLC

Okay. And second question is more on spreads. So when I'm looking at the forward spreads on Midland Cushing, I'm seeing a $12 discount for November 2018. I just wanted to know your view on this spread. And if anything, what you're seeing on the ground in terms of trucking economics from the region. Any color you could add.

Thomas G. Creery - HollyFrontier Corp.

Yeah. This is Tom Creery. Yeah. We look at the forward markets as well on the Midland. As George mentioned earlier, that's just an indication of the imbalance of takeaway capacity versus drilling activity, which we believe is going to continue well into 2019. So we're well poised to take advantage of those conditions. On the ground levels, we don't really see anything that's happening. There are some previously announced pipeline production projects that will be completed later this year, that'll help remedy it, but those are already built into the price.

Manav Gupta - Credit Suisse Securities (USA) LLC

Thank you so much, guys, and congrats on a great quarter and restarting buybacks.

George J. Damiris - HollyFrontier Corp.

Thanks, Manav.

Operator

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

Roger D. Read - Wells Fargo Securities LLC

Yeah thanks. Good morning. And I'll echo the good quarter comments. Well done. And also on the share repos. It's always good to see that kick back around a little bit. If I could though jump into, maybe operationally thinking about some things. On the PCLI side, remind me if I'm off here, but I think this will be the third out of five quarters where we've seen some level of maintenance at PCLI. So I was wondering is this a function of a lot of different units that need constant maintenance or that you're just getting familiar with the units. And so it makes sense to kind of call out the specific turnarounds as well as just sort of fine tuning them for better product yields?

James M. Stump - HollyFrontier Corp.

No, Roger, it's a fair question. What I'd say is that the maintenance we have this quarter as well the fourth quarter was always planned. The maintenance we had last year was really not. So to your point like it's not – there's room for improvement absolutely, but really looking into 2019, we always expected a turnaround at that facility in the fourth quarter and we have some minor maintenance here in the second quarter.

Roger D. Read - Wells Fargo Securities LLC

Okay. So just I mean, I guess, that's kind of what I'm trying to figure out is how much of it is normal? What we should consider as normal levels of maintenance going forward? I guess, a little bit each year?

James M. Stump - HollyFrontier Corp.

Yeah. It should be better. I mean 2019 is a turnaround year; so fairly typical in that sense and then we would expect a cleaner run, obviously, 2020 and going forward.

Roger D. Read - Wells Fargo Securities LLC

Okay. That's helpful.

George J. Damiris - HollyFrontier Corp.

So at a higher level here, Roger, we have two major process units at Mississauga and those units go down every three or four years on average. This just happens to be the year, as Rich laid out, that we've taken both of those units down this year.

Roger D. Read - Wells Fargo Securities LLC

Okay. Perfect. And then my follow-up question, looking at your Southwest region obviously, and following-up on Manav's question about the difs. What is your flexibility there between running the light sweet and the sour barrels out there? So while we haven't seen a real separation, I think, between the price of the two, thinking about how you're set up for your yield by barrel, what's the swing factor there of sweet versus sour?

George J. Damiris - HollyFrontier Corp.

We can swing 100% sweet to sour. Now, a little bit of that depends on what you mean by light sweet. When you start getting too much above, say, 45 gravity, we can't process a lot of that material, as you know that type of crude has a lot of laid ins and we're constrained in our saturates gas plant, but as far as swinging from sweet to sour, we have 100% flexibility.

Roger D. Read - Wells Fargo Securities LLC

Okay. Great. Thank you.

Thomas G. Creery - HollyFrontier Corp.

And, Roger that's where – this is Tom – that's where the Centurion Pipeline comes in too, that's a huge advantage enabled to bifurcate those crudes and move them around within the system.

Roger D. Read - Wells Fargo Securities LLC

Absolutely. Good to own infrastructure. Thanks.

Operator

Your next question comes from the line of Ryan Todd with Deutsche Bank. Your line is open.

Ryan Todd - Deutsche Bank Securities, Inc.

Thanks. Good morning guys. Maybe a quick follow-up on those last comments. I mean, as you think about the flexibility in your system to segregate crudes and swinging between things, I mean how do you think about your positioning into the IMO switch in 2020? How it's likely to impact the way that you run your system and the kind of flexibility that you see to adjust to changing environment?

George J. Damiris - HollyFrontier Corp.

Yeah. Obviously, IMO is going to help us from a crude differential perspective with the Canadian heavy. I don't see it impacting the rate of Canadian heavy. We run because even at the recent or past differentials, we tend to run as much Canadian heavy as we can, but net-net, as Tom said in his prepared remarks, we run about 85,000 barrels a day, 90,000 barrels a day of Canadian heavy, and we'll run about those type of levels even in IMO 2020 scenario.

Ryan Todd - Deutsche Bank Securities, Inc.

Did it change much the type of crude slate on light side that you had looked around?

George J. Damiris - HollyFrontier Corp.

I don't think so.

Ryan Todd - Deutsche Bank Securities, Inc.

Okay. And then I guess switching to use of excess cash. Again, it was good to see a restart of the buyback. I appreciate the comments earlier on buyback versus dividend, but can you – you're generating a lot of excess cash. I mean, can you talk a little bit about how you think about priorities for the use of excess cash. I mean, how much cash that you'd like to keep on the balance sheet, what's the appropriate level there and how we should think about the excess?

Richard Lawrence Voliva - HollyFrontier Corp.

Sure Ryan. So, we can really start with keeping the balance sheet healthy, which we've laid out. We think given where we are today with debt levels and a credit facility, we feel like $500 million of cash on the balance sheet is a good number. And above that, we would consider it to be excess. So first it's maintaining the facilities; second would be to keep the dividend competitive; third would be to grow whether that's organic capital or whether that's acquisition. And then beyond that, and we fit that $500 million threshold, we'll look to buy back stock.

Ryan Todd - Deutsche Bank Securities, Inc.

Okay. And the pace of buyback that we saw during the first quarter, is there anything to read in terms of how we should think about that pace going forward? Is this just going to – as we look over the near-term, will that just change based on the level of cash flow?

Richard Lawrence Voliva - HollyFrontier Corp.

I think it was done on a reasonable pace, but it's definitely on a – it'll move around a little bit based on what else we have going on. Obviously, we've got a higher level of capital spend in, call it, last three quarters of the year and the first quarter of the year is also dependent on how cash flow is going here. We're all very optimistic about the rest of the year, but till the dollars are in the door, we're not going to spend them either.

George J. Damiris - HollyFrontier Corp.

Most of our (00:29:05) were back-half loaded.

Richard Lawrence Voliva - HollyFrontier Corp.

Correct.

Ryan Todd - Deutsche Bank Securities, Inc.

Okay. Thanks, Rich and George.

Richard Lawrence Voliva - HollyFrontier Corp.

Thanks, Ryan.

Operator

Your next question comes from the line of Paul Cheng from Barclays. Your line is open.

Paul Cheng - Barclays Capital, Inc.

Hey, guys. Good morning.

Richard Lawrence Voliva - HollyFrontier Corp.

(00:29:22)

Paul Cheng - Barclays Capital, Inc.

Two questions, if I may. In the first quarter George, should we assume your WCS run and the Permian run is the maximum that you can go (00:29:36) new pipeline as being installed or that has some additional room that you would be able to squeeze more?

George J. Damiris - HollyFrontier Corp.

Yeah. I think on the Permian, we did a really good job in the first quarter moving volume through our Centurion lease space. As Tom said in his prepared remarks, we ran, what, 68,000 barrels per day through that lease capacity. That's really good. So we might go squeeze a little bit more, but I would view that as being near the top of the end. And then I think similarly on the WCS, Tom mentioned 86,000 barrels per day of WCS run between Cheyenne and El Dorado. We might be able to squeeze a little bit more, but I wouldn't view it as being significantly more than that.

Paul Cheng - Barclays Capital, Inc.

Okay. If I'm looking at your margin capture, it seems like you have at least versus your own HollyFrontier, you bought them in the first quarter 2017. Since then that you've been steadily improve up and down, but on the rolling four-quarter basis, steadily improved. And then in the first quarter, you reach on a four-quarter basis, average about (00:30:52) 64% versus 56%. So yes a big improvement over the last several quarters. Is there any particular things that you can cite why the improvement has been so sharp, and that the recent performance, could you say that's a baseline to go forward or that you think those are not necessary sustainable?

Richard Lawrence Voliva - HollyFrontier Corp.

So Paul, this is Rich. There's a couple of things going on there; captures tend – just way the math works, capture tends to be better at higher cracks which they've definitely been better in the last, call it, six months than they were early 2017 and certainly in 2016.

Second, obviously our benchmark cracks are based on WTI at Cushing. So I think as much as crude differentials are widening, that's a big boon to capture rates per se. And then we've obviously had a pretty good discussion on that. And last there will RINs costs again that get back to that. There's a higher level RINs are roughly the same, but cracks are higher, capture is going to look better. So that's the other big factor that comes in here. So, to your point Paul, look, we've been running well, we expect to continue to run well at higher differentials, when I would expect to see higher capture rates going forward.

Paul Cheng - Barclays Capital, Inc.

Right. So I guess my question is that Rich, I understand everything that you just said earlier. So from operational standpoint, is there any one-off issue that make the operation to be better or that some benefit, whether your wholesale margin price realization that we should take into consideration may not be repeatable, I guess, those are my question.

Richard Lawrence Voliva - HollyFrontier Corp.

I don't really believe so, no Paul.

Paul Cheng - Barclays Capital, Inc.

Okay. Very good. Thank you.

Richard Lawrence Voliva - HollyFrontier Corp.

Thank you.

Operator

Your next question comes from the line of Neil Mehta with Goldman Sachs. Your line is open.

Neil Mehta - Goldman Sachs & Co. LLC

Hey, good morning guys. Congrats again on a good quarter here. Just want to start off on the Lubricants business, PCLI. And as the crude prices ticked up, we've been watching your index here, but how do you see higher crude price impacting the profitability of that business and can pricing increases keep up with input costs?

Richard Lawrence Voliva - HollyFrontier Corp.

Hey Neil. So this is where frankly having an integrated business is really helpful. Obviously we saw some compression on the rack back side, and to your point, we saw base oil kind of benchmark cracks compress in the first quarter some of that seasonality. Some of it was just where we are in the cycle in the group 3 side. We expect it to get better seasonally on in the second and third quarter. And what we've seen frankly is base oil postings have started moving up. On the flipside then, there is going to be a lag on the rack forward side going through and passing through pricing that's slower to move. But again, this is where we're optimistic around the business in general and having an integrated business model is really helpful.

Neil Mehta - Goldman Sachs & Co. LLC

All right. Thanks. And a follow-up is just on the share repurchases and dividend growth, again recognize that you want to see the cash come in first. But one of the constraints we've viewed historically about being overly aggressive for you guys around (00:34:10) growth has been the fact that you guys are BBB minus and want to protect that investment grade rating. Do you think there's the balance sheet capacity to become more aggressive around the buyback? And do you think the ratings agencies would give you the space to do that?

Richard Lawrence Voliva - HollyFrontier Corp.

Hey Neil. So I think again we laid out earlier kind of how we think about cash return and we view excess cash above, call it, $500 million in the balance sheet with today's debt loads and revolver capacity, $500 million is sort of our walk around number and beyond that is excess. Keeping in mind that we've got an eye to growing the business both organically and inorganically, so where we are on those kind of opportunities, will affect that pace and rate.

Neil Mehta - Goldman Sachs & Co. LLC

Okay. Thanks, guys.

Operator

Your next question comes from the line of Phil Gresh with JPMorgan. Your line is open.

Phil M. Gresh - JPMorgan Securities LLC

Yes. Hi. Good morning. Quick question on the cash flow in the quarter. Was there a working capital benefit?

Richard Lawrence Voliva - HollyFrontier Corp.

Yeah. Phil, there was a small working capital benefit in the quarter. Thank you. About $80 million or so, I was just looking for the number exactly.

Phil M. Gresh - JPMorgan Securities LLC

Okay. Got it. So, okay, I guess, if we look at the ending cash balance, Rich, about $780 million or so, I think you mentioned on the last quarter call that you would not expect to be building cash on the balance sheet unless perhaps there were M&A opportunities that would be in the line of sight, I think was kind of how you framed it relative to the $500 million of cash that you want on the balance sheet. So is the build in cash in the quarter because of some working capital timing or I guess this somewhat comes back to the buyback question. Just trying to understand how you think about managing the cash.

Richard Lawrence Voliva - HollyFrontier Corp.

Sure, Phil. So I think in this quarter, to your point, there's a little bit of working capital build which is good – or excuse me, benefit. As I mentioned earlier we've got just timing of CapEx for this year. We're a little bit backend loaded. So we got to keep that in mind. And the reality right is we can't predict necessarily a month or two out in our business given where crack spreads are. So, there's a lot of art to the speed of a buyback at the end of the day.

Phil M. Gresh - JPMorgan Securities LLC

Okay. And I guess maybe more broadly, obviously there was other news in the sector this week. We get a lot of questions from investors as to whether the sector more broadly might have an opportunity to consolidate and you guys have talked about looking for M&A opportunities, but really haven't been able to find anything. So do you think that the M&A environment in the sector has improved at all recently or is it more status quo from your perspective?

George J. Damiris - HollyFrontier Corp.

Yeah. I think the way we view it is pretty much status quo. I think the macro read that we have is consistent with what we shared at our Analyst Day that we think the industry is going to continue to consolidate. I think scale is important which is why we have our desire to double the size of each of our businesses in a disciplined manner, but as far as the set of opportunities that we're seeing in the market right now, they really aren't impacted by the announcement earlier this week.

Phil M. Gresh - JPMorgan Securities LLC

Okay. And just to clarify building cash on the balance sheet here you shouldn't necessarily be a read Rich that there are opportunities unfolding?

Richard Lawrence Voliva - HollyFrontier Corp.

Yes, Phil. That's correct.

Phil M. Gresh - JPMorgan Securities LLC

Okay. Thank you.

Richard Lawrence Voliva - HollyFrontier Corp.

Thanks.

Operator

Your next question comes from the line of Matthew Blair with Tudor, Pickering, Holt & Company. Your line is open.

Matthew Blair - Tudor, Pickering, Holt & Co. Securities, Inc.

Good morning, everyone.

Richard Lawrence Voliva - HollyFrontier Corp.

Good morning, Matthew.

Matthew Blair - Tudor, Pickering, Holt & Co. Securities, Inc.

I was hoping you could talk about black wax availability. It looks like Utah crude production is above 100,000 barrels a day for the first time since 2015. And on the screen at least we're seeing some increasing discounts on black wax barrels. Are you getting all the black wax volumes that you want? And are you realizing some of these larger discounts that we're seeing?

George J. Damiris - HollyFrontier Corp.

Yeah. We're very encouraged by what we're seeing and hearing out of the Uinta Basin to your specific question. We have been receiving all the wax crude that we need especially prior to our incident at Woods Cross, but I think the producers that are in that region now are very focused on that region. They've made some significant technology improvements in the way they're producing the oil. So we think as long as crude is above the $60 per barrel range, we're pleased with what we're seeing out of the production in that region.

Matthew Blair - Tudor, Pickering, Holt & Co. Securities, Inc.

Sounds good. And then I guess sticking in Refining, if I look at the spread here between your sales of produced refined products in your crude charge that spread seemed a little elevated in the quarter. Is that a good number (00:39:51) was it a higher maybe due to like selling inventory during the Tulsa turnaround?

George J. Damiris - HollyFrontier Corp.

Yeah. I think you just hit it. I don't think using this quarter is representative for our business, because as Rich said in his prepared remarks, we had built up inventory in advance of Tulsa turnaround that we've liquidated through the quarter.

Matthew Blair - Tudor, Pickering, Holt & Co. Securities, Inc.

Got it. Thank you.

George J. Damiris - HollyFrontier Corp.

Sure.

Operator

There are no further questions at this time. I turn the call back to the presenters.

Jared Harding - HollyFrontier Corp.

Thanks, everyone. We appreciate you taking the time to join us on today's call. If you have any follow-ups, as always reach out to Investor Relations. Otherwise, we look forward to sharing our second quarter results in August.

Operator

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.