Vertex Energy, Inc.'s (VTNR) CEO Ben Cowart on Q2 2022 Results - Earnings Call Transcript

Aug. 09, 2022 12:38 PM ETVertex Energy, Inc. (VTNR)21 Comments
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Vertex Energy, Inc. (NASDAQ:VTNR) Q2 2022 Earnings Conference Call August 9, 2022 9:00 AM ET

Company Participants

Noel Ryan - Investor Relations

Ben Cowart - Chairman and CEO

Chris Carlson - Chief Financial Officer

Alvaro Ruiz - Chief Strategy Officer

James Rhame - Chief Operating Officer

Conference Call Participants

Manav Gupta - Credit Suisse

Noah Kaye - Oppenheimer

Eric Stein - Craig-Hallum

Amit Dayal - H.C. Wainwright

Michael Hoffman - Stifel

Operator

Good day, ladies and gentlemen. And welcome to the Vertex Energy Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be open questions-and-comments after the presentation.

It is now my pleasure to turn the floor over to your host, Noel Ryan.

Noel Ryan

Thank you, Ali. Good morning. And welcome to Vertex Energy’s second quarter 2022 results conference call. Leading the call today are our Chairman and CEO, Ben Cowart; CFO, Chris Carlson; Chief Strategy Officer, Alvaro Ruiz; and Chief Operating Officer, James Rhame. We issue a press release before the market opened this morning, detailing our recent operational and financial results.

I’d like to remind you that management’s commentary and responses to questions on today’s conference call may include forward-looking statements, which by their nature are uncertain and outside of the company’s control.

Although these forward-looking statements are based on management’s current expectations and beliefs, actual results could differ materially. For discussion of some of the risk factors that could cause results to differ, please refer to the Risk Factor section of Vertex Energy’s latest annual and quarterly filings with the SEC.

Additionally, please note, you can find reconciliations of the historical non-GAAP financial measures discussed during our call on the press release issued today.

Today’s call will begin with remarks from Ben Cowart followed by financial review from Chris Carlson. And at the conclusion of these prepared remarks, we’ll open the line for questions.

And with that, I’ll turn the call over to Ben.

Ben Cowart

Thank you, Noel. Good morning. Welcome to today’s call. Well began to call with a high level overview of our second quarter results, which include a full quarter of contributions from the Mobile refinery, which we assumed ownership as of April 1st.

During a volatile period for the broader energy complex we generated record consolidated second quarter adjusted EBITDA of $71.3 million, supported mainly by contributions from our recently acquired Mobile refinery, which generated $63.6 million in standalone adjusted EBITDA during the period.

Our legacy UMO collection and re-refining assets also performed exceptionally well in the period, with Marrero and Heartland both operating near capacity during the second quarter, product spreads and sales, volumes for the legacy business have continued outperform expectations.

Since acquiring the Mobile refinery, we’ve experienced strong demand for conventional fuels in the local market. At same time recent decisions by competitors to reduce refining capacity in our regional markets have contributed to tightness in product supply resulting in elevated refined product margins.

We believe a similar narrative is playing out across many areas of the country given a structural shortage of domestic refining capacity, so that end according to the EIA domestic inventories of both distillate and gasoline remain well below the trailing five-year average, while demand remaining healthy, implying further potential upside to product cracks.

During the second quarter, Mobile operated at 96% of operable capacity, producing just under 72,000 barrels per day, which was ahead of our guidance for between 69,000 barrels per day and 70,000 barrels per day.

Total gross profit per barrel, excluding a realized hedging loss and inventory adjustments was more than $23 per barrel in the second quarter or approximately 51% of the benchmark 2/1/1 Gulf Coast crack spread in the period.

Throughout the second quarter, we process a combination of WTI, LLS and light -- local light sweet crudes. Total production of finished high-value light products, which includes gasoline, distillate and jet fuel represented approximately 70% of the total production in the second quarter.

During July, market conditions remained favorable, supported by seasonal strength for conventional fuels, while the 2/1/1 was -- has declined sequentially versus second quarter levels and remains more than 100% above the third quarter in 2021. During the third quarter, we intend to operate Mobile at between 72,000 barrels per day and 74,000 barrels per day positioning us to capitalize on continued strength in the market.

Turning now to a discussion of the ongoing renewable diesel project at the Mobile refinery. During the second quarter, we begin construction of the foundations and fabrication of pipe related to the project. While the supply chain remains challenging, our teams continue to successfully navigate these issues having orders on all major long lead equipment earlier in the year.

As before we expect the total project costs to be in the range of $90 million to $100 million, funded entirely through existing cash and on hand cash flow from operations. Today, we have committed $43 million to the project and are trending to within budget at this time.

In October 2022, we expect to engineer a planned shutdown of a hydrocracker at the Mobile refinery as we move forward. We believe this planned unit shutdown will have no impact on crude oil throughput rates during the fourth quarter of 2022. And consistent with our previous guidance, initial renewable diesel production volumes are expected to come on stream by first quarter 2023.

Before I turn the call over to Chris, allow me to share a few comments around our reported results this quarter. No question. The second quarter had some noise in it, including both realized and unrealized hedge losses.

Concurrent with acquisition of the refinery, we made the decision to enter into a series of crack, spread and inventory hedges designed to mitigate our downside risks, while locking in 50% of our planned production during Q2 and Q3 at what remained historically elevated levels. It was the safe bet, a bet one that kept our upside during a period when spreads moved higher.

With a few -- full quarter at Mobile behind us, together with expectations for a prolonged period of elevated refined product margins, we have concurrently chosen not to expand our hedging program past the third quarter of 2022, position us take full advantage of the spot market beginning in the fourth quarter of this year.

During a period of transition, our people executed on plan ensuing a successful integration of the Mobile refinery, while continuing to drive value creation across our legacy business. I’m exceptionally proud of the combined efforts of our entire team, each of whom played an integral role in our record second quarter results.

Looking ahead, we will continue to advance our strategic plan with an emphasis on; one, ensuing safe reliable operations; two, invest in organically in high-value renewable fuel opportunities; three, driving superior cash flow conversion, particularly as we exit a CapEx heavy period leading up to the completion of the RD conversion; and four, continuing to pursue a balanced capital deployment strategy.

Long-term, we intend to use Vertex as a platform upon which to create an energy transition of scale. One focus on delivering next-generation decarbonisation solutions, we believe the biofuel sector remains an attractive opportunity one where we can become a leading regional producer of renewable diesel and overtime sustainable aviation fuels.

With the pending passage of the Inflation Reduction Act, we see a positive trend towards the multiyear extension of tax incentives such as the Blender’s Tax Credit that will support future visibility and project economics. We also see a trend towards accelerate the demand for renewable fuels from commercial and industrial customers as companies seek to further align their business priorities with environmental responsibility.

In summary, it’s an exciting time for us here at Vertex. We appreciate the continued support of our customers, shareholders and partners, and look forward to building on the momentum evident across our business.

With that, I’ll hand the call over to Chris.

Chris Carlson

Thanks, Ben. And welcome to those joining us on the call today. For the three months ended June 30, 2022, Vertex reported a net loss of $63.8 million versus a net loss of $16 million in the second quarter 2021. The second quarter net loss includes a $46.9 million unrealized commodity derivative loss, a $23.2 million loss on an intermediation agreement due to backwardation, a $46.1 million realized commodity derivative loss, together with $11.6 million in non-recurring transaction and other non-operating expenses.

We reported record adjusted EBITDA of $71.3 million in the second quarter 2022 versus $4 million in the prior year period. On a standalone basis, the Mobile refinery generated $63.6 million.

Second quarter results benefited from a combination of strong operational reliability, elevated refined product margins and robust demand for conventional fuels, including the first full quarter of financial contributions from the Mobile refinery acquisition, which closed on April 1, 2022.

As of June 30, 2022, the company had total cash including restricted cash of $97.9 million versus $36.1 million at the end of second quarter 2021. Vertex had total net debt outstanding of $299 million at the end of the second quarter of 2022, including lease finance obligations. The ratio of net debt to trailing 12-month adjusted EBITDA was 2.4 times as of June 30, 2022, which includes only one quarter of EBITDA contribution from the Mobile refinery.

Back on November 1, 2021, we issued $155 million and 0.625% convertible notes due in 2027, implying underlying shares of 26.3 million on full conversion. These notes are callable by Vertex on or after October 6, 2024 if the stock price exceeds 130% of the conversion price or $7.66 per share.

During the second quarter, noteholders voluntarily converted approximately $60 million of their notes into approximately 10.2 million shares of Vertex common stock, thereby reducing the outstanding amount of the convertible note from $155 million to $95 million. In addition, this conversion had a non-cash impact to the income statement in the amount of $41 million due to an acceleration of the OID and interest expense.

Also during the quarter, we upsized our term loan from $125 million to $165 million, using the incremental $40 million in proceeds to repurchase Tensile Capital’s outstanding 65% ownership within certain legacy assets including our Heartland refinery and Myrtle Grove sight. At this juncture, Vertex remains the sole owner and operator of all legacy assets, further simplifying the capital structure.

Today we introduced financial and operational guidance for the third quarter 2022. Going forward, we expect to provide a similar level of guidance on subsequent quarterly calls. All guidance is current as of the time provided and is subject to change. All prior financial guidance should no longer be relied upon.

For the third quarter of 2022, we currently anticipate the following; total throughput of between 72,000 barrels per day and 74,000 barrels per day at the Mobile refinery and direct operating expense per barrel of between $3.50 and $3.75 at the Mobile refinery.

And consolidated total capital expenditures of between $30 million and $35 million. For the full year 2022, we currently anticipate consolidated total capital expenditures of between $115 million and $120 million.

With that, we will open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. First question is coming from Manav Gupta with Credit Suisse. Please pose your question.

Manav Gupta

Hey, guys. So obviously a lot of moving items and a lot of noise in 2Q, a lot of that obviously relates to various kinds of hedge -- hedges that you did put in place. And I’m just trying to understand as we look at 3Q, should we think about these kinds of losses replicating themselves in 3Q or should they be lower? How should we think about the losses associated with hedging in the third quarter at this point of time?

Ben Cowart

Yeah. Thank you, Manav. I’ll let Chris kind of follow up -- follow in behind me if he’s got something additional to add. But, obviously, as you indicated, the hedging that we put on the production -- half of the production as create a lot of complexity in our second quarter earnings. I think the number for the second quarter is around $90 million impact to what you see in our financial results.

So that includes both the hedge allowance that we accounted for in the second quarter and the accrual for the third quarter. So, we have seen an improvement in the hedge position for the third quarter, probably, a $23 million and so we anticipate that continuing to follow the market.

So trying to forecast the outcome for the third quarter is, as it relates to those hedges is very difficult, depending on what the quarter outcome is. But I can say, to-date, we definitely are in a better situation.

So timing was not good, hindsight in 2020 it’s easy to look back, and say, well, we shouldn’t have hedge crack spreads like we did. But I’ll take responsibility for that as we went into a very complex acquisition, a transition, that was monumental of a challenge that we knew we had to be prepared to do.

We had a long-term strategy and still do for the site, to lead us to an energy transition platform, by converting the hydrocracker through renewable fuels. And so we made the decision early, at the end of March, that upon closing, we would take a 25% premium over a five-year historical crack spread, put it in the bank, more or less, the purchase of the refinery and set us up safely for a long-term strategy as a company. And at that time, there was no real precedents for the kind of crack spreads that we seen develop over the second quarter and it was amazing.

So love to have the money in the bank, but I’m very thankful for the platform that we have, the transition with the business and just how well everything is executed, it certainly shows long-term the cash flow potential of the business.

And so we -- we don’t look back. We’re not going to be press at the moment and try to figure that out. I know it’s a long answer. But I know the hedging has been -- it’s a material noise in this quarter and I think that was a good explanation. So thank you for the question.

Manav Gupta

And a quick follow up, obviously, here that is, last quarter, you did have on 2022 guidance. So as we go in the year in 2023, how should we think about the earnings power of Vertex, first, obviously, 2022 basically we’ll be refining and then 2023, you obviously will have your renewable diesel project up and running. So how should we think of some kind of EBITDA that you think you can achieve in 2022 and 2023? And I’ll leave it there. Thank you.

Ben Cowart

Yeah. Thank you. Again, if we didn’t have the crack hedge going forward the second quarter, third quarter, are actually for the second quarter, we would have been looking at another $90 million of cash flow and EBITDA to be talking about.

So that’s the true business. That’s really when we look ahead into 2023, we -- if the shortage of refining capacity continues to prevail, like we believe it will, then our conventional side of this business will continue to perform extremely well.

The on time, on plan, renewable diesel production coming into the 2023 will bring a lot of new cash flow to boot and so we’re very positive about 2023 EBITDA. As far as guidance goes, what we -- what we’re trying to do is just follow today the way the industry provides guidance, obviously, when you try to forecast EBITDA and you got a volatility in the market like we just seen, it creates confusion. We don’t want to do that going forward.

We did provide some straight guidance at the end of our call last quarter only to provide the market with just an idea of the power the asset has to generate cash. So, with that in mind, we will be providing more measurable per barrel guidance, using our operating cost and we’ll let the market figure out what the forward pricing and strips look like as we go forward.

Manav Gupta

Thank you, guys.

Ben Cowart

Thank you.

Operator

Our next question is coming from Noah Kaye with Oppenheimer. Please pose your question.

Noah Kaye

Great. So to follow up on your response around the derivatives position, Ben, I just want to clarify, make sure we understand. So you’re saying that as of today -- number one, you already accrued for the derivative loss in 3Q and with crack spreads starting to come down, you’d be in a position if nothing changed from today to recognize something to the tune of a $20 million derivative gain in the third quarter and would that be an unrealized or realized gain?

Chris Carlson

Yeah. That’s correct, Noah. And it would be a realized gain in the third quarter.

Noah Kaye

All right. That’s very helpful. So outside of the derivatives, it’s around 50% capture the spread the right level to be thinking about going forward, was it higher or lower than expected in 2Q, anything to call out there and how do we think about the run rate going forward?

Ben Cowart

Yeah. I’d say, I think, the capture was around 51% of the 2/1/1 crack spread. Again, it depends on how the market plays out and the premiums. In the crack spread, we do believe that diesel is in a material short position with no real answers, in our opinion, as far as how that plays out. Our asset is a diesel heavy asset. So we’re going to benefit long-term by, by that factor. And so, trying to figure out where these markets are going to end up going is a guess, right, and so we do believe that all the market conditions are in our favor for the asset.

Noah Kaye

Okay. And on the renewable diesel project, the -- you mentioned, the long lead times, it seems like almost every major construction project these days see some push out for equipment long lead times seem to get a little bit longer. I guess, what’s your confidence level at this point in being able to stand up the project by 1Q 2023 and is there anything that we can point two in terms of key equipment in progress or delivery or anything like that and how much visibility you have into the key equipment?

James Rhame

Yeah. Noah, this is James Rhame. Let me answer that or attempt to answer it. At this stage, we do not see anything that is causing us concern. However, at the engineered equipment, we have our eyes on every bit of it and that seems to be hitting right on schedule, we continue to watch it. Right now the areas of concern for us are more than the bulk of equipment and much of this is specialty piping, specialty bows.

We -- as I stated, we don’t see anything that is material as of yet, but we’ll continue to watch this. Unfortunately, you may not know till it doesn’t show up and I am going to be very careful about making sure I don’t take down the OFH until all the equipment’s available and we’re ready to go.

We’re on schedule, plugged the two elements of risk that we have on this project is not just the supply chain that we just discussed, but also the impact of COVID in that area is starting to impact us a little bit with some of our engineering resources, but we’re managing around that also, so more to come.

Noah Kaye

Okay. Thanks. Let me just sneak one more in here. Obviously the UMO business has continued to outperform, really expectations and the certainly elevated spreads driving that, but here it’s still classified as current asset held for sale. Can you just update us a little bit on your thinking around the business, current levels of interest from potential buyers, how you are thinking about that strategic element of the business today? Thank you.

Ben Cowart

Yeah. Yeah. We hope to finish up this quarter with the work that has been in play just coming out of the last several months of discussion. So, accounting wise, we felt like it’s necessary to hold everything as it is and have more clarity in the next quarter is our goal. There -- and all of that is just to manage our fiduciary responsibility to tendered the interest that has come in in several parts of the business and that’s a process. So I don’t think it’s -- until that’s resolved and put to bed, then we -- we’ve been advised to keep this in a whole pattern for now.

Noah Kaye

Understood. I mean, the business is performing really well. So hopefully that gives you some…

Ben Cowart

Yes.

Noah Kaye

… flexibility. All right.

Ben Cowart

Yeah. Absolutely.

Noah Kaye

I’ll jump back in queue. Thanks.

Operator

Thank you. Our next question is from Eric Stein with Craig-Hallum. Please pose your question.

Eric Stein

Hi, everyone. Good morning.

Ben Cowart

Good morning, Eric.

Chris Carlson

Good morning.

Eric Stein

Good morning. Hey. Can you -- so can you just help me out here a little bit? I mean, yes, lots of noise in the quarter, and Yes, you did hedge, but you also guided with that hedge in place in for the naked portion of your production, spreads went higher. So I’m just trying to figure out why it’s such a big delta between your guidance at the midpoint of $120 million and your reported number, and I know, in your deck, you give the bridge, but just -- if you can help me out, that would be great, because something -- it just -- it seems like something’s missing here?

Ben Cowart

Yeah. So good question and I believe in flat seven, the bridge kind of breaks that down. They -- the key is the spread impact. So at the time, you’re looking forward on a forward strip with pricing that you’re using, that’s only way to provide a guidance. When you reconcile that back, you’re going to be $35 million short of market expectations at the point in which we were having that discussion.

Second, we had some minor yield adjustments inside the refinery, as we took the refinery over, that we had assumed would play out that we’re not actual, so that was put that on us, I guess. And then you just have inventory impact.

So that would be the gain in inventory from the beginning of the quarter to the end of the quarter. We ended up with a lot of additional finished product that did not get to market right at the quarter, this is a lumpy business.

So, when we load out cargoes, vessels, et cetera, you’re going to have inventory, build for those events and forecasting when that sale will take place, really reflects the $13 million, nothing lost the margin, the cost has already been paid to produce that product. We just -- if you look at our balance sheet, you can see a significant gain in inventory.

So, that’s really, yeah, I think we -- the market played out really well. And so, I think that, just didn’t play out like everybody thought it would, when you’re looking across the future quarter. So that’s as good as you can do when you’re trying to provide some kind of feel and direction when we bought the refinery, there was really no way to give the market an idea of just, how strong of an asset and its ability to produce cash flow, so that’s…

Eric Stein

Okay. So, I mean, the yield impact that, I mean, it sounds like that’s something that’s rectified the inventory impact, you can have that any quarter. I mean, given its timing, you’re going to make that $13.3 million backup in the third quarter and then we’ll see what happens at the end of the third quarter. If I’m understanding it incorrectly, but then you’re still, there’s about a $30 million difference. And that’s, I guess, maybe it’s something I just need to take offline. But I mean, you -- that was already kind of you knew you were going to be $35 million short, right, when you guided. So I’m just trying to figure out the delta, and if it’s something we need to take offline, talk more in depth about, we can certainly do that, but that’s…

Ben Cowart

No…

Eric Stein

…thing I am missing.

Ben Cowart

Yeah. Let me just say it again, at the point in which we were guiding, we were using forward pricing. When you reconcile the forward pricing that was in hand when the guidance was provided to the actual pricing that played out, you’re going to get more than a $35 million difference in outcome. That makes sense.

Eric Stein

Yeah. Yeah. Maybe, right, so -- yeah, we can talk about this offline and dig into that a little more. Maybe, I know previously, and this is kind of fluid, I mean, your -- it’s your first quarter of operating it. But thinking about it as the 3/1/2 crack now it’s the 2/1/1, just maybe thoughts on that, is that something where you think it’s the 2/1/1 permanently going forward or is it something that you can switch, let me not on a dime, but can switch back and forth, based on the market?

James Rhame

Yeah. This is James. Let me try to answer that. We think the 2/1/1 is a better way to reflect its operation today. But what will change in the future as the OFH comes down and is converted renewable diesel, the crack looking forward. I really don’t have a great picture yet, because I’m not sure how to roll in the renewable diesel and so that’s more of a -- that’s a different spread, so we’ll have to communicate that consistent.

What you will see occurs in the fourth quarter of this year as the OFH comes down, we do lead -- lose some of the diesel make that occurs and we’ll be selling the product, what is feeds the OFH will now go out in the product market and so that spread will change going forward and we’ll provide guidance on that when we get to the next quarters, we’ll continue to look at those.

Ben Cowart

Yeah. Your net diesel make with the renewable and what you lose on OHF (sic) [OFH] are going to be hot, right?

Eric Stein

Okay.

Ben Cowart

So we will be ahead on diesel and then your feed you indicate is the vacuum gasoline, which is typically a 70% gasoline, 30% diesel yield if it goes to a cat cracker. So if it goes into hydrocracker, for feed for basals or desilets, then those yields are more.

The nice thing is that there’s a strong premium on the vacuum gasol today. That is a result of a shortage of vacuum gasol to the refineries in the Gulf that was dependent on barrels from Russia that aren’t coming to the U.S. So I think timing is really good for what we’re doing and the product that we’ll have for that market.

Eric Stein

Okay. I’ll take the rest offline. Thanks.

Ben Cowart

All right.

James Rhame

Thank you.

Ben Cowart

Thank you.

Operator

Thank you. Our next question is from Amit Dayal with H.C. Wainwright. Sir, please pose your question.

Amit Dayal

Thank you. Good morning, everyone. Ben, I guess, my key question is, what is preventing you from sort of establishing guidance for 2022? It looks like you have some visibility on the crack spreads, how you are hedged for the current environment? Is there anything that you don’t have some confidence in that you are not sort of establishing guidance for the -- for at least 2022?

Ben Cowart

No. That’s a good question, Amit. We are very confident on our production rates. We’re very confident on our operating costs. We’ve provided that those are your key drivers. The difficulty in trying to pin at EBITDA number down is the volatility in the energy markets, the product pricing and these crack spreads.

And so, we want to make sure that we are leaving that to the market and to make sure that that we’re still, I guess, educating ourselves and getting used to the volatility that may be out there. It’s been extremely volatile in the second quarter and so far in the third quarter the same.

So trying to figure that out is somewhat of a challenge and we are following to the best of our ability, what the industry, the way they treat guidance on a go-forward basis, just to kind of stay in the group and not try to be smarter than those that have already been down that road, I guess, is my best answer.

Amit Dayal

Okay. And then for the fourth quarter, it looks like you are not in any hedges yet. Is that something that you might do is macro environment changes?

Ben Cowart

Yeah. No. That’s a very good question. So, as I said, in our remarks, we’re currently not hedging the fourth quarter. We would have put on some hedges, if we were following the same strategy that we started with at the close of the refinery.

We have some precedents. Now we have some view on the markets. We do believe that we’ve got a -- an opportunity going forward. We’re not that concerned about the exposure to the cracks. We do have inventory hedges on everything. So we’re not putting our inventory at risk at all.

But we believe that it’s better for us to provide the exposure and the decisions that we’re making. We’ve now built a hedging team that is managing our hedging positions and we -- they will continue to make certain recommendations to our risk committee that we can execute at any time, if we see opportunities that present themselves. So that’s how we’re going to move forward.

Amit Dayal

And then maybe just last one, again, not on the same topic. Like, see we’ve almost one and a half month into the third quarter now. So how is the hedging and spread environment sort of playing out for you so far? I mean, are the results a little better than what you’ve seen for the second quarter, just any color on how the situation is, as of now would be also probably helpful for investors to get clarity on?

Ben Cowart

Yeah. I think we’re going to continue see volatility in the third quarter. So it’s hard to define how that is going to ultimately play out. But as we talked about earlier, we did accrue for a -- the adjustments, the hedge allowance in the third quarter, that was part of our second quarter numbers.

So, to-date, we’re $23 million better so far in this quarter than what we had planned and made adjustments for. So we believe that cracks specifically around heating oil is going to improve. That’s our assumption. And we think the quarter is going to be better and should outweigh what we seen in the second quarter.

Amit Dayal

Understood. Thank you. That’s all I had, Ben. Appreciate it.

Ben Cowart

Thank you, Amit.

Operator

Thank you. Our next question is coming from Michael Hoffman with Stifel. Please pose your question.

Michael Hoffman

Hey, gang. So I don’t want to believe, but I do want to ask for some clarity help this poor dumb farm kid understand. So on the spread conversation, if I understand it correctly, at the time, I’m making numbers up, the forward world look like a buck. At the end of the day, it was $0.65. You had a 35% difference and there’s your $35 million, that’s what we’re playing with and that’s the challenge you have on trying to do guidance is those spreads are moving around still given the world volatility around the energy model. Is that -- did I get that right?

Chris Carlson

Yeah.

Ben Cowart

That’s a good way to lay it out there. That’s exactly right.

Michael Hoffman

Okay. All right. What direction are those spreads moving relative to 2Q at the moment in the aggregate, are they -- they’re up, is that or are they up, down, flat, sideways? What are they look like?

Ben Cowart

No. I think they’re trending down as an aggregate. What we anticipate is, a firmer and more robust diesel crack as we go through the third quarter and into the fourth quarter. But at the moment, they’re trending down.

Michael Hoffman

Okay. So that’s a head, so if I start with a baseline of $63 million plus $13 million for inventory, right, the inventory was a timing issue. So that’s some starting with a baseline…

Chris Carlson

Yeah.

Michael Hoffman

… and sort of $79 million. And then I’ve got spread pressure, so that’s a headwind. Is that the right way to think, that’s mentally where I ought to be starting?

Ben Cowart

Yeah. No. The only thing I would add is the increased production rates that we’ve provided in this call. So we guided to 70,000 barrels a day and we’re 72,000 barrels a day to 74,000 barrels a day for the third quarter. So the refinery is certainly doing their part.

Michael Hoffman

Okay. So we -- so those are the two major puts and takes, are the spreads narrowing and but I got better output.

Ben Cowart

That’s right.

Michael Hoffman

…for the balance, for sure. Okay. But I’m still starting round numbers around $79 million, that’s the right way to think, is that opening bid on the quarter $63 at the end, plus the $13 million in inventory, now go -- now play with that?

Ben Cowart

Yeah. Now I think that’s a good way to think about.

Michael Hoffman

Okay. All right. As the Black -- I can -- I want to ask about Black Oil from a different perspective. It looks like it’s now on a pace to do more like 28 million to 32 million for the year versus the kind of came into the year thinking it was going to be 25 million. Is that the right way to think about the run rate of activity or is there a major turnaround coming that I need to account for?

Ben Cowart

No. I think that’s -- directionally you’re in a good zip code. I mean…

Michael Hoffman

Yeah.

Ben Cowart

… the business in general is just done really well, teams done really well, spreads are good. We continue to grow our collections. So really nothing backing up related to the legacy asset. It’s, obviously, we are -- we have to provide the color on the bigger picture with taken on the Mobile refinery, but we’re very pleased with where the business is and where we’re at in the third quarter going into the fourth quarter on the legacy business.

Michael Hoffman

Okay. So help me understand if -- I get the accounting issues, I’d be maintaining dis ops. My assumption is that you would still sell this business, whether it was dis ops or continuing ops, you would be a seller of the assets and concentrate your energies on Mobile and that’s an ongoing process. So if that’s true, I’m not -- I’m a little confused, why buy Heartland back in, I get buying Myrtle Grove optionality of what you might do there, but why buying Heartland back in?

Ben Cowart

Yeah. We want to clean our capital structure up. We believe in our legacy business as part of our long-term decarbonisation strategy. So it’s the foundation of what we’re doing in Mobile, as we transition the hydrocracker over to renewables and bring renewables into our focus, our recycling and reclamation, and the work we’ve done on our legacy business gives us a long tenure when it comes to energy transition. And so, we want to keep that as part of our overall brand strategy and what we aspire to be in the energy space, more of energy transition company than that of just the independent refiners.

Michael Hoffman

Okay. So you’re sending a message that you’re pulling the sale off the market then?

Ben Cowart

I am sending a message that, we love our legacy business as part of our strategy and we’ve got work to complete before we can make an accounting decision on how that comes back into the picture. And we got to get that work done and then -- and go from there.

Michael Hoffman

Okay. In the cash flow statement is the $93.745 million hedged commodity loss and then sitting here today basically comment you made, if the quarter were to have ended for 3Q, that number would be $23 million smaller. That’s the message you’re sending, right? That -- is that am I understanding the accounting, right, like the…

Ben Cowart

Yes. That’s correct.

Chris Carlson

That’s correct. That’s right.

Michael Hoffman

Okay. And then, James, on the long lead items, I mean, you’re not shutting down in October unless all that stuff shows up. That’s -- so part of your confidence is you believe you can do your shutdown and so far nobody’s giving you any indication, you’re not going to be able to do the shutdown, because everything’s supposed to show up on it’s supposed to?

James Rhame

That’s -- you are absolutely correct.

Michael Hoffman

Okay. What part of the world is this stuff coming from?

James Rhame

Most of its domestic and is the -- at this stage is really the specialty pipes and valves, most of the engineered equipment, we’ve got good line of sight on, but it starts becoming the bulks. Just to give you a rough number and I know I’m probably getting the details. We have 100 -- a little over 180 tie-ins that have to occur for this project to be successful. And it’s all of those tie-ins and many of that is specialty pipes inside the unit and OSBL also.

Michael Hoffman

Okay. And is their issue…

James Rhame

Okay.

Michael Hoffman

They have a potential issue could be supply chain or it’s just the demand is really strong and they’re making things as fast as they can make them, when they get to you, they’re going to get made and sold and shipped?

James Rhame

Both is our understanding. Their ability to make and they’re running, most of the things you see we’re doing, we’re going to extra hours, try and help and talking with them, what can we do to help them. But it’s also their ability to get material.

Michael Hoffman

Okay. All right. Thanks.

Ben Cowart

Thank you.

Operator

Gentlemen, as there appear to be no further questions in the queue. I will hand it back to management for any closing comments you’d like to finish with.

Ben Cowart

Okay. Ali, thank you. And thank you everybody on the call. It’s certainly a monumental quarter. One that takes a lot of work to digest, we did it. I am very thankful for the future that we hold in our hand, the cash and the cash generation of this asset and the business.

What we have going forward as far as our strategy to unfold for the market, the challenge that our team faced in transitioning a very large piece of business into the company. I can’t underscore more their hard work and just the fact we delivered everything operationally in this quarter, both with the new team and the new business, as well as our legacy team did their job.

So, I’d love to have the $90 million back in our bank account from the hedging, but I personally stand tall on that decision, with the plan we have for the future and just managing our balance sheet and the full exposure to the upside to our shareholders.

And that’s been a journey for us to be able to get here and deliver on all the things that we were able to accomplish in the very first quarter without dropping the ball and without having any material setback in doing so.

So thank you everybody for the support and we look forward to our third quarter call, for sure, and continued information that we hope to provide to the market between now and the end. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

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