HollyFrontier Corporation (HFC) CEO Michael Jennings on Q1 2020 Results - Earnings Call Transcript

HollyFrontier Corporation (HFC) Q1 2020 Earnings Conference Call May 7, 2020 8:30 AM ET

Company Participants

Craig Biery - Director, IR

Michael Jennings - President & CEO

Thomas Creery - President, Refining & Marketing.

Richard Voliva - EVP & CFO

Conference Call Participants

Brad Heffern - RBC Capital Markets

Paul Cheng - Scotiabank

Ryan Todd - Simmons

Teresa Chan - Barclays

Neil Mehta - Goldman Sachs

Chris Sighinolfi - Jefferies

Phil Gresh - JPMorgan

Matthew Blair - Tudor, Pickering, Holt

Jason Gabelman - Cowen & Company

Manav Gupta - Credit Suisse

Operator

Welcome to the HollyFrontier Corporation's First Quarter 2020 Conference Call and Webcast. Hosting the call today from HollyFrontier is Mike Jennings, President and Chief Executive Officer. He is joined by Richard Voliva, Executive Vice President and Chief Financial Officer; 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. [Operator Instructions]

Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Director, Investor Relations.

Craig, you may begin.

Craig Biery

Thank you, Paulie. Good morning everyone and welcome to HollyFrontier Corporation's First Quarter 2020 Earnings Call. This morning, we issued a press release announcing results for the quarter ending March 31, 2020. If you would like a copy of the press release, you may find one on our website at hollyfrontier.com.

Before we proceed with 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 security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures, please see the press release for reconciliations to GAAP financial measures.

Also please note any time-sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript.

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

Michael Jennings

Thanks, Craig. Good morning everyone. Before the team and I share our usual discussion of business updates and our quarterly results, let me first begin saying that I hope you and your families are staying healthy and safe during this unprecedented time. The COVID-19 pandemic has struck a hard blow on the economy, our company and our families. With this situation, given the potential to create distraction. I want to express my gratitude to our employees who have stepped up and delivered in a very safe and consistent and professional way during this period.

The impact of COVID-19 on the global macro economy has created unprecedented destruction of demand as well as lack of forward visibility for many of the transportation fuels, lubricants and specialty products and the associated transportation and terminal services that we provide. We expect a strong recovery of demand for all these essential products in the long run. There is little visibility on the timing for, or the extent of this recovery in the near term.

In response to the COVID-19 pandemic and with the health and safety of our employees as our top priority, we took several actions, including limiting on-site staff at all of our facilities to essential operational personnel only; implementing a work-from-home policy for certain employees and restricting travel unless approved by senior leadership. We will continue to monitor COVID-19 developments and the dynamic environment to properly address these policies going forward.

I'll now get into the details of our first quarter results. Today, we reported first quarter net loss attributable to HollyFrontier's shareholders of $305 million or a negative $1.88 per diluted share.

First quarter results reflect special items that collectively decreased net income by $391 million. Excluding these items, net income for the first quarter was $87 million or $0.53 per diluted share, versus adjusted net income of $93 million or $0.54 a share for the same period in 2019.

Adjusted EBITDA for the period was $269 million, a decrease of $13 million compared to the first quarter of 2019. This decrease in earnings was driven by lower product margins and crude differentials. The refining segment had adjusted EBITDA of $176 million, compared to $193 million for the first quarter of 2019. Consolidated refinery gross margin was $11.32 per produced barrel and 11% decrease compared to the same period last year.

Our Lubricants and Specialty Products business reported EBITDA of $32 million compared to $11 million in the first quarter of 2019. Rack Forward EBITDA was $77 million, representing a 16% EBITDA margin and our strongest quarter to date since the acquisitions of PCLI, Sonneborn and Red Giant Oil. During our strong first quarter -- despite our strong first quarter, we have withdrawn 2020 guidance for the Rack Forward business.

Within our industrial and passenger car related end markets, beginning late in the first quarter demand dropped substantially, while in our Personal Care end markets demand is running slightly below normal. We expect industrial end market demand to rebound with the broader economy and within the Rack Back portion, we expect base oil demand to rebound with the reopening of its primary transportation related end markets. Similar to our refining segment, we intend to match production to market demand.

Holly Energy Partners reported EBITDA of $64 million for the first quarter compared to $94 million in the first quarter of last year. The first quarter included non-recurring loss on early extinguishment of debt of $26 million related to HEP's previously outstanding 6% notes due 2024. In view of both the short-term impact from COVID-19, as well as our expectations for the future, HEP reduced its quarterly distribution to $0.35 per unit representing a new policy focused on funding all capital expenditures and distributions within cash flow, improving distributable cash flow coverage to 1.3 times or greater, and reducing leverage to 3.0 times to 3.5 times EBITDA.

As we continue to navigate the COVID-19 pandemic, our top priority remains the health and safety of our employees, communities and contractors. We are committed to delivering safe and reliable operations during this challenging environment. We believe our disciplined approach to capital allocation led by our strong balance sheet and liquidity position will help to position HollyFrontier for long-term success.

And now, I'll turn the call over to Tom for an update on our commercial operations.

Thomas Creery

Thanks, Mike. For the first quarter of 2020, we ran 436,000 barrels per day of crude oil, including 35% Permian and 22% WCS and black wax crude. Our laid-in crude cost was under WTI by $6.87 in the Rockies and $0.99 in the Mid-Con and over WTI by $2.04 in the Southwest. We ended the first quarter of 2020 with gasoline inventories remaining at high levels, and gas fracs at low levels in many of our markets. In the Magellan system we ended the quarter at 10.6 million barrels roughly 800,000 barrels higher than fourth quarter levels.

Diesel inventories ended the quarter at 6.5 million barrels, roughly flat with 2019 year-end inventories. First quarter 321 cracks in the Mid-Con were $10.66, $23.62 in the Southwest and $17.29 for the Rockies. In the Canadian heavy market first quarter differentials at Hardisty averaged at a price of $20.73. Recently, we have seen this differential compress to the $5 range due to overall flat crude price. Midland differentials ended the first quarter -- averaged for the first quarter at $0.85 over Cushing and currently for the June market that index is trading at $2.75 over Cushing.

Canadian heavy and sour runs averaged 76,000 barrels per day at our plants in the Mid-Con and Rocky regions. We refined approximately 153,000 barrels per day of Permian crude in our refining system composed of 107,000 barrels per day, at the Navajo complex and 46,000 barrels per day by the Centurion Pipeline at our El Dorado Refinery.

Our RINs expense in the quarter was $41 million. In response to the demand destruction associated with the COVID-19, we have reduced run rates at all our refineries by an average of 30%. Run rates have and will continue to be based on demand for products, as well as feedstock inventory plans. Crude oil availability has not been a problem so far, so we remain a little short and buy additional volumes of crude oil, as required.

On the demand side, we experienced low levels during the last couple of weeks in March and through the first part of April. Since then, we believe demand has picked up for gasoline in all of our markets. Jet fuel demand drops have been severe, and we continue to minimize the production of jet fuel. Diesel, has been the least affected up until this point, and we have benefited from spring, agriculture demand associated with the planting season.

For the second quarter of 2020, we expect to run between 300,000 barrels and 340,000 barrels per day of crude oil, based on the market demand for these transportation fuels. Currently, the primary determinants of demand are the various government orders and guidance restricting and discouraging most forms of travel. We intend to match refinery production with demand and adjust with the market.

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

Richard Voliva

Thank you Tom. As Mike mentioned, the first quarter included a few unusual items. Pre-tax earnings were negatively impacted by a lower of cost or market charge of $561 million. HollyFrontier's $15 million pro rata share on Energy Partners loss, it's early extinguishment of debt and Sonneborn integration costs of approximately $1 million. A table of these items can be found in our press release. Cash flow from operations was $190 million in the first quarter, including turnaround spending of $39 million and $65 million of working capital costs. HollyFrontier's standalone capital expenditures totaled $65 million for the quarter.

In the second quarter, we expect to consume between $100 million and $300 million of working capital, based primarily on the impact of falling crude and product prices as well as reducing refinery throughput to match demand. These mechanics are not unusual, but they may be larger than a typical quarter, and we expect to recover this working capital as commodity prices and demand for product normalizes.

During the first quarter, we declared and paid a $0.35 dividend per share totaling $57 million. We did not repurchase any shares in the first quarter and do not intend to repurchase shares until market conditions and visibility improve. As of March 31, 2020, our total liquidity stood over $2.2 billion comprised of a standalone cash balance of $890 million, along with our undrawn $1.35 billion unsecured credit facility.

As of March 31, we have $1 billion of standalone debt outstanding. The debt to cap ratio of 14% and the net debt to cap ratio of 1%. Our earliest standalone debt maturity is, our $1 billion of senior notes due in 2026, which are rated investment grade by S&P, Moody's, and Fitch. Interest expense was $22.6 million for the three months ended March 31, 2020 compared to $36.6 million for the three months, the prior period. This decrease was primarily due to a $9.8 million unrealized gain in our refinery catalyst financing program.

HEP distributions received by HollyFrontier during the first quarter totaled $38 million; HFC owned $59.6 million HEP limited partner units representing 57% of HEP's LP units at a market value of approximately $825 million as of last night's close. We have reduced the range of our 2020 consolidated capital budget to $525 million to $625 million from the previous $623 million to $729 million. And we remain committed to our two major strategic investments in 2020; the Artesia renewable diesel unit and our Cushing Connect joint venture.

We now expect to spend between $222 million and $251 million for standalone capital at HollyFrontier Refining and Marketing a $130 million to $150 million in renewables $30 million to $45 million in HollyFrontier Lubes and Specialties and $85 million to $110 million for turnaround in catalysts. At HEP our capital budget remains unchanged at $59 million to $60 million. We are continuing to evaluate additional ways to reduce cash costs, including operating and SG&A expenses, as well as incremental capital spending reductions. We will continue to monitor COVID-19 developments and make further changes as circumstances dictate.

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

Question-and-Answer Session

Operator

The floor is now opened for questions. [Operator Instructions] Thank you. Our first question is coming from the line of Brad Heffern with RBC. Sir, you may state your question.

Michael Jennings

Brad, are you on mute? Sorry, we're not hearing you. Paulie, I'm not sure Brad is on mute or if we've connected him correctly or. Yes, hey Paulie, can we go ahead and try our next question and see if we can get Brad requeued?

Operator

Okay. And Brad your line is open.

Brad Heffern

Hey, can you hear me now?

Michael Jennings

Yes sir.

Brad Heffern

Okay, there we go. I was hoping we could start on LSP. So, in the first quarter the Rack Back results looked a little weaker than the cracks and then the Rack Forward results look stronger. So, can you walk through any dynamics there. And then additionally, I appreciate the comments you gave on demand going forward. Do you have any thoughts on margin at this point? Is the Rack Forward holding in relatively strongly then I guess, how does the Rack Back look, just given the low flat price dynamics?

Michael Jennings

Sure, Brad. So, there's a few things in there. In the first quarter, we saw very good demand and good sales growth, frankly, in the Rack Forward side of the business. On the Rack Back side, obviously as the bottom fell out of the crude market that pulled feedstock prices down with it, and it widened benchmark margins. The reality was, in the -- probably the last month of the quarter, there was no actual buyer on the other side of those margins. There was no demand, it sort of evaporated and that's continued into April.

So, the margins look good on paper, they weren't real. It's probably the simplest way to say that. As we've gone into the second quarter, obviously we've retracted our guidance on Rack Forward. If you look at our Rack Forward business, it's basically 20% is consumer products or consumer staples and that demand is held in very well. The other 80% is really industrial or passenger car end markets, and that demand has fallen off as you'd expect and that we have very, very little visibility on when it's going to come back, that's going to be very economy driven and hence we've pulled our guidance.

On the base oil side of the business in the second quarter, similar, right. Most of those products end up in the car or a truck and as miles driven have gone down, demand has gone down. That will rebound as people start driving again. But, in the long run that will be fine. But the path back from here is hard to call.

Brad Heffern

Okay, thanks for all that color. And then, I guess switching over to refining. We're seeing a lot of sudden announcements at this point I'm curious if you could talk about the impact of that on the system, and particularly in the Rockies? Thanks.

Thomas Creery

Hey Brad, it's Tom. Yes, we've seen some of those shut-ins, as well. As you are more than aware, we buy a lot of crude on 30 day contracts. So, as we move through this month. We really haven't experienced a lot of interruptions in supply. It's hard to say what's going to happen going forward. We've tended to mitigate some of this by carrying a little bit higher inventory of crude oil at various locations and tankage, that's got the benefit of supplying us with some contango profits, but it also gives us a little bit of comfort if one of our producers does come up short, then we can use those barrels to supplement runs at the refinery, if they are economic.

Brad Heffern

Okay. Thanks, everyone.

Michael Jennings

Thanks, Brad.

Operator

And your next question comes from the line of Paul Cheng with Scotiabank.

Paul Cheng

Hey guys, good morning. Couple of questions. My -- how the COVID-19, I know that I mean why now, everyone focused short-term or liquidity preservation of the balance sheet. But if we look past at some point that it will pass. And after this event, does this in any shape or form change your view, how you're going to operate in terms of your operating parameter, as well as the [indiscernible] in order.

Michael Jennings

Yes. Paul, I think your question is one of how we operate longer term, how we recover into increasing demand. Yes, certainly...

Paul Cheng

I think my question is that once that we recover, if we're looking at the way how you run your company, will that change before and after COVID-19. So, let's say if we're looking at the -- what will be the comfortable cash balance that you want to keep on the balance sheet. What is your nippage [ph] ratio, how are you going to run your company and how you view the M&A market? Just shape or form that this event has changed your longer-term way to look at the business?

Michael Jennings

Yes, I got the question now Paul, being balance sheet-centric and capital allocation-centric. The answer is not really. We have for a long time run with a fairly conservative balance sheet, recognizing the commodity business and the working capital and capital intensive business that we're in. We believe that's the right strategy, in terms of the way we manage our leverage. Looking forward, clearly in the near term, we're going to be limiting capital investment into the refineries, one of those is a practical driver and just being able to get work done in the plants during this environment, and the other is a question mark in terms of the recovering demand and how quickly that will come.

So, I think you'll probably see a little less capital, in terms of growth capital going into our plants. But, as it pertains to the balance sheet that we maintain, the liquidity reserves, capital allocation and then, obviously part of that is return of cash to shareholders. I haven't seen anything through this that changes our philosophy. Execution in the near term is clearly going to be one of conserving cash, but longer term, I think we've built this business to be robust through cycles. This is obviously a very dramatic cycle and then, I won't tell you that we anticipated it, but we do run with a conservative balance sheet, because of the nature of our business.

Paul Cheng

My second question is that, you have one of the strongest balance sheet your net debt is very small. And there's a number of assets that is now that being put on the market, and one would argue that the best time to buy is when everyone is distressed. So, from your standpoint will M&A be at the front of the consideration for the [indiscernible] asset or that preservation of partnership is going to override that?

Michael Jennings

Yes, I'm afraid I'm going to have to answer both Paul. We obviously are much more interested in assets when the price is lower, but we're going to be careful about it because this is a time when capital is dear, and so the return parameters are going to have to be that much better for us, but to say that we've excluded focus on acquisitions would be inaccurate. It is just a high standard.

Paul Cheng

Okay. Thank you.

Michael Jennings

Thank you.

Operator

And your next question comes from Ryan Todd with Simmons.

Ryan Todd

Thanks, good morning everybody. Maybe, if I could follow-up a little bit on that -- some of your comments on flexibility around the capital side. I mean, could you talk about additional flexibility that you might have in the 2020 budget, if necessary, and thoughts and implications beyond that for 2021, I believe is expected to be a higher turnaround through the next year to do deferrals from this year approaching to next year, and how much flexibility should we think over the next 12 months to 18 months, as we think through your budget?

Richard Voliva

Good morning, Ryan. So, I think realistically, we probably got some more wiggle room in the 2020 budget, and we'll keep looking at that. It's not stuff we would prefer to cut, but we're going to adjust to the circumstances, it's just the reality of it. As you look in 2021, yes we look -- we have a big turnaround year coming next year. This -- now is the time you're planning these and evaluating, so the team's done a really good job of continuing to look and see what might be deferrable and we'll continue to work that over -- really the next six months.

It's a delicate balance of trying to preserve cash and you want to take care of the assets, which is obviously important to us. So, nonetheless, 2021 will be a big turnaround year for us. How big? We'll see if we can manage around that.

Ryan Todd

Good. Thanks. And then maybe, can you talk in your -- I appreciate the comments on distillate holding in, and gasoline showing a little bit of a balance here. I mean, can you talk about, how you see the various supply demand drivers right now for gasoline versus diesel in your various -- in your various markets and how you see those playing out over the next couple of quarters?

Michael Jennings

Yes. Sure, Ryan. I guess, we're a little bit more bullish on gasoline than we are on the distillate side of the barrel for the following reasons is, as the stay in place gets lifted, you see more people driving around in their cars. We certainly see that in Dallas and it's helping spur gasoline demand. To that effect, we have probably seen and most of our area is probably at 10% to 15% increase in gasoline demand in the areas that we operate in, excluding the Denver region which is a bit of a special place at this point in time.

On the distillate side, we're showing a little concern on the distillate as inventories continued to grow, and we believe that's primarily not due to demand destruction, but it's due to the jet being repurposed -- re-refining being put back into the diesel pool. So, as you well know, there's not a lot of airplanes in the skies these days, but there is a lot of jet being ending up in the diesel pool. So, Diesel pool. So we're a little more -- like I said, we're a little bit more bullish on gasoline. We should see increases though, as these restrictions are lifted in diesel, and the next little while is going to be very important, and it might be a little more slow climb to get back to normality on the diesel barrels at this point in time, given what we know.

I mean, the one thing about diesel that will be interesting to watch relative to jet fuel is as crude rates start to come up, the diesel hydrotreating capacity isn't going to grow with it, in terms of being able to handle more kerosene and turn that jet back into road diesel. Our company produces very little jet fuel so we think we're pretty well positioned. But, there may be growing barrels of jet and tankage as things go forward, if people try to increase crude rates to meet gasoline demand.

Ryan Todd

Great, thanks. I appreciate that.

Operator

And your next question comes from the line of Teresa Chen with Barclays.

Teresa Chen

Hi, thank you for taking my questions. Following up on the discussion of gasoline demand, when you were talking about the 10% to 15% recent increase -- so, in terms of the fall-off from demand like call it last year, what was like the depth of the trough and where are we now to that?

Michael Jennings

Yes, that's a tough. It's really hard to say Theresa, because every market is a little bit different. I think in the Mid-Con, it was a little bit less than some of the other areas. I think the industry did a very good job of keeping that supply demand in balance. So, we didn't see as much erosion there. I did mention the Denver market; in Denver, we saw a pretty precipitous drop in demand there, it's starting to come back now. But that precipitous drop ended up with extremely low prices for finished gasoline at the Rack in Denver. The other markets weren't so bad as well, and the Woods Cross market in Salt Lake City has been pretty well and it continues to be that way in terms of demand.

So, although it's a smaller market, it doesn't seem to be as harder hit. So, very diverse and it's kind of hard to put a number straight across the board in saying, how much we've lost.

Thomas Creery

But, the geography we serve tends to be opening more quickly than some of the coastal geographies. So, we see that as a positive, but it's a tough call in terms of the pace or otherwise the trajectory.

Teresa Chen

Got it. And then, on the feedstock side, so there has been a lot of discussion about the benefits of contango to a refinery and given your exposure to WTI linked crude, can you provide some sensitivities around that or what kind of benefit you might expect to recognize in second quarter, relates to this sector alone?

Michael Jennings

Yes sure. As you know, we make money off contango two ways, I guess we're buying prompt crude that's lower than future price. So, by the time it gets into the refinery, and the curve staying the same we get a higher price that way, plus it gives us the ability to actually, as I mentioned before storing barrels and roll them on the NYMEX and capture a profit that way. That's always a nice little bonus as compared to when we are in backwardation [indiscernible]. So, it does help with our crack spreads going forward on the domestic barrels that do have that pricing component in them.

Teresa Chen

Thank you.

Operator

And your next question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta

Good morning. Good morning, team. First question was on the refining side, a little bit better capture than we expected in the Rockies in the first quarter. Just anything -- quick thoughts on the gross margins there, and anything unusual that you would call out and thoughts on how much to carry forward?

Michael Jennings

Yes. Neil, on capture rate, we did, we did benefit by, in the first quarter with having at WCS differential, fairly wide. As we mentioned, that certainly helped us in terms of capture rate, and as I mentioned Salt Lake was a very good market, very high gasoline and premium differentials coupled with a very strong distillate market which was helped -- influenced as well by refining problems on the West Coast. So, whatever we moved into Las Vegas was giving us a pretty good price too. And you know -- versus the fourth quarter, we ran without a lot of maintenance and that helps our capture rate as well.

Neil Mehta

Okay, that's helpful. Follow-up is for you Mike, you've re-established yourself in the role here for a couple of months now, relative to our last check in a few months ago. Do you want to just give us a layout, as you see it from a strategic perspective as a returning CEO what you think is working, where are there opportunities for improvement, and in layout out where you are on your strategic roadmap?

Michael Jennings

Yes, fair enough. What I would say is that the broader strategy isn't different than what I articulated on our year-end call. Obviously, we've had a bit of a bump in the road called COVID, and we have had to go into crisis management mode, quite frankly. What I would comment on that is that the -- most important dimensions that I identified on the previous call were that of refinery reliability, safety, environmental performance and good use of capital. During this period of COVID and of essential personnel only and such, our plant performance has been just spectacular. And I think it's demonstrated an employee focus, a management focus on the fundamentals and on the things that are really most important to operating successfully. So, I'm really pleased about that. We've gotten better traction, more quickly than I would have expected. On some of the broader strategic front in terms of where is the company going and how quickly -- I think right now we're responding to the challenge of COVID, of meeting demand as it comes back to us of reducing capital spending, reducing operating spending because of the obvious.

So, those are what I'd call crisis responses and things that we need to do in the very near term, but longer term in terms of having a refining company, lubricants, transportation that is very effective in the marketplace, generating high returns on the capital we choose to invest and operating well and leanly, those priorities still very much exist. As I spoke previously, our head is not in the sand with respect to the growth of our business and acquisitions. I think the market is fairly illiquid right now, but there are assets out that will be sold within probably the next 12 months. So, I hope that addresses your question. Obviously, there's a lot here, and much of it induced by the COVID crisis. But most importantly, the fundamentals of our business and day-to-day operations have been quite good and safe during that period.

Neil Mehta

Thanks, Mike.

Operator

And your next question comes from the line of Chris Sighinolfi with Jefferies.

Chris Sighinolfi

Hey, good morning everyone, thanks for the time and color, appreciate it. Mike, I was just curious, can you -- obviously appreciate all the color about what you've done at the refining side to manage lower throughput, manage fixed cost absorption, manage the cash flows of the business. I was just curious, You know obviously, I feel like I know less about the operations of the base oil business and LSP in general. Is the approach there similar or is there something fundamentally different about running lower operating rates at the base oil facilities and lubricants facilities versus the refining operations?

Michael Jennings

Yes. So, the base oil and lubricants facilities are largely hydrotreating operations, they're going to be demand driven in terms of throughput, just as refining is. The ability to turn down those assets is similar -- you'll often hear in the refining space 60%, 65% turn down rates before things get operationally difficult. Those numbers might be more toward 50% in lubricants hydrotreating facilities. But the key is in terms of our focus operationally, safety obviously and strategically is on the market side. We need to be effective in the marketplace and those things in terms of growing the Rack Forward business and the margins in that business are the most important strategic priorities to deliver in this business.

Chris Sighinolfi

Okay, that's very helpful. That's exactly what I was looking for. And then I guess maybe to take a follow on from Paul's earlier question about the learning's of this process and things you might do differently. I'm just curious, a lot of people seem to be focused on sort of certainly a recovery in activity, recovery in demand. But, I guess recognizing that may not be a linear progression that we may go into sort of a secondary or tertiary wave of what we've recently faced. Are there things that you've learned from sort of the initial COVID response that we might see you guys do differently, if we get back up towards more of a normal operating rate and then face a secondary situation where we have to shut things down aggressively again?

Michael Jennings

Yes, I think Tom kind of spoke to it implicitly, just a bit earlier. But, under buying crude with the notion that were linked to Cushing in many instances and otherwise to storage opportunities -- having the flexibility to meet demand and work into demand without having to dispose barrels in distress, that's key in terms of volumetric management. The focus at the plants, I think has been obvious, we're going to need to get contractors back in to do maintenance, but the learning's are -- some that we're still digesting quite frankly, but others particularly how well we have operated at the site level during this period.

Yes, we're going to gain from that, and try to extrapolate that into the future, so that's probably the most important thing and the management of our inventories, and our production around market signals. It is also going to be really important, if we have kind of an erratic or otherwise volatile recovery of demand.

Chris Sighinolfi

Okay, perfect. One final one from me and perhaps for Rich. On the HEP side, totally understand what was done with the distribution there and I understand it from an HEP perspective. I was curious, if you could talk about it from an HFC perspective, I don't know the right way to think about it, but when I think about distributions received from the MLP, underpinning historically 70% plus of the HFC dividend now, it's obviously about half that number. Can you just talk about how you thought about that cash flow stream and what maybe the plans are or at once you reach the leverage targets that you've stipulated for the HEP vehicle?

Thomas Creery

Sure, Chris. So, if you're in HFC issues and that situation, you're balancing exactly what you're highlighting, the cash flow to HFC stand-alone against the reality of consolidated leverage and trying to manage the balance sheet from HFC's perspective. On balance, in the current environment, we think HFC should be happy about this decision, so lead to deleveraging at HEP and by extension in HFC. Look, to your point yes, it was cash flow that we missed and we'll manage accordingly in the meantime. It just goes into the broader points, Mike, and we've all been trying to make about, trying to be very careful with our spend right now.

Chris Sighinolfi

Of course, I appreciate that. Okay. All right. Well, thanks for your time again and be safe.

Thomas Creery

Thanks, Chris.

Operator

[Operator Instructions] And your next question comes from the line of Phil Gresh with JPMorgan.

Phil Gresh

Hey. good morning. I had a follow-up question on the lubes. Rich, you're talking about how things played out in March versus earlier in the quarter and I recognize that it's too difficult to have visibility to the full year, but maybe just a little bit more color on the actual financial performance in March and April, just to help us think through, at least what 2Q might be looking like, whether it's volume or EBITDA and just maybe any other color around actions on the cost side and lubes that can partially offset any of this, just so we can have a better understanding. Thanks.

Richard Voliva

Yes, so the data I've got that's handy here is really on volume that speaks to what you're talking about. On the industrial side of our business, for the month of April, we're looking at sales that are down 50% to 60% year-over-year, and that's on the volume side. On the consumer-oriented side, if you will, primarily the legacy Sonneborn businesses, you're talking about down 5% to 10%, so very different perspective. Base oils was going to look a lot more like the 40% to 60% in the finished side.

Phil Gresh

Okay.

Richard Voliva

And then to that point, so we just don't have visibility, more than a couple of weeks in front of our face right now. So, calling that arc is impossible.

Phil Gresh

Sure. I guess just more like in March and April, where you're seeing negative EBITDA across the entire lubes business or any kind of metric, we could at least start with?

Richard Voliva

Yes Phil, I'm not going to go into monthly financials.

Phil Gresh

Okay, fair enough. My broader question would just be about -- how do you think differentials are going to play out here? You made some opening remarks about Cushing, Midlands and WCS, but with production now just starting to roll over here pretty hard with the shut-ins. Do you have a strong view of where differentials might go in the second half of the year?

Michael Jennings

That's a tough call too. You know, we're seeing some pretty dramatic changes, not only in frac price, but differentials and I think to put it in perspective, I think earlier this week we saw WCS and Cushing almost trading at parity with domestic sweet, which doesn't make a lot of sense. But based on the availability and market conditions, it happens. So, going forward, I would say we need time to normalize in the markets, and there is going to be a lot of jumping around, but they will normalize and get back -- in the long term, we still probably see a Midland barrel trading over a Cushing barrel as exports start to come out of the Gulf Coast again that's how we truly believe. And then we see -- when WCS going back to a transportation basis and quality to get it into the Cushing market or the Gulf Coast.

So, that's going to take some time and it's going to be a slow process, but it's going to happen and I suspect probably by the third and fourth quarter, you will see some return to that normalcy, and we'll get a lot of these knee jerks out of the market.

Phil Gresh

And just on the Brent WTI spread, the last time crude production rolled over Brent TI went to near zero, back in 2016. So, I guess I was just wondering if you think that might be possible again until crude production starts to rebound?

Thomas Creery

Yes, it's hard to tell that. Brent is a physical market and WTI is a financial market, and that's one of the big things that we saw during this COVID-19, the OPEC situation. There has been a huge de-link between a physical and a pay per barrel. So, comparing it to prior years, I don't know if it's going to be the same case going forward. When you look at the forward curve, it's still getting back to historical numbers on Brent TI to around that $4 mark. And so, that's where we would expect it to be and it's there now.

Phil Gresh

Thanks a lot.

Michael Jennings

Thanks, Phil.

Operator

And your next question comes from Matthew Blair with TPH.

Matthew Blair

Hey, good morning, Mike, Tom and Rich, glad to hear you guys are safe and sound here. I think it was Tom mentioned that refiners are moving jet into the diesel pool, what year do you expect jet demands return to 2019 levels, and does this impact your thinking on the renewable diesel project?

Thomas Creery

There again, tough question. I don't think we're going to see jet demand rebound until probably sometime next year to 2019 levels. I just can't imagine that it's going to happen. This year, I don't think people are very anxious to get on an airplane, and when they do, I don't know what kind of shape the airlines are going to be in or they're going to have retired some flights, and they're not running as many options as they did going forward. So jet is a real concern going forward. Mike did say as diesel demand goes up and crude rate goes up, DHT capacity will be taken away or just run diesel off the crude. So, that's going to push more jet back into the market, so that's -- the airlines have got a tough go ahead of them as far as I'm concerned and that -- level of those is personal and not the corporate viewpoint.

Michael Jennings

The RD project. I don't think that swings with jet fuel demand, honestly it's a more unique market than that and really is geared toward a low carbon fuel standard market, and jurisdictions that are putting that in place, California being the obvious. But, the lack of jet demand, doesn't really in our minds interplay with our RD business.

Matthew Blair

Got it. Okay, and then ethanol, RINs have moved a little higher here, I think they are currently around $0.37 in Q1. They averaged $0.24. How does this big drop in gasoline demand impact your ability to meet these RFS obligations?

Michael Jennings

Right. So, for 2020 our obligation has been conveyed to us as a percentage of gasoline sales that's kind of how that works the EPA figures -- a volumetric obligation translates that into a percentage. So, the fact that gasoline sales are lower, doesn't correlate to a higher percentage blending value --obligation that's fixed for the 2020 year. As to the RIN cost or the RIN value, with gasoline prices low, and ethanol prices relatively high, it frankly costs you more money to blend that ethanol into the barrel, and I think that's really what the RIN price reflects today.

Matthew Blair

Very helpful. Thanks.

Thomas Creery

Thanks, Matthew.

Operator

And we do have other questions caller, please go ahead, stating your first and last name and your company name.

Unidentified Analyst

Hello. Hey, this is Kalei [ph] from Bank of America Merrill Lynch. My first question is on operations. So, the cracks have improved here off the lows pretty appreciably. I am wondering, how you guys are planning to operate into an improved demand environment, understanding that those cracks are because of the lower runs, and I guess what's on my mind is when you look at the DOE data, it shows very low gasoline yield as a percentage of production. So, I'm wondering if the first move would be to normalize gasoline yields rather than to increase crude runs?

Michael Jennings

Yes. When we have a driver in terms of margin to improve gasoline yields, we do that and we can do that relatively quickly. That swing, as you probably know is a percentage point or two or maybe three at the higher side of total throughput or total produced volumes. Beyond that, we're going to be opportunistic, but also pretty measured about the gasoline demand that's out there, so that we don't swamp the markets -- our nearby markets with our own barrels.

As you know, we serve geography that tends to have fairly low population density and kind of smaller markets, if you will. So, we just need to be disciplined and balanced about how aggressively we produce into the growth. Now, with that said, gasoline demand has been very inelastic for the last, what two months? Right. We've had imposed restrictions placed upon us, I think that flips to elastic demand, the stuff is cheap and it's one of the things that people can do fairly inexpensively to get out frankly, and enjoy life a bit. So, I think you're going to have the cooped up scenario, as we look into June in particular and then people will be consuming a lot more gasoline at what are very attractive prices.

Unidentified Analyst

Thanks for taking my question.

Michael Jennings

Thanks, Kalei.

Operator

And we do have another audio question -- caller, please go ahead. State your first and last name and your company name.

Jason Gabelman

Hello. Thanks. This is Jason Gabelman from Cowen. I guess I had a couple of questions, first on the competitive position of the company as a whole. I mean you guys have obviously benefited the past few years, particularly from wide inland crude differentials that seems to be going away, I think you guys kind of said you expect $4 Brent to TI dip. So, how do you view the competitive footprint of the business in light of changing inland crude differentials, maybe in a very structural way and what are you guys doing to kind of make sure you stay competitive relative to peers?

Michael Jennings

Well, as a starting point, I don't think we're willing to roll over and say that crude differentials are [ph] dead certainly during this current period, a very low demand and shut-ins. There are days on which every barrel price is the same at Cushing as Tom was suggesting that WCS was pricing with sweet crude that's unnatural and won't continue into the future, in our view. But, with lower flat price I think your point is well made that crude differentials tend to be more narrow with lower nominal crude prices. So, what do we do as a business? So, obviously competitively, we've got to work on cost structure, throughput utilization and capital allocation. So, we have levers available to us. I won't tell you that they're anywhere near as easy as buying cheaper crude, but those are the things that we're working on, and we're certainly not going to roll over, because of the loss of a few dollars of crude differential.

Jason Gabelman

Got it. Okay, thanks. And then my follow-up is just on some of these inland niche markets that you serve. Are you seeing any margin erosion or may be higher inventory build in those markets, because you have players from outside of those markets moving product into the primary markets you serve specifically I'm thinking about some of these Gulf Coast guys, where maybe exports have fallen off and maybe instead of reducing runs they're moving -- they are just flipping product from the export market into more US inland markets, any color on that you're seeing there would be great? Thanks.

Thomas Creery

Yes, that's -- Jason, that's a typical occurrence that we always watch, sometimes they are visible from the Gulf Coast and there's a variety of pipelines coming up, so we're paying attention to that all the time. So, we see a little bit of that happening, when the arb is there and when the arb isn't, we're not seeing it as a dumping ground per se in the group anyways. The other markets, it's a little harder to get product in there on an instantaneous basis, either you have to have pipeline space or you have to wait 30 days to get it there. So, there is a lead/lag effect in a lot of those other markets, that's hard to take advantage of, and as you say, put additional or excess barrels into those markets.

Michael Jennings

And the arb generally flows through this process as well. So, the pressure in terms of the price drivers really aren't there. Our markets are largely trading at a discount to the screen, which means that if you have Gulf Coast barrels and ability to go up to Colonial Pipeline, you'll probably elect that over some of these inland markets.

Jason Gabelman

Great, thanks. That's really helpful insight.

Michael Jennings

Thanks, Jason.

Operator

Thank you. We do have another audio question caller, please go ahead, stating your first and last name and your company name.

Manav Gupta

Hey, can you hear me?

Michael Jennings

Yes.

Manav Gupta

Hey, this is Manav. I never thought I would get in. A quick question on the Rockies part, the capture came in much stronger than expected. Can you help us understand what were the factors that drove stronger capture versus some of your own benchmarks?

Michael Jennings

Sure. The main factors, as we've previously stated was probably volumetric in the Rockies, we had a very good crude run rate in the first quarter versus the fourth quarter of 2019, and we also did see some benefit from crude pricing through WCS differentials of Hardisty.

Manav Gupta

Okay, the second question is you're very close to the entire Cushing situation. So, in terms of how are you seeing the storage build up over there, and what's the capacity left over there, and is there a chance, we max out storage in Cushing?

Thomas Creery

Yes. We see that there is a little bit of room left in Cushing. What I mean, a little bit -- I'm not talking a lot here probably less than 10 million barrels. The flows in the Cushing have probably been lower in the past couple of weeks that -- than what we thought was going to happen, earlier in the month of April. So, I think the general consensus is, is that Cushing is not a big danger spot or is high a danger spot as it was previously in getting coal and not being a repository recruit. That however could change, very rapidly given another factors in the marketplace. But, at this point in time, from a HollyFrontier standpoint we're not worried about Cushing filling up as much as we were two weeks or three weeks ago.

Manav Gupta

And the last question is, you lowered your CapEx about 15%, but you didn't actually postpone any major projects. I'm just trying to understand how this was achieved, lowering the CapEx by 15% without actually changing anything on the major projects side?

Richard Voliva

So Manav, if you look at our capital spend rate, less than $200 million of what was originally -- call it a $625 million to $725 million budget was "major projects". There are a lot of projects in there of $2 million, $5 million, $10 million, $15 million that can be canceled or deferred and that's where the vast majority of these dollars came from.

Manav Gupta

Perfect. Thank you so much for taking my questions.

Operator

You do have a follow-up question from the line of Chris Sighinolfi with Jefferies.

Chris Sighinolfi

I just have one quick one Rich, I missed it in your prepared remarks, but the offset item in your interest expense in the first quarter. Could you just walk me through that again -- the driver -- what it was and maybe just a bit of explanation?

Richard Voliva

Sure, Chris. So that's unrealized. So, we do finance some of our refinery catalysts, really platinum and you can go ahead and pull platinum price up on the screen. Platinum dropped precipitously, really in March in April, so we took an unrealized gain on that financing which runs through interest on the income statement.

Chris Sighinolfi

Is that something Rich, that's going to reverse in subsequent periods, and you're going to reflect a higher than sort of average run rate interest expense in some future period?

Richard Voliva

Depending on your platinum price call, yes. So, if you think platinum is going up. Yes. If you think it's going to continue to go down, no.

Chris Sighinolfi

Okay. And can you remind me the amount of it?

Richard Voliva

It was right around $10 million.

Chris Sighinolfi

Okay. I appreciate that, and all the color this morning.

Richard Voliva

Thanks, absolutely.

Operator

And at this time, there are no further audio questions sir. And I can turn the conference back over to you for your closing remarks.

Craig Biery

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

Operator

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