Holly Energy Partners' (HEP) CEO Mike Jennings on Q2 2021 Results - Earnings Call Transcript

Holly Energy Partners, L.P. (NYSE:HEP) Q2 2021 Earnings Conference Call August 3, 2021 4:00 PM ET

Company Participants

Craig Biery – Vice President of Investor Relations

Mike Jennings – Chief Executive Officer and President of HollyFrontier and Chief Executive Officer of Holly Energy Partners

Rich Voliva – Executive Vice President and Chief Financial Officer of HollyFrontier and President of Holly Energy Partners

Tim Go – Executive Vice President and Chief Operating Officer of HollyFrontier

Tom Creery – President of HollyFrontier Renewables

Bruce Lerner – President, Lubricants & Specialties, HollyFrontier Corporation

Conference Call Participants

Ryan Todd – Piper Sandler

Theresa Chen – Barclays

Paul Cheng – Scotiabank

Paul Sankey – Sankey Research

Phil Gresh – JPMorgan

Manav Gupta – Credit Suisse

Spiro Dounis – Credit Suisse

Kalei Akamine – Bank of America

Michael Blum – Wells Fargo

Jeremy Tonet – JPMorgan

Jason Gabelman – Cowen

Roger Read – Wells Fargo

Carly Davenport – Goldman Sachs

Operator

Good morning, and welcome to HollyFrontier’s and Holly Energy Partners’ Investor Conference Call. At this time, all participants have been placed in listen-only mode. The call will open for your questions following the presentation. As a reminder, this conference call is being recorded and the press release and slide presentation regarding today’s announcements are available on the Investor Relations section of the HollyFrontier and Holly Energy Partners’ website. The archived replay can also be accessed on both websites following the call.

I will now turn the call over to your host, Craig Biery, Vice President of Investor Relations. Mr. Biery, you may now begin.

Craig Biery

Thank you, Lauren. Good morning, everyone, and thank you for joining us. On the call with me today are Mike Jennings, Chief Executive Officer and President of HollyFrontier and Chief Executive Officer of Holly Energy Partners; and Rich Voliva, Executive Vice President and Chief Financial Officer of HollyFrontier and President of Holly Energy Partners. We are also joined by Tim Go, Executive Vice President and Chief Operating Officer of HollyFrontier; and Tom Creery, President of HollyFrontier Renewables.

Before we proceed with remarks, please note the Safe Harbor disclosure statement in today’s press release. In summary, if such statements are 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 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 earnings 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.

Mike Jennings

Thanks, Craig, and good morning, everyone. We are thrilled to share the news this morning that HollyFrontier Corporation and Holly Energy Partners have entered into definitive agreements with the Sinclair companies. In light of that, we’ll be doing things a little differently on the call today. Rich and I will first walk through the transactions and the expected benefits they will create for HollyFrontier, Holly Energy Partners and our shareholders. After that, Rich will briefly review HFC and HEP’s results for the quarter before we turn it over for questions.

Starting on Slide 3, to put it simply, the acquisition of Sinclair’s assets will be transformative for both HollyFrontier and Holly Energy Partners. It diversifies and scales HollyFrontier’s portfolio with the addition of Sinclair’s iconic brand and integrated distribution network; its renewable diesel business, which was the first mover in the space; and its two complementary refineries in the Rocky Mountain region. And we expect it will strengthen our financial position, increasing our earnings, cash flow and free cash flow within the first year, positioning us to increase returns to shareholders while we deepen our commitment to ESG and sustainability.

For HEP, too, this transformative transaction provides strategic and financial benefits. With the addition of Sinclair’s integrated network of pipelines and storage facilities, HEP will have the scale and incremental earnings power to capture new growth opportunities and focus on increasing returns to unitholders.

Turning to Slide 4. This transaction follows a decade of growth since the merger of Holly and Frontier. We spent a greater part of that period, expanding our Refining business, building our Renewables business, establishing and growing our Lubricants business and benefiting from our interest in Holly Energy Partners. Since 2011, we’ve returned more than $3.6 billion in cash through special and regular dividends and an additional $2.3 billion through share repurchases.

Similar to our 2011 merger, we believe these transactions with Sinclair represent an inflection point for our company. We know the holding family well and have deep respect for the brand and the business they and generations of Sinclair employees have built over the last century plus. We’re pleased this family will retain a significant stake in our combined companies, and we’re incredibly excited about beginning this next chapter as HF Sinclair.

I’ll turn now to a brief overview of the details of the transaction on Slide 5. First, the HollyFrontier transaction. HollyFrontier is acquiring Sinclair’s branded marketing business and all commercial activities related thereto, which build upon an iconic brand with exceptional customer loyalty; also Sinclair’s renewable diesel business and Sinclair’s two Rocky Mountain-based refineries. Sinclair’s hospitality ranching and upstream oil and gas businesses are not part of this transaction. HollyFrontier will create a new publicly-traded holding company named HF Sinclair Corporation.

Sinclair shareholders will receive approximately 60.2 million shares in the newly-formed HF Sinclair, equal to 26.75% of the company. HollyFrontier’s existing shareholders will own 73.25% of the equity or approximately 164.9 million shares of the common stock of HF Sinclair. As a result, each outstanding share of HollyFrontier common stock will convert into one share of HF Sinclair common stock at the closing.

The all-stock transaction has a value of $1.8 billion based on HollyFrontier’s closing stock price on July 30, 2021, and Sinclair comes with no debt. Upon closing, HollyFrontier’s existing senior management team will operate the combined company, and Sinclair has been granted the right to nominate two Directors to the HF Sinclair Board of Directors at the closing. The transaction is expected to close in mid-2022.

And now, I’ll turn the call to Rich.

Rich Voliva

Thank you, Mike. Good morning, everybody. Turning to Slide 6. HEP will acquire Sinclair’s integrated crude and refined product pipeline and terminal assets comprised of 1,200 miles of pipeline, eight product terminals and two crude terminals with 4.5 million barrels of operated storage. We will also acquire Sinclair’s interest in three midstream joint ventures for crude gathering, product offtake, including Powder Flats Pipeline, Pioneer Pipeline and the remaining interest in the UNEV pipeline, of which we already own a significant stake.

Critically, this transaction provides additional scale and earnings power to HEP, is expected to add $70 million to $80 million of annual EBITDA. Over 75% of the revenue on these assets will be supported by long-term minimum volume commitments with HF Sinclair. Under the terms of the HEP transaction, Sinclair shareholders will receive 21 million HEP common units and $325 million of cash for a total consideration of $758 million based on HEP’s closing price on July 30, 2021. On closing of the acquisition, HEP’s existing senior management team will operate the combined company, and Sinclair has been granted the right to nominate one Director for the HEP Board at closing. The HEP transaction is also expected to close in mid-2022.

Mike Jennings

Thanks, Rich. So turning to Slide 7. HF Sinclair will be well positioned for the next decade and beyond. We expect to generate shareholder value through strong free cash flow, increased earnings per share as well as realizing synergies, all of which underpin a commitment to deliver enhanced cash returns to shareholders and will fuel our continued growth.

Moving to Slide 8. HollyFrontier and Sinclair share a common philosophy on commitments to environmental stewardship, sustainability and strong corporate governance that will endure and be strengthened within HF Sinclair. The transaction will increase the scale of our renewable diesel business. This is a critical step forward as we diversify our business for a low carbon future.

Our cultures also share a deep commitment to safety, which is important to us as we strive every day to put our people first, do right by our communities and manage risk. We also take very seriously the responsibility for supplying the exceptional products that provide our customers with mobility and quality of life. And at the governance level, our Board is equipped with the right mix of skills and experience to oversee the company and ensure we are delivering for our shareholders and our other stakeholders.

Turning to Slide 9. You can clearly see how we are creating scale in our geographies, diversifying our business and building an integrated business with a strong marketing presence. With that in mind, I want to take some time walking through why these individual businesses are a complementary fit within our existing business and discuss some of the compelling strategic benefits of this acquisition.

On Slide 10, I’ll begin with the marketing branded business. By adding a branded wholesale business, the combined company will have a significant base business and the opportunity to grow this iconic brand across a range of HF Sinclair products and geographies through a consistent sales channel. The Sinclair dinosaur, known as DINO, is one of the industry’s most recognized symbols and will represent the brand for HF Sinclair. We’re thrilled to bring on board Sinclair’s marketing team who will help us to manage and grow a footprint of over 300 distributors and 1,500 branded locations across 30 states with over 2 billion gallons of annual branded fuel sales.

The marketing business provides significant renewable identification or RIN generation through Sinclair’s integrated product distribution network. The addition of the branded marketing business also provides a consistent sales channel for produced fuels with stable margins as well as additional earnings from brand licensing and credit card programs.

Turning now to renewables on Slide 11. Sinclair was the first mover in this space. Its renewable diesel unit colocated at its Sinclair, Wyoming refinery has been operational since 2018 and was recently expanded to produce 10,000 barrels per day. Sinclair is also currently in the process of constructing a pretreatment unit, allowing for further feedstock advantage and flexibility. Feedstock flexibility generates higher low carbon fuel standard value through lower carbon intensity while also mitigating single feedstock risk.

The pretreatment unit is expected to be completed in mid-2022. The combined renewable diesel business will have the scale and size to support logistical, procurement, feedstock and operational synergies and will enhance our ESG profile as we help to facilitate a clean energy transition.

Together, we will be a leading producer of renewable diesel in the U.S. with three renewable diesel production facilities with an anticipated production of approximately 380 million gallons annually. Beyond the facilities, the Sinclair team brings significant renewables expertise that we intend to leverage to capture further synergy opportunities. In short, this is a key part of the transaction. With Sinclair, we are standing in a fast-growing segment, we’ll have additional size and scale to support logistical, procurement, feedstock and operational synergies.

Turning to the refining business on Slide 12, we were adding two refineries that are complimentary to HollyFrontier’s existing refinery network, expanding the company’s combined footprint in the Rocky Mountain region. Together, the Sinclair gas refineries add almost 125,000 barrels per day of operating capacity, an approximately 5.2 million barrels of storage.

The Sinclair Refinery distributes products by pipelines to Denver and Salt Lake City, and the Casper Refinery delivers products across the Eastern Rocky Mountain region and South Dakota. Like HollyFrontier’s existing refineries, the Sinclair refineries are feedstock advantage given their Northern tier access to Canadian and Rocky Mountain crudes. Each refinery has the complexity to convert discounted crude oils into a high percentage of gasoline, diesel and other high value refined products.

Looking at our combined refining network, we will feature seven complex refineries in the Mid-Continent, Southwest, Rocky Mountain and Pacific Northwest regions with a combined crude oil processing capacity of 678,000 barrels per day. With these additions that combined company has an opportunity to create significant value to increase reliability and an improved cost structure. Rich?

Rich Voliva

Okay. Turning to Slide 13, Holly Energy Partners acquisition of Sinclair’s expansive network of crude and product assets provides an integrated system with connectivity to key crude hubs in the Rockies, including Casper and Guernsey. Together, the combined company will operate 4,600 miles of pipeline in 19 terminals with over 20 million barrels of storage capacity. HEP will also acquire stakes in three joint ventures, serving crude productions in the Powder River Basin and product distribution for Wyoming through Utah and Nevada.

Consistent with HEPs existing business, these assets will be supported by long-term minimum volume commitments, representing 75% of the revenue generated. We expect this will translate into $70 million to $80 million annually from the acquisition of EBITDA and grow HEP to $400 million to $450 million in annual EBITDA.

So let’s turn to the financial aspects of these acquisitions. We expect to generate $100 million of run rate synergies within the first two years post-closing through a combination of commercial improvements, operating expense reductions and SG&A savings. On the commercial side, we expect to increase gross margin by $40 million through multiple opportunities, such as the sale of legacy HollyFrontier Refining product through the branded wholesale business, improvements in renewable diesel sales values and feedstock costs.

From an operating expense perspective, we anticipate another $40 million in cost savings, primarily through the optimization of the combined companies renewable diesel logistics and improvements from our procurement activities. Finally, we also expect $20 million in traditional SG&A reductions associated with corporate savings. In addition to these run rate synergies, we expect to generate another $100 million to $200 million in one-time savings during the first two years from working capital benefits.

Turning to Slide 15, transaction is expected to be accretive for the company’s earnings, cash flow and free cash flow within the first year. In a mid-cycle environment, total EBITDA for each of Sinclair is expected to be over $2.5 billion per year and we anticipate after tax free cash flow of approximately $1.5 billion per year.

HollyFrontier’s credit profile will be enhanced as part of the combined company through reduced leverage, increased scale and diversification of our businesses. Consistent with our history, we expect to maintain a strong balance sheet and investment grade credit rating. Fueled by significant free cash flow generation, the combined company will be able to support a balanced approach to capital investment and cash return to shareholders.

To that end, Slide 16 lays out HollyFrontier’s renewed commitments to returning capital to our shareholders. In the near-term as previously announced, we intend to reinstate the regular quarterly dividend of $0.35 per share no later on the second quarter of 2022. In the medium-term, we intend to return $1 billion of cash to our shareholders through regular dividends and share repurchases by the first quarter of 2023. For the next 18 months, this represented cash return from [indiscernible]

And returns increase from there. For 2023 and beyond, we intend to implement the target payout ratio, comprise both of dividends and share repurchase of 50% of adjusted net income. Bottom line, we are committing to substantial capital returns as we realize the benefits of our growth initiatives in renewables and the acquisitions of the Puget Sound Refinery and Sinclair Oil.

Turning to Slide 17 and HEP’s. The sustainable free cash flow we generated by this transaction will support our deleveraging strategy while allowing for increasing unitholder returns. In the near-term, we intend to reduce leverage and maintain our quarterly distribution of $1.35 per unit. Inclusive of the Sinclair acquisition in 2023, we expect to reach a leverage ratio of 3.5 times and increased distributions with a target coverage ratio of 1.5 times and maintain the option to repurchase units.

Longer term in 2024 and beyond, our goal is to maintain leverage below 3 times and increase the distribution with a target coverage ratio of 1.3 times, again, with the option to repurchase units. We expect that these increases to the quarterly distribution and optional unit repurchases will be funded through excess free cash flow. Mike?

Mike Jennings

Yes. Thanks. Looking ahead on Slide 18, we’ve presented a road map to completion. The transaction has been approved unanimously by the Boards of Directors of both companies and is subject to certain closing conditions, including receipt of regulatory clearance. We expect to close in mid-2022.

And so I will now ask Rich to walk through the second quarter financial results for both HollyFrontier and Holly Energy Partners.

Rich Voliva

Okay. Thank you, Mike. Details of our earnings are available in this morning’s press releases. HollyFrontier reported net income attributable to stockholders of $169 million, or $1.03 per diluted share and adjusted net income of $143 million or $0.87 per diluted share for the second quarter. Reported consolidated EBITDA was $444 million and adjusted EBITDA was $335 million.

Our strong second quarter results were driven by sequential improvements in Refining margins in both the West and Mid-Continent regions, as well as strengthening based on our margins, which are visible and the results from the Rack Back portion of HollyFrontier lubes and specialties, as well as in the Tulsa refinery.

For the second quarter of 2021, net cash provided by operations totaled $428 million. And at June 30, our cash balance stood at approximately $1.4 billion, representing a build of approximately $205 million in the quarter. For the third quarter of 2021, in our refining business, we anticipate running between 380,000 and 400,000 barrels per day approval.

At HEP, we reported second quarter net income attributable to unitholders of $56 million, or $0.53 per unit and reported EBITDA of $88 million, all supported by continued improvement in crude and refined product demand within the markets we serve. Distributable cash flow was $67 million for the quarter, representing a 2% increase versus the same period last year. HEP announced a quarterly distribution of $0.35 per unit to be paid on August 13 to unitholders of record on August 2.

And with that, I’ll hand it back to Mike for some closing thoughts.

Mike Jennings

Okay. Thanks for those details, Rich. The second quarter was financially and operationally very solid. Ending on Slide 19, as we communicated today, we believe this transaction will drive value for all of our stakeholders. With more diversified and integrated revenues and with increased scale, the transaction is a win.

Shareholders will benefit from the free cash flow, synergies and accretion, which will enable a balanced approach to investment and cash return to shareholders. For customers and partners, we will extend the reach of our products and network of pipelines and storage facilities. And for employees, this transaction adds a strong and talented workforce across all of our business segments. I’m confident that together, we will capitalize on many the opportunities this combination with Sinclair will provide.

And with that, Lauren, we’re going to open the line for questions. Thank you.

Question-and-Answer Session

Operator

The floor is now open for questions. [Operator Instructions] Our first question comes from Ryan Todd from Piper Sandler. Ryan, your line is now open.

Ryan Todd

Great. Thanks, good morning and congratulations guys. Maybe could you just talk from a, I guess, a couple of high-level strategic things on the deal. I mean after the timing of the Anacortes deal earlier this year, can you maybe talk about the timing of what’s now multiple kind of transformative transactions in a single year? What – how you view that the environment has kind of driven, whether it’s more willing sellers or more of an opportunistic outlook from you all? And how does this, particularly the Sinclair deal, could position you differently for an uncertain refining environment going forward versus how you view yourselves previously?

Mike Jennings

Absolutely, Ryan. Thanks for being on the call. Listen, our company has taken on a major strategic shift in the past 18 months as we’ve worked to add renewable fuels to our mix and protect our feedstock economics through pretreatment, redouble our efforts to improve our reliability and asset utilization at refineries, increase our asset quality and add a high-value products market through investment in Puget Sound and now combining with Sinclair to add a really exceptional downstream branded marketing channel, increase production of renewables both on a relative and absolute basis and increase our presence in the Rocky Mountain states, all very intentional while also adding a logistics network that knits this together.

This is exceptionally transformative for us, and I think it differentiates us from many other downstream businesses in the business that we have built here in response to the environment that we’re now in. So we think that HF Sinclair is going to be a great place to work and will support the forward-leaning capital return strategy that we’ve laid out alongside this deal. As it pertains to your comment on the market and on asset availability, what I’d say is this isn’t really responsive to willing sellers, but rather our desire to build the business in a manner that we think is going to be durable for the future.

Ryan Todd

Great. Thanks, Mike. Maybe a follow-up on cash returns. I mean you’ve laid out kind of a near-term, midterm and long-term strategy for capital allocation. Can you maybe talk a little bit about what metrics is going to drive the reinstatement of the dividend and the buyback? You mentioned the reinstatement of the dividend no later than the second quarter of 2022. What would allow you – is there an environment that would allow you to reinstate that earlier? Depending on the environment, is there a risk that it could slip further? And maybe the same kind of questions on the $1 billion of cash return and the outlook for the buyback. Is there kind of an underlying cash flow in 2022 to support that expected buyback? And how could that swing either way?

Rich Voliva

Hey, Ryan. Good morning. This is Rich. So with respect to the dividend, again, it will be reinstated no later than the second quarter of 2022. And we’re optimistic depending on the markets, to your point, that we can come back earlier than that. With respect to the buyback, absolutely, look, we, as you can tell, expect to add a lot of cash flow in the next 6 to 12 months between renewables, Puget Sound and then Sinclair.

And at the same time, obviously, our capital expenditures will be falling dramatically in 2022 versus 2021. So free cash flow generation here is going to go up dramatically, and we intend to return that to the shareholder.

Ryan Todd

Thanks, Rich.

Operator

Our next question comes from Theresa Chen from Barclays. Theresa, your line is now open.

Theresa Chen

Good morning. Thank you for taking my questions. Maybe if I can just follow up on the last question that Ryan asked about the macro environment that underlies your assumptions to get to not just the target EBITDA and free cash flow, but also the capital allocation target. What has to happen in terms of broad-based benchmark cracks, differentials and the capture? What are your assumptions that underlie your expectation that you’ll be able to achieve these targets?

Rich Voliva

Theresa, good morning. It’s Rich. They’re not – I would not call them terribly aspirational. Our internal estimates are not very dissimilar from consensus. You’re probably a touch lower. So really, we just need the macro environment not to get worse. And again, we expect to generate a large amount of free cash under that scenario. If it gets better than that, it will be even better. But really, we’re not assuming some sort of dramatic recovery or anything exotic in order to get to these numbers.

Mike Jennings

Theresa, I think if you take the second quarter as an example, our business isn’t in a very healthy state right now. Really, all aspects of it are working well. We were looking forward to renewable diesel, as you know, but the base business is solid despite what has been a punch in the gut from COVID, where we’ve recovered pretty well, and it doesn’t take a big step forward in order to be able to meet these returns targets that we’re laying out.

Theresa Chen

Got it. And just in terms of the two refineries to be acquired. In terms of the breakdown between WCS, Rocky sweet and other crudes, can you provide a percentage range of each?

Mike Jennings

Yes. The Casper refinery runs principally on Rocky sweet, and that’s 30,000, 50,000 barrels a day. Sinclair, otherwise, we’re all in the refinery, is more in the neighborhood of 30,000 to 40,000 barrels a day of Canadian heavy with the remainder being sweet crudes.

Theresa Chen

Thank you very much.

Operator

Our next question comes from Paul Cheng from Scotiabank. Paul, your line is now open.

Paul Cheng

Thank you. Hey, guys, good morning.

Mike Jennings

Good morning, Paul.

Paul Cheng

Just wondering, Rich, can you provide – you gave a mid-cycle, midterm expectation for refining, marketing and renewable. Can you tell us, maybe give some things, that how those mid-cycle number compared to the actual result in the first half of this year or 2019? Is there any comparison that we can use?

Rich Voliva

So Paul, I think we’ve laid this out in some of our historic IR materials similar assumptions. But really, we’re looking at Gulf Coast cracks on a 3:1 basis of roughly $10 a barrel, historic cleaning…

Paul Cheng

But the Gulf Coast doesn’t work in here, right?

Rich Voliva

Pardon, Paul?

Paul Cheng

I say the Gulf Coast doesn’t really matter in here. It really is more on the Rocky Mountain.

Rich Voliva

Right. So you’re going to trade at premiums to the Gulf Coast, but we do believe that the Gulf Coast sets the market at the end of the day, the marginal barrel. Obviously, we have crude advantages across our fleet that we assume historic mid-cycle numbers on. And those product differentials that I mentioned, Paul, we assume those to be similar to history. Does that help?

Paul Cheng

How about on the marketing and the renewable?

Rich Voliva

So with respect to the marketing, Paul, this business looks very similar to what you see in publicly-traded companies that are out there now that do wholesale. You typically see a few pennies a gallon of wholesale margin. There’s some money to be made in credit cards and brand – license branding as well, very stable over time. With respect to renewables, I think to the broader question, obviously, things are moving around dramatically, and Mike made the point about pretreatment. What we see today really is that the economics are in your ability to process discounted feeds, not so much in your ability to take high-grade soybean oil and turn it into renewable diesel. We expect that, that’ll move around over time, and that’s why we’re consistent on having that kind of feedstock flexibility at the end of the day.

Paul Cheng

Okay. And second question that, can you share with us that how much is the RIN the marketing business generates?

Rich Voliva

So basically, Paul, Sinclair is long RINs. They are more or less balanced on the D6 basis and long D4 RINs via the renewable fuels business that they’ve got. So pro forma transaction…

Paul Cheng

Can you tell us how much is actually that in January?

Rich Voliva

Well, I think probably the better answer here, Paul, is pro forma, the transaction, HollyFrontier or HF Sinclair I should say, excuse me, will basically be balanced.

Paul Cheng

And that’s including your own two renewable – your two renewable diesel plant, right, when you say you’re balanced.

Rich Voliva

Yes.

Paul Cheng

And when you say balanced, let’s say, you’re balanced on a total RIN or your balanced, I mean individually, on D6 and individually in D4 and D5?

Rich Voliva

We’ll be balanced on our total RINs, Paul.

Paul Cheng

And how about D6, specifically?

Rich Voliva

So directionally, we’ll be short D6 and long D4 and imbalanced in aggregate.

Paul Cheng

Okay. Thank you.

Rich Voliva

Thanks, Paul.

Operator

We now have a question from Paul Sankey from Sankey Research. Paul, your line is now open.

Paul Sankey

Good morning, all. Just if I could continue on the EBITDA question. So given that you’re saying that a mid-cycle would be about $1 billion of refining EBITDA for HFC, based on the report that you just made and what you said about the $10 crack on the Gulf Coast, it feels like we’re only about 20% below where we would be on your mid-cycle assumption. Can you just sort of run through some of the elements of that EBITDA and how much distance there is to travel if you want before we get to this $2.6 billion that you’ve talked about for the combined company? Thanks.

Rich Voliva

So Paul, I think, look, we flagged $1 billion of refining EBITDA for legacy HollyFrontier, right? In this quarter, we printed about $210 million. So to your point, we’re just a little offset. I think directionally, if we just get a little more improvement in jet fuel market, that probably bridges us home.

Paul Sankey

Yes. I was really thinking more about the Sinclair breakdown.

Rich Voliva

Well, it’s going to be similar, Paul. I think at the end of the day, where you add these together, these are all apples-to-apples assumptions across Puget Sound legacy, HollyFrontier and Sinclair.

Paul Sankey

Yes, okay. I guess – go ahead.

Mike Jennings

I was going to say what you’re seeing in the last couple of years in the Rockies is really ahead of mid-cycle earnings and margins. And so to the extent that continues, that puts wind in the sales.

Paul Sankey

Great. Okay. And then a tough one for you guys is that you’ve had some operational criticisms over the years, and you’ve had some issues with your renewable diesel project with – as far as you sit behind time and over budget. What conviction can you give us that it’s the right thing for you to be taking on a much bigger footprint in the way that you are and that you’re going to be able to do the number one most important thing, which is run the assets well and efficiently? And I know that’s a tough question to answer, but I have to ask it. Thanks.

Tim Go

Paul, it’s a tough question. This is Tim. Let me try to start with this and see if others want to chime in. But we’ve been focused on the last 1.5 years really, a year and two really trying to build our operating capability, grow it. We’ve been implementing operating discipline programs. We have an operational excellence management system that we’ve implemented. We’ve got a [indiscernible] team management process that we’ve laid out.

We’ve been bringing in some additional resources to help shore up our existing capability both on the turnaround side, on the process safety side, mechanical integrity, overall operations leadership. We spent the last few years trying to strengthen our internal capability to improve not just the refining operations, which I think you’re starting to see some of the fruits of that labor here even just in this last quarterly earnings update.

But it’s going to serve as the foundation for us to be able to build on with Puget Sound and with the Sinclair assets. One thing I will tell you is we’ve got familiarity with operating in the Rockies. We understand the crude markets. We understand the product markets. We understand the operating environment for that. We have plenty of time, we believe, to plan and execute this integration.

Keep in mind the Puget Sound transaction is scheduled or anticipated to close here in the fourth quarter, which will give us plenty of time to continue to plan and integrate the acquisition of Sinclair, which we’re anticipating to close in mid-2022. So we think we have time, and we think we have the resources to be able to build and integrate this transaction.

Tom Creery

Paul, this is Tom Creery – sorry, go ahead.

Paul Sankey

You go ahead.

Tom Creery

I was just going to say, this is Tom Creery in terms of renewables. Just a quick update on where we are since we last talked at the last earnings call. Nothing has really changed. We’re still on track in terms of both cost and schedule. All the long lead items have been ordered as have been the critical path items. Their schedule still looks good at this point in time. We’re heavily into the construction phase at all three locations, that being the two RDU plants as well as the PTU in Artesia. Things are going well. No manpower shortages or anything else. And like I say, we are on track as last reported.

Mike Jennings

Yes, Paul, I would add that, I mean our execution you highlight is absolutely critical, and we’ve got it. With respect to renewable diesel, we took on a big project, particularly during a time when it’s sometimes hard to get a pizza delivered. But we’re nearing the end of it. And we’re really excited about these projects, and we think we can bring them on from here according to the schedule and budget that Tom’s laid out. So we feel like we’re in a good spot there.

Paul Sankey

Yes, and it feels like you can point to this result – this morning’s result and say things are operating well at the HollyFrontier level. Is that a statement you’d make? Is everything running the way you would want it right now?

Tom Creery

Yes.

Paul Sankey

Okay, great. Thanks guys.

Operator

We now have a question from Phil Gresh from JPMorgan. Phil, your line is now open.

Phil Gresh

Yes. Good morning. You were talking on the Sinclair side that the refining EBITDA, you think, is operating. I think you said ahead of mid-cycle. I was wondering how you would characterize the performance in the renewable diesel business right now, given that it does not have a pretreatment unit currently? And then if you could kind of walk through some of your assumptions to get to the $150 million of EBITDA there that we could think about as we try to model this.

Rich Voliva

Hey, Phil. It’s Rich. Good morning. So given they just completed an expansion of their plant, given that they do not have a pretreatment unit at the moment, it’s been a little tough for the last 6 to 12 months. But again, they’re doing the right thing here and investing in a pretreatment unit that we expect to be up and running before close. So I think that’s essential to the assumptions we’ve made here. Going forward, we’re expecting D4 RINs north of $1 is what we’ve assumed. Blender’s tax credit, we now expect will probably be extended somewhat longer than 2022. But we do expect it to get phased out over time and then continue to expect LCFS credits to be higher in the long run.

Phil Gresh

And do you have a rough feedstock mix for post PTU?

Rich Voliva

There will be probably roughly 50-50, maybe a little higher on low CI feed versus high-grade bean oil.

Phil Gresh

Okay. And so the $400 million of renewables EBITDA, are you saying that does or does not include some amount of blender’s tax credit?

Rich Voliva

It does include some amount of blender’s tax credit, yes.

Phil Gresh

Okay, okay. And then, Rich, just on – I’m just kind of like running free cash flow per share numbers of stand-alone Holly versus the pro forma, and it looks to be a little bit dilutive on free cash flow per share. So I guess I’m just curious how you think about the valuation. Obviously, Sinclair has a different mix than stand-alone Holly. But just in general, how do you think about the valuation paid? And if you agree with my comment?

Rich Voliva

So now, Phil, actually, look, we expect, frankly, across all metrics, earnings per share, cash flow per share and free cash flow per share that will be accretive in the first year, call it, to the tune of mid-single digits, and that will increase dramatically over time as those synergies come in. So now we’re expecting some substantial accretion across all the kind of conventional metrics you would look at.

Phil Gresh

Okay. All right, thank you.

Rich Voliva

Yes.

Operator

Our next question comes from Manav Gupta from Credit Suisse. Manav, your line is now open.

Manav Gupta

Hey, Rich and Mike. So if we just look at the 2Q earnings, right, you are out-earning your bigger competitors and more diversified competitors. And so if you think about it only on a PE basis, there’s a massive dislocation in your stock price, right? I mean your stock is 30. Your bigger peers are 60 and 70. And so things are actually working out very nicely for you. And from that perspective, you’re about to take all this transformation, Puget Sound, renewable diesel and Sinclair.

Again, if everything works out, your EBITDA could be $1.8 billion next year, but there is an execution risk here. There’s a lot of things, which you’ll have to make sure go right. And I’m just trying to understand, why push for so much change when you are actually doing so well on a stand-alone basis?

Mike Jennings

Yes. It’s a good conservative point, Manav. What I would say is that the good quarter doesn’t comprise a good strategy. And looking at the business environment that we see and foresee, we believe that the downstream integration into branded wholesale, controlling more of the value chain and serving those customers on a branded basis really is going to help us out, both with RFS compliance and with gross margin generation.

So we think that it’s a smart move. We also see the renewable diesel business as an important addition as we try to expand in that and have the opportunity to optimize and gain synergies across the two sets of plants. And finally, adding Rocky Mountains exposure to us given our experience in that geography is a smart and high earnings thing to do. So I guess we could leave well enough alone, but we’re trying to build this for the 5 and 10 years forward, not for the next two quarters.

Manav Gupta

That’s fair one. My second question is you did see some CapEx escalation in renewable diesel last quarter. And again, it’s still the same, but I’m trying to understand, was there a design change made somewhere during the process that would allow you to use a lot more lower-quality soya bean oil versus the RBD? And did that make that – was that one of the reasons your CapEx actually went up because your guidance is one of the cases, that should be pretty positive because the lower quality soya bean oil is trading like $0.20 discounts to RBD? So was that also a reason your CapEx actually went up on the renewable diesel side last quarter?

Tom Creery

Manav, you bring up an excellent point. It’s Tom Creery. Yes, we did make some scope changes as we went along to accommodate the low CI feedstocks, predominantly Tallo at the Cheyenne Refinery, repurposed refinery. That is going to do a lot for us in terms of feedstock flexibility, and it also works well with our PTU at Artesia as well. So it reduces our dependence upon RBD or refined soybean oil. And we think it’s going to play out well and give us a great amount of flexibility as we move forward that we’ll be able to run a variety of feedstocks to get the maximum value up.

Manav Gupta

Congrats on the great quarter and look forward to the deal. Thank you.

Mike Jennings

Thank you, Manav.

Tom Creery

Thanks, Manav.

Operator

We now have the question from Spiro Dounis from Credit Suisse. Spiro, your line is now open.

Spiro Dounis

Thank you. Good morning, guys. First question, just on the strategy for HEP. Can you talk a little bit more about some of the integration and synergy opportunities for these assets at the HEP level? And curious if that $70 million to $80 million EBITDA contemplates any synergies? And if you could, Rich, just maybe expand on why these assets provide more opportunities for growth versus some of your legacy assets there? Thanks.

Rich Voliva

Sure, Spiro. Good morning. Look, it’s a very complementary set of assets, both in the sense of culture and the way we operate, being based around steady refinery customers as well as in a sense of a cultural fit. So we’re really excited to welcome some new colleagues here. I think to your point about growth, look, I think we’re going to have achieve some real scale at a corporate level and in certain markets where we’ll be able to – I think we’ll find organic opportunities that we’ve not had historically, particularly on the crude gathering side. So we’re really looking forward to be able to grow going forward here. To your question, it does assume a little bit of synergy, a few million dollars a year. It’s not going to be a huge number on the HEP side.

Spiro Dounis

Got it. That’s a couple, Rich. Thanks. Second question just around the capital allocation outlook once again for HEP. The reduction in that coverage ratio seems to imply a pretty healthy kind of double-digit distribution growth. I just want to make sure I didn’t miss anything in sort of reading that right. And if you could just maybe talk about the mechanics of reaching that goal. And then I guess, how much, if any, Puget Sound asset drop downs are contemplated in that outlook, if at all?

Rich Voliva

Yes. So you are correct in where your math is getting you on a growth rate basis. I think we will probably phase into that. I don’t think it’ll be a step change. There is not any Puget Sound embedded in that. It’s probably worth highlighting here on the Sinclair transportation side, maintenance capital here is very low. It’s consistent with what you see at HEP today in the $5 million-ish range. So that EBITDA is going to flow right through the cash flow per share and distributable cash flow.

Spiro Dounis

Perfect. That’s all I had. Thanks, guys. Congrats.

Rich Voliva

Thanks, Spiro.

Mike Jennings

Thanks, Spiro.

Operator

We now have a question from Doug Legate from Bank of America. Doug, your line is now open.

Kalei Akamine

Hey, good morning, guys. This is Kalei on for Doug. Just a couple of questions from me. So firstly, I don’t think anyone would argue the strategic logic of building scale in the Rockies. But wondering if you guys see any FTC issues on the concentration of assets.

Mike Jennings

No, we expect to have this transaction reviewed thoroughly by the FTC. We believe that it’s a good transaction for our customers, marketers, employees and the communities we serve, and we don’t see it as reducing competition. So that’s kind of where we are at this point.

Kalei Akamine

Got it. Second question, just can you remind us on the breakdown of the synergy? And I’m wondering how conservative you’re being given the concentration of the purchasing power and the operation overlap. It’s fairly robust.

Rich Voliva

Sure. Let me give you a little more detail there, Kalei. So again, it is about $40 million on the gross margin side. By way of example, we see plenty of opportunity in the renewable side, sourcing lower-cost feeds, using our scale in that space as well as the ability to consolidate transportation, really, which is obviously a big deal in the renewable space. In the operating expense side, again, we’ll see some opportunities in renewables. There’s also a tremendous opportunity here in procurement. Our procurement organization has delivered a lot of value to us in the last five years, and we’ll be able to realize some real opportunities with Sinclair from that group. And again, as mentioned, G&A, we’re comfortable that we can obtain $20 million there. So these feel like very comfortable run rate synergies to us.

Kalei Akamine

Got it. And last one, if I can just sneak it in. Are there any tax considerations from net operating launches for asset in Sinclair?

Rich Voliva

No.

Kalei Akamine

Okay. Thank you.

Operator

Our next question comes from Michael Blum from Wells Fargo. Michael, your line is now open.

Michael Blum

Thank you. Thanks for taking my questions. Just two follow-ups on HEP. One, is there any growth or maintenance CapEx associated with the acquired assets from Sinclair? That’s the first question.

Rich Voliva

So Michael, I think there’s going to be roughly $5 million a year of maintenance capital in these assets. There is the opportunity for growth capital, particularly with the Power Flats joint venture, but that’s going to be driven by rig count and well growth in that area.

Michael Blum

Okay, great. And then just to clarify on the sequence of distribution growth and leverage. Is the plan going to be to first get to 3 times leverage and then start pushing towards from 1.5 to 1.3 on the coverage? Or do you anticipate that those things will sort of happen simultaneously?

Rich Voliva

So I think these things will happen simultaneously, Michael. We want to work our way into this. Again, I don’t expect a stair step change here.

Michael Blum

Great. Thank you very much.

Rich Voliva

Thank you.

Operator

We now have a question from Jeremy Tonet from JPMorgan. Jeremy, please go ahead.

Jeremy Tonet

Hi, good morning.

Rich Voliva

Good morning, Jeremy.

Mike Jennings

Good morning.

Jeremy Tonet

Just wanted to follow up on the – from the HEP perspective here with regards to accretion because the transaction terms on EBITDA level looks fairly similar maybe to where HEP trade that, and so just wondering if you could dive in a little bit more on what goes into the accretion at the HEP level in this transaction and maybe timing of achieving that accretion.

Rich Voliva

Yes, Jeremy. So directionally, you’re correct. So we’ll be using marginally more leverage at the HEP side, which helps. And I think consistent with what I mentioned earlier, we’re talking about very low maintenance capital in these assets. So this will really flow through on a cash flow per share basis.

Jeremy Tonet

Got it. So it’s really just leverage here, is how we should think about it.

Rich Voliva

And again, we’re not going to add any G&A. So we’ll get some operating leverage there.

Jeremy Tonet

Got it. I’ll leave it there. Thank you.

Operator

Our next question comes from Jason Gabelman from Cowen. Jason, please go ahead.

Jason Gabelman

Hi, yes, thanks for taking my questions. I first wanted to ask on HFC, just understanding the debt and buyback outlook for the next couple of years. Can you just provide what the debt-to-EBITDA target is once the acquisition closes, where you want to get that number to? And is the intention on the buyback to offset the shares issued over some period of time, maybe the next couple of years or further out? Just any color on that. And then just going back to the strategic rationale on the deal. You mentioned you wanted to create a more durable business. Do you see the need to do anything else to get the business in a place that you wanted? Or following the Sinclair acquisition, do you now think HFC post Sinclair is in a position to be durable over the next 5 to 10 years?

Mike Jennings

Hey Jason, I’ll answer the third question first, and then Rich will hit the financial metrics and the leverage, okay? Do we need to do anything else to get there? The short answer is no. We’ve obviously got a lot on our plate. We’ve emphasized execution as being critical, and we’re really excited about what we have. This business model is as it comes together going to, our mind, be a launchpad. But we’re very satisfied to integrate it and run it and basically optimize it for the next period of time and focus on cash returns.

Rich Voliva

Jason, on your financial questions, with respect to leverage targets, I wouldn’t say we have a target per se. We do expect the closing to be right around 1.5 times consolidated net debt to EBITDA. And we do expect and then foresee this whittling that down going forward, clearly well within the range of an investment-grade balance sheet. And with respect to your question on repurchases, yes, absolutely. We would expect to be in the market. We do expect that the Sinclair Oil shareholders will be sellers over time, and we look forward to being able to participate in the market when they’re selling.

Operator

Our next question comes from Roger Read from Wells Fargo. Roger, please go ahead.

Roger Read

Yes. Good morning. Just wanted to catch up on a couple of items. One, getting back to the question on the kind of mid-cycle, what your expectations are for the various crude diffs that predominantly, I guess, Brent TI or LLSTI and the WCS? And then my other question is on the CapEx side. You gave, I believe, $590 million consolidated CapEx. And is that just a maintenance level? Or what all is included in there? Any kind of a breakdown by segments of the company as we look at refining, renewable and the leads business.

Rich Voliva

Hey Roger, so on the crude diff assumptions that are embedded in there is consistent with what we’ve shown previously. Brent TI diff of $3, $4 a barrel. Really, we expect no Midland differential for the foreseeable future. And a WCS differential with these kind of crude prices in the low to mid-teens. With respect to CapEx, that is a maintenance capital number that you see. And it’s – again, it’s a mid-cycle number, freely admitting that there is no actual mid-cycle year in capital spending. As you can imagine, the lion’s share of that is in the refineries and is in turnaround. So there will be volatility around that admittedly.

Roger Read

Okay. Thanks for that, Rich. And then one other kind of modeling-type question. As we look at the renewable diesel and your assumptions kind of a mid-cycle, you mentioned – well, I’m sorry, you mentioned, but it was mentioned on the call possible extension of the BTC for a period of time. What sort of the – you run the math. Are you assuming a $0.50? Or are you assuming it stays $1.25 a gallon? Just curious what you’re using for your analysis.

Tom Creery

Well, we – it’s Tom Creery. What we used in our analysis is that we expected the BTC to continue on unchanged through 2022 and then ratchet down over the next five years at 75, 50, 25 and then zero. That’s the way that we modeled it in absence of any firm information at this – given at this point in time. So that’s what we used.

Roger Read

No, that’s fine with me. I’m just curious what you were using. Thank you.

Tom Creery

Yes.

Operator

We now have a follow-up question from Paul Cheng from Scotiabank. Paul, your line is now open.

Paul Cheng

Thank you. Hey guys, maybe I missed it. Did you say how long is the lockup?

Rich Voliva

So Paul, the lockup is going to be worked through in phases over a 15-month period. Basically, the first quarter of the stock will be unlocked at closing, and then there’ll be a quarter unlocked the six-month mark, the 12-month mark and a 15-month mark.

Paul Cheng

Okay. So yes, 25% every three months unlocked.

Rich Voliva

Every six months or so.

Paul Cheng

Okay. Every six months. So 25% unlocked every six months?

Rich Voliva

So at close, at 6 months and 12 months and then the last one is a little shorter at 15 months.

Paul Cheng

I see. Okay. Sorry. So 6 months, 12 months and then 15 months, all right. On the – on Page 15 on the CapEx for the Sinclair asset of $175 million, I think, Rich, you mentioned that logistic is $5 million. Renewable can’t be that high. Probably it’s only maybe $20 million, $25 million. And marketing since its brand marketing with a wholesale, so it’s probably not more than $5 million, $10 million. So it seems to suggest that the refining may be about $130 million to $145 million back out range. That seems really high. Is my math – have done something wrong?

Rich Voliva

No, I think, Paul, the margin, the capital numbers in marketing are probably going to be a little higher than you’re saying, and the renewals are probably going to be a little higher than you’re saying. But yes, I think to be honest, I think we’ve been pretty conservative with the capital on the refining side.

Paul Cheng

Yes, because I mean that is 120,000 barrels per day and 25,000 barrels a day in total capacity. So one would have thought the CapEx there for maintenance should not be more than, say, $90 million or so. So I’m a bit surprised that. So you think that, that number could potentially be conservative?

Rich Voliva

Yes. Paul, as you heard from Tim, we are laser-focused on execution and asset reliability, and we want to ensure that we have sufficient capital in our modeling and our planning to be able to deliver those results. So yes, it’s conservative. But for now, it’s intentional until we really get in and understand more about what we’re going to want to do to help to achieve higher reliability across the system.

Paul Cheng

Yes, that’s totally fine. I just want to make sure that it’s not something related to the speculations of those two facilities and as such that their maintenance CapEx will be much higher on a per daily barrel of capacity comparing to other assets in the U.S. So that’s…

Mike Jennings

Yes. That’s a fair question, Paul. That’s a fair question, and the answer is no. It’s our own conservatism to ensure that we can deliver on our promises.

Tim Go

Yes. And in fact, Paul, I would just – this is Tim. I would just chime in that Sinclair has just completed investing $1 billion in capital in their two refineries over the last several years as a way to modernize and improve their infrastructure. So these are not undercapitalized facilities that we’re taking on here.

Paul Cheng

And is there any outstanding or pending environmental emission regulation tie-up spending that they need to spend in those two facilities over the next five years? Oh, and meaningful, I should say.

Mike Jennings

It’s a normal spending. The environmental regulations and our desire to exceed those continues to grow, and so I would say it’s normal spending as we try to improve our environmental footprint and reduce emissions.

Paul Cheng

Okay. Very good. Thank you.

Mike Jennings

Thank you, Paul.

Operator

Our next question comes from Neil Mehta from Goldman Sachs. Neil, your line is now open.

Carly Davenport

Hi, good morning. This is Carly on for Neil. Thanks for taking the questions. Just a quick one kind of on the quarter. Base oil margins continue to be robust here, and HFLSP results were strong relative to history in the quarter. So can you just talk about your views on the base oil margins in the back half and just what you’re seeing around base oil supply/demand in real time?

Bruce Lerner

Sure. This is Bruce speaking. So we see the environment continuing the way it is through the balance of the year. Our forward forecast indicates that. And base oil supply, in general, on a global as well as domestic basis remains pretty tight, particularly in Group 3 and Group 1. Two is a little more balanced, but still favorable. So we would look for the same continuation of metrics that we’ve been seeing.

Carly Davenport

Great. That’s helpful. Thank you. And then just a follow-up around the capital returns point. So Holly has been known over the years for special dividends and a strong return of capital. So you mentioned the regular dividend reinstatement and the buybacks. But just curious if there would be any other means of capital returns that you would consider over time in addition.

Rich Voliva

No. Carly, those would really be the two we’ll focus on. We look at the dividend as the stable and source of capital return and treat the buyback as the variable. Obviously, we’ll have a more stable business going forward, but we’ll still have volatility in our cash flows.

Carly Davenport

Great. Thank you.

Operator

There are no further questions. So I will now hand you back over to Craig for any closing remarks.

Craig Biery

Thanks so much, Lauren, and thank you all for joining us. Obviously, we’re really excited about this transaction. We think it’s incredibly strategic and transformative for our company as we step into an integrated downstream business centered around the DINO brand, which has been built through time to one of the most recognizable petroleum brands in the country, and important enough that we’re willing to take its name. So this is big for us. The renewable diesel business that Sinclair has and has built is also going to add incredibly to what we have going on in that space.

And finally, the earnings engine of petroleum refining and what those people do every day to supply their customers is going to fit well within our system. It’s in crude and product markets that we understand, and we’re really looking forward to it. And all of this really comes together to drive two things. One is an opportunity for our employees to have long and stable and productive careers, and the second is for our investors to enjoy high cash returns from a company that’s intent on doing the right thing. So thank you so much for your support and your participation today, and we’ll look forward to talking to you next quarter.

Operator

Thank you. This concludes today’s conference call. Please disconnect your lines, and have a wonderful day.