HollyFrontier Corporation (HFC) CEO Mike Jennings on Q4 2021 Results - Earnings Call Transcript

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HollyFrontier Corporation (HFC) Q4 2021 Earnings Conference Call February 23, 2022 8:30 AM ET

Company Participants

Mike Jennings - President and Chief Executive Officer

Rich Voliva - Chief Financial Officer

Craig Biery - Investor Relations

Tim Go - President and Chief Operating Officer

Tom Creery - President, HollyFrontier Renewables

Bruce Lerner - President, HollyFrontier Lubricants & Specialties

Conference Call Participants

Theresa Chen - Barclays

Paul Cheng - Scotia Howard Weil

Phil Gresh - JP Morgan

Roger Read - Wells Fargo Securities

Connor Lynn - Morgan Stanley

Manav Gupta - Credit Suisse

Doug Leggate - Bank of America Merrill Lynch

Neil Mehta - Goldman Sachs

Jason Gabelman - Cowen Securities

Operator

Welcome to HollyFrontier Corporation's Fourth Quarter 2021 Conference Call and Webcast. Hosting the call today from HollyFrontier is Mike Jennings, Chief Executive Officer. He's joined by Rich Voliva, Executive Vice President and Chief Financial Officer. Tim Go, President and Chief Operating Officer; and Tom Creery, President, HollyFrontier Renewables. [Operator Instructions] Please note that this conference is being recorded.

It is now my pleasure to turn the floor over to Craig Biery, Vice President, Investor Relations. Craig, you may begin.

Craig Biery

Thank you, Julie. Good morning, everyone and welcome to HollyFrontier Corporation's fourth quarter 2021 earnings call. This morning we issued a press release announcing results for the quarter ending December 31, 2021. 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's the 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 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, Greg. Good morning, everyone. 2021 was a momentous year for HollyFrontier. First and foremost, I want to recognize our employees for their commitment to safety. Despite the continuing challenges of the COVID-19 pandemic, the reportable injury rate for our employee and contractor workforce was a record low for HollyFrontier.

Second, we delivered solid financial results led by record earnings in our Lubricants segment, advanced our renewables projects, closed on the Puget Sound acquisition and announced our plans to acquire Sinclair. We believe the combination of these strategic initiatives will enhance our value to shareholders over the long-term. These investments are significant both in terms of capital and for our people. Our team has taken the strategic initiatives head on and remained committed to execution.

Turning to our fourth quarter results. We reported net loss attributable to HollyFrontier shareholders of $40 million or $0.24 per diluted share. These results reflect special items that collectively increased net loss by $22 million. Excluding these items, adjusted net loss for the fourth quarter was $18 million, or negative $0.11 per diluted share versus adjusted net loss of $119 million or $0.74 per diluted share for the same period in 2020.

Adjusted EBITDA for the period was $126 million, an increase of $148 million compared to the fourth quarter of 2020. The Refining segment reported EBITDA of $25 million, compared to $8 million for the fourth quarter of 2020, and consolidated refinery gross margin was $8.70 per produced barrel, a 116% increase compared to the same period last year. This increase was due to higher margins driven by strong product demand for transportation fuels, as we continue on the path to recovery to pre-pandemic levels.

Fourth quarter crude throughput was approximately 421,000 barrels per day, below our initial guidance of 450,000 to 470,000 barrels per day due to heavy planned and unplanned refinery maintenance and weather-related downtime during the quarter.

Our Lubricants and Specialty Products business reported EBITDA of $75 million, compared to $49 million, which is before the goodwill impairment charge of $82 million in the fourth quarter of 2020. For the full year 2021, our Lubricants and Specialties business achieved record financial results of $331 million in adjusted EBITDA led by strong margins for base oils throughout most of the year.

Holly Energy Partners reported adjusted EBITDA of $80 million for the fourth quarter compared to $88 million in the fourth quarter of last year. Despite the planned turnaround and unplanned maintenance at HollyFrontier's Navajo refinery, HEP delivered another quarter of strong operational performance and financial results. HEP maintained its distribution in 2021, and ended the year with a coverage ratio of 1.8x and continued its deleveraging strategy, repaying over $70 million in debt and bringing HEPs leverage to 3.9x.

Looking ahead, within our Refining segment, for the first quarter of 2022, we expect to run between 490,000 and 510,000 barrels per day of crude oil. This guidance reflects the impacts of weather-related downtime at Puget Sound refinery, a scheduled turnaround at the Woods Cross refinery, as well as maintenance activities at the Navajo refinery throughout the first quarter.

We believe that demand for transportation fuels will continue to strengthen as the global economy recovers from the pandemic. Within our Lubricants and Specialty products segment, for the first quarter of 2022, we expect seasonal improvement in earnings and a continued shift in mix toward rack forward from rack back. We expect base oil prices and margins to continue to decline through the first quarter, as base oil supply continues to recover.

In 2022, HEP expects to hold the quarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. HEP remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow, and maintaining distributable cash flow coverage of 1.3x or greater with the goal of reducing leverage to 3.0x to 3.5x.

In our Renewable segment, we're pleased to announce that the 6,000 barrels per day Cheyenne RDU is now fully operational, and we are lining the unit out to produce on spec product. The Artesia pretreatment unit is expected to be completed in the first quarter of 2022 and the Artesia RDU is expected to be operational in the second quarter of '22. Once completed, we will have the ability to produce approximately 15,000 barrels per day of renewable diesel with advantaged feedstock sourcing and flexibility through our own pretreatment unit.

We ended 2021 with a robust financial foundation and bright prospects for continued growth and value. As we look to 2022, we're focused on one thing, execution. Execution will be critical as we ramp up to serve recovering economy, start up our renewable diesel operations and work toward the closing of the Sinclair business acquisition and subsequent integration after the closing.

With that, let me turn the call over to Rich.

Rich Voliva

Thank you, Mike. As previously mentioned, the fourth quarter included a few unusual items. Pre-tax earnings were negatively impacted by acquisition integration costs of $16 million, a lower of cost or market inventory valuation adjustment of $9 million and charges related to the Cheyenne Refinery conversion to renewable diesel production of $3 million. A table of these items can be found in our press release.

Net cash used for operations totaled $333 million in the fourth quarter, which included $98 million of turnaround spending and $320 million of working capital headwinds. Both planned and unplanned refinery maintenance, reduced throughputs, which was the single largest driver of the working capital consumption. We expect to recover $150 million to $200 million of this working capital as refinery operations normalize, and this will take us into the second quarter to fully recover.

HollyFrontier's standalone capital expenditures totaled $254 million for the quarter and $725 million for the full year 2021. As of December 31, 2021, our total liquidity stood at approximately $1.6 billion comprised of a cash balance of $234 million, along with our undrawn $1.35 billion unsecured credit facility. At December 31, we have $1.75 billion of standalone debt outstanding with a debt to cap ratio of 24% and a net debt to cap ratio of 21%.

We anticipate recovering $83 million in cash tax benefit in 2022 from the loss carry back potential under the CARES Act. HEP distributions received by HFC during the fourth quarter totaled $21 million. HollyFrontier owns 59.6 million HEP limited partner units, representing 57% of HEPs LP units and a market value of over a $1 billion as of last night's close.

With respect to capital spending of 2022, we continue to expect spending between $250 million to $270 million at HollyFrontier Refining, $225 million to $300 million in Renewables; $45 million to $60 million at HollyFrontier Lubes and Specialties and $70 million to $100 million for turnaround and catalyst. HEP we expect to spend $15 million to $20 million from maintenance capital, $5 million to $10 million for expansion capital and $35 million to $50 million in refinery processing unit turnarounds.

Beginning in the first quarter of 2022, HollyFrontier report a new renewable segment that will contain all financial information related to renewable diesel units at the Cheyenne and Artesia facilities as well as the Artesia pretreatment unit.

And with that, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. Our first question is coming from Theresa Chen from Barclays. Please go ahead.

Theresa Chen

Good morning. Thanks for taking my questions. I guess, first, if we can go over the progress on the Sinclair deal and where you are in terms of working with FTC and given your comments yesterday, which on the HEP [indiscernible] in the closing. Can you just talk about what's driving that?

Mike Jennings

Yes. Theresa, this is Mike. We are working with Sinclair closely and collaboratively to satisfy all the closing conditions. The principal gating factor at this time is the FTC process. We're obviously cooperating with the FTC and Sinclair is working closely with us to obtain that clearance. We expect to close transaction as soon as we can. And at this point, we still expect closing in 2022, as we've said previously. We don't have update beyond that.

Theresa Chen

Got it. And then maybe turning to Puget, given the volatility in fourth quarter and still some downtime reflected in first quarter. Can you just talk about your outlook for the asset from here? And if the delay in TMX coming online, for the postponement of that, does that change the economics of your crude outlook for the area in general?

Tim Go

Yes, Lisa, this is Tim Go. Let me take a shot at that. We were disappointed that the Puget Sound refinery had some unplanned maintenance in the first 90 days that we owned it. But it does not change our outlook for the profitability of that refinery. Puget Sound got impacted by 3 weeks of the crude pipeline, flooding event that occurred in the fourth quarter, as you guys may have heard. It was then followed by a record freeze event that occurred under freezing temperatures for basically 7 to 10 days.

That basically impacted the operation and still carries into the first quarter, as Mike mentioned in his prepared remarks. But none of that changes -- they're all isolated events, nothing that changes our long-term view of Puget Sound. We still think it has a mid-cycle EBITDA of $150 million to $200 million. And we believe that we are still in that mid-cycle at/or above mid-cycle conditions for the rest of the year.

So, if you look at that on an annualized basis, we still think that Puget Sound will deliver that. As far as the delayed TMX, we've got lines based on the existing TNPL that is providing us with a large portion of our crude runs today. The rest we bring in over the waters through our dock and we believe that the delay is not going to impact our long-term outlook on PSR.

Theresa Chen

Thank you.

Operator

Your next question is coming from Paul Cheng from Scotiabank. Please go ahead.

Paul Cheng

Hey, guys. Good morning.

Mike Jennings

Hi, Paul.

Paul Cheng

Rich, I think in the past, you have been talking about a capital return to show they call you up to a $1 billion in the 12 months after first quarter, I would say. Can you give an update, given the market condition and also Sinclair being delayed. And also, Puget Sound, quite frankly, that operation has not been living up to expectation, at least during the first 90 days or 100 day of your ownership. That's the first question.

Rich Voliva

Sure, Paul. So, I don't think there's any change to our capital return plans. Consistent with what we announced at the time, both the Puget Sound and then the Sinclair acquisition, we expect to reinstate the dividend in May, at that $0.35 per share level. We expected them to return a $1 billion of cash in total, inclusive of both dividends and repurchase into the first quarter of '23. And then in the long-term, we think a 50% payout ratio. And the combination of dividend and repurchase is appropriate for a business like ours.

Paul Cheng

So even though the Sinclair delay could be because I think previously, the expectation is that you may be able to close Sinclair by mid-year that doesn't look like that likely. And so, if that's further delayed beyond 2022, does that change the way how you look at the capital return?

Mike Jennings

No, Paul, I don’t think it does.

Paul Cheng

Okay. And second question, can we go back into the Puget Sound operating issue. Fourth quarter, at least we can understand you have a sub-zero temperature, which, from what I understand never happened in at least the last 40 years past. And then you have Trans Mountain shut down. But you still into January that you have the hydrocracker problem and all that. All want that to cook maybe. Can you tell us that, I mean, what causing in the first quarter downtime? And what is the game plan that you -- perhaps to make the operation to be better. And Mike, quite frankly, in your prepared remarks you talked about execution. For the past 7 years, I think every year the CEO has talked about execution is the most important priority for the company. But unfortunately, it seems the company has been [indiscernible] periodically by a set of issues. And so, what gave you the confidence that this time you will get it right.

Mike Jennings

That's a loaded question, Paul. Thanks. As a starting point, the issue in Puget Sound, was weather induced and the remaining issue really pertains to the hydrocracker [ph] unit and a compressor that effectively needed major maintenance following damage by the weather. So that is, Tim, to this point, if you want to it take from there.

Tim Go

Yes, let me jump in, Paul, on this, and then I'll turn it back over to Mike. But I can tell you that that issue has been resolved. And so, when we say that the Puget Sound issue will carry into the first quarter, it has been resolved now and we are in the process of returning to full rates of Puget Sound. But it has impacted the first quarter.

Mike Jennings

And I guess beyond that, we operate a network of inland refineries where the degrees of freedom during unit downtime are pretty limited. And so, we get the operational results matter perhaps more in that context than plants that they're among the coastal network. And so effectively, we have to be better. And we have had operational issues obviously affected our fourth quarter results. And we told you they will roll into the first, but we have people on the ground and asset strategies, I think that carry us forward toward improvement. And you know, the proof is going to be in the future results more than what I say on this call. So, I think I'll leave it at that. But we certainly put a high priority on it, and we're working the issues hard.

Paul Cheng

Thank you.

Operator

Your next question is coming from Phil Gresh from JP Morgan. Please go ahead.

Phil Gresh

Yes. Hey, good morning. Thanks for taking my questions. First one, Rich, could you just talk about how you expect the cash balances to progress in the first half of this year? You mentioned, the working capital tailwinds. You mentioned the cash tax benefit at some point in '22. I'm just trying to think about getting back to those minimum cash levels of $500 million that would then allow for the dividend reinstatement.

Rich Voliva

Sure, Phil. Obviously, we're going to have a hard first quarter. Take this in pieces, we expect to see renewables really delivering on the income statement, the cash line in the second half of this year, obviously, as we ramp things up through the first half, you're not going to see a lot of cash generated there. We clearly expect our refinery performance to be significantly better, starting with the second quarter, which will clearly generate a lot of cash, both from earnings as well as recovery and working capital. So that gives us a comfort around dividend in the second quarter.

To your question on the tax refund. We are extremely frustrated at this point, to be honest, the government is still not back in the office and their speed of work reflects that. So, we are diligently working this issue. It's a battle I have. I can't -- it's not in our control to be honest. We'd obviously expected to have this money back 9 months ago. So really trying to your point, we'd expect that, second quarter when we really start seeing cash start to accumulate, and that gives us comfort around that dividend number in particular.

Phil Gresh

Am I still correct in saying that the minimum target cash would be the [indiscernible]?

Rich Voliva

Yes, I think that's a good target. I think as we are doing some of this work now, as we close and integrate Sinclair, I would expect we will seek more liquidity probably through an expanded revolver. But that $500 million target cash balance will remain -- we still think that's a good number in an expanding company.

Phil Gresh

Okay. My follow-up would just be on some of your comments you just said on renewable diesel with the startup and now that we're almost 2 months through this first quarter. You said you don't expect much of a contribution in the first half. But I mean, I guess as we look at the first quarter, would you say that with startup costs and things like that, that you're trending towards positive EBITDA? Or should we be thinking that there are startup expenses and things that would make that -- take some time?

Rich Voliva

No, I think it's going to take a little while. So, I'd expect small negative EBITDA in the first quarter, probably into the second quarter, to be honest. We're being very careful and I will ask Tom to chime in, on how we start these units up. Obviously, we've seen others have major issues. So we're babying them a little bit, if you will. But we think that's the prudent way to approach this. So that we have the earnings power in the next several years.

Tom Creery

Yes, Phil, this is Tom. Just to parrot Rich's comments, we are going slow on purpose. These are somewhat new units to us. Although we understand hydrotreating process from the refinery operations, this is still something new for us. So, we're going slow. We want to do it right and we want to do it one-time, and that's our goal here. As you can appreciate, as we start up a new business, we have virtually no volumes in the tanks of renewable diesel that we're going to have to build up, we're going to have to get working stock in place before we can even look at entertaining sales to customers. So that does take some time. And some -- it's going to extend even though that we're running, it's going to extend the period of time until we can generate revenue. So, it's going to be a slow process.

Phil Gresh

Got it. And the Sinclair and their pretreatment, where are Sinclair in a pretreatment startup? Thank you.

Mike Jennings

To the best of our knowledge, this is just public information is that they're looking sometime between the second and third quarter of this year for startup.

Phil Gresh

Got it. Thank you.

Operator

Your next question is coming from Roger Read from Wells Fargo. Please go ahead.

Roger Read

All right. I’m going to get the microphone in the right place. Good morning, guys. I just like to maybe dig a little deeper in just how the renewable diesel startup process will go. I mean, I recognize we've seen others have problems, and you all want to be careful with it. But as you look at running, I guess maybe here's the question, where are you in terms of running any kind of a feedstock through the units in getting comfort? And where are you in terms of security of the feedstock across all types?

Tom Creery

Okay. From a high level -- Roger, this is Tom. First of all, in the startup process, we have to heat up the units and we have to get them the warm, and we do that by introducing hydrogen. And once we reach certain temperatures, then we can start to introduce feed, at which time, then we start increasing the feed. And it's just a slow processing. We just have to walk up these units very slowly, and make sure all the instrumentation is working properly. So, levels are within the various units, so it's a slow process. So, it's not like flipping a switch and these things run. It usually takes multiple days to get everything lined out and make sure that we're operating [indiscernible] and we have stability at various temperatures throughout the whole units, both the reactor and the isomers [ph].

So, in terms of feed, let me -- we haven't had any problem whatsoever in acquiring feed for Cheyenne, Artesia, or the PTU. It has not been a problem. We have secured some volumes to get it through the remainder of this year and even early into 2023 by long-term contracts. We don't foresee any problems going forward. We still believe in our strategy of having the PTU in place, though, that gives us more flexibility to buy different feeds. And we will continue on startup to divide the feeds that give us the highest return by balancing price versus carbon index.

Roger Read

Okay, great. Thanks. And then just the final question for me on the renewable diesel side. In terms of the CapEx guidance and the original CapEx guidance -- when I say original, but the most recent which was $800 million to $900 million total kind of where do you think you're going to come in at this point on CapEx at the total level?

Rich Voliva

Hey, Roger, it’s Rich. We will be within that range.

Roger Read

Okay, great. Thank you.

Operator

Your next question is coming in from Neil Mehta from Goldman Sachs. Please go ahead.

Mike Jennings

Neil?

Operator

Neil from Goldman Sachs, your line is now open. And your next question is coming from Connor Lynn from Morgan Stanley. Please go ahead.

Connor Lynn

Yes, thanks. I wanted to stay on the feedstock sourcing question for renewable diesel. You'd said last quarter, you were kind of evaluating options to participate in for -- up the value chain. So, I'm just curious where your head is at on that, any options you've been exploring?

Tom Creery

Sure. Connor, this is Tom again. We're currently tracking over 20 soybean oil processing plant investment opportunities that have been presented to HollyFrontier. We have been looking at strategic opportunities two ways, either long-term offtakes or equity investments. And we’ve had equity -- I'm sorry, active discussions are underway with possible counterparties. What -- like I said before, we want to optimize the best netback, give us the most flexibility. So, there's no shortage of crush plant announcements, as you're probably well aware. And we're trying to touch base with everything that comes across to see if it presents value for HollyFrontier.

Connor Lynn

What type of criteria would you say are important to you in determining that? I mean you certainly manage your feedstock independent of production on the refining side. So, I guess the question is, do you see the ultimate value creation shifting to that side? Or is it more of a hedge? Just basically, what would make you want to invest?

Tom Creery

Probably more of a hedge. It's vertical integration, so it allows us to capture profitability throughout the chain as a part one specific point. And sort of along the same lines, as the PTU and why we entered into that market.

Rich Voliva

Just to pile on there, Connor. Look, obviously, our criteria is returns against cost of capital, whether those returns come in the form of a reduction in price or return on the investment. We are just -- so far, we have not seen returns that are clearing any sort of hurdle.

Tom Creery

Which is pushing us back towards just an outright lifting or an offtake agreement.

Connor Lynn

Got it. Got it. All right. Thanks for the color. I will turn it back.

Operator

Your next question is coming from Manav Gupta from Credit Suisse. Please go ahead.

Manav Gupta

Hey, guys. Question more on inland refining. It seems like people love the coastal a lot more now with some of the Ukraine crisis. And then you're looking at Exxon saying they want to grow Permian 25%, Chevron 10%, and all these guys are looking to accelerate Permian. Do we see a scenario where we could have a resurgence of, or a reemergence of some of these inland differentials as it looks like the rig counts are accelerating and the production is expected to go up in '22, '23?

Tim Go

Yes, Manav, this is Tim. I will take a first shot at that. We’ve been pleased to see the increased production in the Permian. I think they hit over 5 million barrels a day here this last month and setting new records. Takeaway capacity is still greater than that. So, we still continue to see that dynamic playing out. But certainly, as the volatility in the rest of the world plays out, the one certainty that seems to be out there is that the Permian production seems to be where most of the focus is on growth here in the U.S. And that’s going to benefit us, both in our Mid-Con refinery as well as our Southwest refinery. So, you've seen some short-term blowout in the Brent TI spread here just in the last day or so. We don’t expect that to necessarily hold at these levels, but we do think that long term, Brent TI about $3 makes a lot of sense. And if you look at the strip going out, it seems like the market feels the same way, if not even a little bit more bullish.

Manav Gupta

How much Permian can you run in your system, if you could remind us?

Tim Go

Well, we run our whole Southwest refinery, Navajo Refinery, runs on basically Permian. And then we can send some additional, call it, 50,000 barrels a day down into our Mid-Con refineries through the Centurion pipeline. So, we’ve got good exposure, good optionality to be exposed to the Permian crudes.

Manav Gupta

Okay. And a quick policy follow-up. I think, Rich, when you initially put out your renewable diesel projections, I remember very clearly you did not have BTC in 2023. And then we got to a situation with build back better and everything and we started assuming BTC most likely will be extended. Now, like, I just want to understand from the policy perspective, there is a lot of support for BTC, but do you see a scenario like where before year end, where BTC could be extended, so it kind of takes all that uncertainty from RDU margins?

Rich Voliva

So, Manav, from a government affairs perspective, if you will, I think our view is that there is a lot of support for the BTC. And that we will see it extended in some form or fashion consistent with a manner right it's been done historically, one of these last-minute tax extender package type events. But to your point, our original project economics were not predicated on long-term BTC.

Manav Gupta

Thanks, Rich.

Mike Jennings

But our long-term expectation around BTC wasn't affected by build back better. It was -- it preceded that the political support for this extension, so we don't see those two as necessarily tied.

Manav Gupta

Thank you.

Operator

Your next question is coming from Doug Leggate from Bank of America. Please go ahead.

Doug Leggate

Good morning, everyone. Note to self, don't hit star 1 more than once. It lowers your [indiscernible] apparently. But anyway, thanks for getting one [indiscernible]. I hate to ask about Sinclair, but I know you don't want to talk too much about it, but I just want to ask a hypothetical question. When Marathon was trying to sell Speedway, they satisfied all their filing requirements and they still didn't get a formal answer, so they went ahead and did the deal anyway. I’m just curious how you guys -- where you guys are in the process of satisfying all the back and forth on filing?

Mike Jennings

Well, explicitly, we’ve complied with the second request, and we are in discussions with the staff. And Paul -- Doug, I'm sorry, I can't share more than that. It's a continuing conversation and our tactics and strategy aren’t going to be public for this call. But we expect this transaction to close in 2022, and we're really excited about it. So that's as much as [technical difficulty].

Doug Leggate

Yes. I apologize for asking. I just wanted to see if there was any additional color. Well, maybe if I may take two quick ones, one is macro and one specific to you. And it's a follow-up to Paul's question about operational improvement. I’m just curious, when you think about Puget Sound and Sinclair, who has the best operating best practice? I’m thinking in terms of transfer of best practice. Does Sinclair make Holly better? Does Holly make Sinclair better and same with the Puget Sound? How do you think about the generic operational reliability of the go-forward combined company?

Tim Go

Doug, this is Tim. Let me take a shot at it. I think the answer is yes to both questions. Puget Sound and Sinclair make HollyFrontier better and the HollyFrontier make Puget Sound and Sinclair better. I think there are opportunities to basically share both forward and backwards with each of these assets.

Puget Sound, as we've talked about before, has a very talented workforce, advantaged assets, a growing market that it sits in. I think they have a lot to offer HollyFrontier, but I think we have some additional things we can offer them as well in terms of an independent refiner mindset, a way to try to not have to work within a larger system, but try to optimize the asset within its individual region. I think there's a lot of opportunity there to work together.

Sinclair, it's -- we are still looking to close, as you know, so I will limit my comments on Sinclair. But Sinclair has a very attractive market that they operate in. They obviously have a very different model in their branded marketing outlets that we will benefit tremendously from. We are looking forward to attaching that to our merchant refining portfolio to take full advantage. On the other hand, we think we’ve some systems and processes and people that we can offer to help Sinclair as well to try to get their assets to run better as well. So, I think it goes both ways.

Doug Leggate

I appreciate that answer. And my last one, guys, is a macro one and I don't know if you want to take this. But we all remember the golden age, so to speak, back in 2000s. My question is this, Europe and Asia has got a very different natural gas supply dependency today than it did back then. So, I'm curious, if Europe and -- the European U.S. gas premium persist, maybe not at current levels, but on a go-forward basis, how do you -- how does that impact your thinking of, let's say, go forward mid-cycle margins?

Tim Go

Doug, we are bullish on refining this year. I think natural gas is just one component that will continue to advantage the U.S. refining system versus the European one, for example, in this case. We think low product supply, if you look at inventories, their 5-year lows right now in the U.S. We think there's going to be a heavy maintenance and turnaround year associated with a lot of the majors and a lot of the other competitors out there who already announced heavy maintenance workload this year. As we’ve talked about before, we do not have a heavy turnaround load for this year.

Aside from this unplanned maintenance and then some smaller planned maintenance throughout the year, we are actually looking to be in pretty good shape to take full advantage of this environment. And so, we think this year is going to be at or above mid-cycle. We think the natural gas situation will only strengthen that and help improve that. Whether that's going to persist, I think will depend on a lot whether the geopolitical risks out there play out or not.

Doug Leggate

Yes, of course. Guys, thanks for taking my questions. I really appreciate it.

Mike Jennings

Thanks, Doug.

Operator

Your next question is coming from Neil Mehta from Goldman Sachs. Please go ahead.

Neil Mehta

Great. Can you guys hear me, okay?

Mike Jennings

Yes.

Craig Biery

Yes, sir.

Neil Mehta

Okay. Sorry about before. So, hey, look, product inventories in PADD 2, I would be curious on your views, Mike and team. We see that happen from time-to-time in the winter where the inventories do get elevated relative to rest of the country and then you work through it. But it is notable that the Mid-Con margins are a little bit softer than other PADDs? Just your observation there, and is this anything we should be concerned about, or is it just normal seasonality?

Tim Go

Neil, let me take the first shot. The Mid-Con inventories are definitely high right now. We do attribute that to seasonal behaviors. We see this typically every winter. We don’t think this will be any different. And we obviously, again, think that this summer is going to be strong in the Mid-Con, certainly mid-cycle or above, despite the higher inventories that we are seeing today.

Neil Mehta

All right. That’s helpful. And then just your thoughts on shape of curve with the time spreads being so strong right now up at the front, given all the geopolitical stuff. Just your thoughts on how that affects capture rates, the market structure. And is that something that we should think of as a deduct relative to the margins?

Tim Go

Yes. I mean, you're right on there, Neil. The steep backwardation is not helpful from a capture standpoint. But we obviously would prefer a contango-shaped market. But that’s not what we've got. And for the next few months, it looks like we are going to continue to face some higher-than-normal backwardation here with all the geopolitical risks that's out there. So, yes, you should factor that into your models, but we don’t think -- we do think it's going to line back out here the rest of the year.

Mike Jennings

Yes. I think I will jump in, and that is to add perhaps the obvious. But the product cracks, even RVO adjusted, are seasonally strong. If you look at Mid-Con as an example, they're depressed relative to the remainder of the country, but still pretty decent for a February time frame for gasoline. If you look elsewhere in the country, other served markets, it's certainly better. And I think what we are seeing is either a snapback or a steady road back from COVID. You are seeing it in vehicle miles traveled, you certainly see it in distillate demand and inventories. And so, while backwardation hurts capture, the overall level of product margin is pretty good. And as we look forward into this year, we expect it to be a strong financial year for our sector.

Neil Mehta

Great perspective. Thank you, Mike.

Mike Jennings

Yes.

Operator

And your next question is coming from Jason Gabelman from Cowen. Please go ahead.

Jason Gabelman

Good morning. Thanks for taking my questions. I had two on the renewable diesel business. First, on the financial projections. I think when you sanctioned the renewable diesel projects, there was $165 million annual free cash flow forecast. Is that still the right number? There's been a lot of moving pieces with environmental credits. So, wondering if that's the right number, excluding the BTC.

And then secondly, just thinking about M&A on renewable diesel. You mentioned potentially looking to take an equity stake in upstream business. Is there a market for you to potentially sell a stake in your renewable diesel project once you get it up and running? Are those conversations you’ve had, or maybe you could just discuss potential interested parties or types of parties that could be out there? Thanks.

Rich Voliva

Hey, Jason, it's Rich. So high level, look, there's some puts and takes, as you mentioned. But I think those -- that free cash flow and our earnings projections remain the same with respect to renewable diesel. Obviously, we expect to see those second half of '22 and really going into '23. BTC looks like a tailwind in the near-term. LCFS is probably a little bit of a headwind, but we are very bullish on that market in the long run. With respect to M&A, like we are focused on executing the projects we’ve got in front of us. There's really nothing to speak to you -- no activity to speak to here. But look, we are always open to anything that will create more value for our shareholders.

Tom Creery

Yes. Jason, this is Tom. Yes, we’ve got a busy road ahead of us, not only starting up our own units, but integrating the Sinclair facilities to make it one happy family or [indiscernible] project. We’ve got some optimization to do after the acquisition of Sinclair. So, we’ve got a full plate from a renewable standpoint. So, to Rich's comments, we really haven’t looked at any kind of potential of spinning off the renewables or spinning off an equity share in it.

Jason Gabelman

Got it.

Operator

[Operator Instructions] Your next question is coming from Paul Cheng from Scotiabank. Please go ahead.

Paul Cheng

Hey, Mike. Just two quick follow-up. Just [indiscernible] if the Cheyenne facility, so wondering in [indiscernible] economic that you guys are making money in that facility? And also, that in the long haul what is the game plan for that business? I mean how do you look at it? Do you want to build substantially more capacity? Or that this is really one-off because of some opportunity you see in Navajo and Cheyenne, and so you will just stick with the existing -- these two facility and the pre-unit [ph], but not with the expansion [ph]. So, what is the longer-term game plan for this business?

Tom Creery

Yes. Paul this is Tom Creery. In today's economics, there's still a lot of factors. We still don’t have, for example -- we don’t have operating costs or operating expenses because we’ve yet to operate, so there's a lot of unknowns. It would still be profitable under today's circumstances. We are seeing some headwinds, as you're aware, through lower LCFS prices. However, we don’t expect those to continue into the long-term and that's not -- we are not -- we didn’t build these units on today's economics, we’ve built them over 20-year economics. So, we think over the long run, they will be profitable and will hit our financial targets.

Rich Voliva

Yes. Paul, looking forward, within our Renewables segment, what we would say is -- we have a lot on our plate right now to get these projects completed and businesses up and running as we’ve constructed them. With that said, we also like to look forward and try to participate in future profitable opportunities. Most likely, those would be in and around our existing asset facilities, meaning brownfield. But as of today, the focus is critically on the three assets that we are building and bringing up to operate.

Paul Cheng

Thank you.

Operator

Your next question is coming from Phil Gresh from JP Morgan. Please go ahead.

Phil Gresh

Yes. Thanks. Sorry, I just had one follow-up on lubes. With your commentary around Rack Back, and some of the headwinds there with Group II that we are starting to see here in the first quarter relative to what we saw in 2021, just curious how you're thinking about Rack Forward and the potential benefits there. And sometimes in the past, you’ve been willing to give a range of guidance for what you think Rack Forward could be. And curious if you have any thoughts there. I know 2021 was a bit of a different kind of year for Rack Forward.

Tim Go

Yes. So, this is Tim. Let me take a shot at that. Last year was a very strange year of market fluctuations between Rack Forward and Rack Back, as you saw. It's continuing into this year and that’s why we didn’t provide any guidance on this year for Rack Forward. In fact, I think what we would tell you is we still believe that our lubes business is a $250 million EBITDA business in a mid-cycle environment.

And we would tell you that for 2022, we expect the year to be at or above mid-cycle on a combined basis. And that’s probably -- excuse me, that’s probably how we would suggest you look at the lubes business for this year. We are seeing some base oil margin compression starting to show signs of happening. That will allow the Rack Forward business to return to more normal conditions.

But at the same time, we are hearing of unplanned events and heavy turnarounds in the base oil producing market here, especially in the U.S., that we think will continue to keep base oil prices tight. And at the same time, we are seeing recovery in our Rack Forward business and we think that business will continue to strengthen. And so, we are optimistic certainly here in the first half of the year that we are going to see above mid-cycle profitability from our lubes business.

Phil Gresh

Okay, got it. That makes sense. Thanks a lot.

Operator

And there are no further questions at this time. I will turn the floor back over to Craig for closing remarks.

Mike Jennings

Thank you, operator. This is Mike, and thank you all for participating. I would like to wrap up the call this morning emphasizing a couple of points. The first is that the fourth quarter includes some significant operational challenges, many of which were brought about by extraordinary weather, but all of which we own and need to manage.

On one hand, I recognize the major events made by our team to recover from these issues. And on the other, I’m going to say that my expectations are for better reliability and throughput. I will note that with respect to employee and contractor safety, our 2021 year was the best ever for our company, and our recordable injury rate was less than half of the industry average. This is a reflection of what we are achieving on the ground. We are nearing the completion of our renewable diesel investments and look forward to the transition from project management to operations management. This is a really exciting new venture for our company, and I believe it's going to be an attractive business for our owners.

And the final point is that the Sinclair transaction is truly transformative for HollyFrontier. It's an incredibly exciting time for us. And while the lag from announcement to close may take some of the limelight away from this deal, internally, we are working really aggressively to plan for the closing and the integration. And we continue to view the combined company as strategic and compelling as an investment, a supplier and an employer. So, thanks all for participating today, and we look forward to talking with you again.

Operator

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

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