Delek US Holdings, Inc. (DK) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Delek US Holdings Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) I will now turn the call over to Mr. Keith Johnson, Investor Relations. Please go ahead, sir.

Thank you, Dennis. Good morning. I would like to thank everyone for joining us on today’s conference call and webcast to discuss Delek US Holdings’ second quarter 2013 financial results. Joining me on today’s call will be Uzi Yemin, our Chairman, President and CEO; Assi Ginzburg, our CFO; Fred Green, Executive VP and President of Refining; and Danny Norris, Vice President of Finance; as well as other members of our management team. As a reminder, this conference call may contain forward-looking statements, as that term is defined under Federal Securities laws. For this purpose, any statements made during this call that are not statements of historical fact maybe deemed to be forward-looking statements. Without limiting the forgoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission, and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Today’s call is being recorded and will be available for replay beginning today and ending November 8, 2013, by dialing 855-859-2056, with the confirmation ID number 21161625. An online replay may also be accessed for the next 90 days at the company’s website at delekus.com. Last night, we distributed a press release that provides a summary of our second quarter 2013 results. This press release is available on our corporate website and through various news outlets. On today’s call, Assi will begin with a few opening remarks on financial performance for the quarter. Danny will cover additional financial details before turning it over to Fred to discuss initiatives in our Refining segment. Then Uzi will offer a few closing strategic comments. With that, I’ll turn the call over to Assi.

Thanks, Keith. During the second quarter of 2013 market conditions in our refining segment remained healthy, but were less favorable by the strong conditions in the second quarter of 2012. The combination of a declining Gulf Coast 5-3-2 crack spread and a narrowing of the Midland crude differential results in a decline in our refining margin on a year-over-year basis. We were able to partiality offset the declining refining margin by increasing our target refining throughput to record levels and improved result in our West Texas Wholesale business. We ended the quarter in a solid financial position with $156 million in net cash. In July, Delek Logistics amended its credit facility to increase lender commitment to $400 million from $175 million, and the first dropdown of Logistics assets was completed for approximately $95 million in cash. Now, I will turn it over to Danny to discuss additional financial details.

Thank you, Assi. For the second quarter of 2013, Delek US reported net income of $46.6 million or $0.78 per diluted share. This compares to a net income of $67.8 million or $1.15 per diluted share in the second quarter last year. This change in year-over-year earnings in the second quarter was driven primarily by lower margins in our refining segment. The Gulf Coast 5-3-2 crack spread was $19.83 per barrel in the second quarter of this year, compared to $25.42 per barrel in the second quarter of 2012. Also the WTI Midland crude discount the WTI Cushing narrowed to $0.14 per barrel in the second quarter of ‘13 from $4.86 per barrel in the prior year period. This was partially offset by increased barrels of Midland sourced crude during the second quarter of 2013 compared to a year ago period. Now I’d like to discuss a few additional items on the income statement. Total operating expenses increased by $5.2 million to $95.3 million in the second quarter when compared to the prior year period. This increase was primarily due to the addition of the biodiesel plant which was acquired in January 2013 and higher expenses related to new stores in our retail segment. General and administrative expenses increased to $28.1 million in the second quarter of 2013, compared to $24.7 million in the prior year period. This increase was primarily due to labor related expenses and outside services. Other income included approximately $6.5 million related to the dismissal of a majority of claims under litigation brought against a subsidiary of Lion Oil. On an after-tax basis, this was approximately $4.3 million or $0.07 per share. Interest expense was $9.2 million in the second quarter 2013, compared to $12.3 million in Q2 of 2012. This decrease in interest expense was…

Thank you, Danny. I’d like to give an update on our crude supply initiatives, as well as other projects in our Refining segment. During the second quarter our initiative to improve pipeline access to Midland source crude was completed. Our Tyler refinery now has access to 52,000 barrels a day and our El Dorado refinery now has access to 35,000 barrels a day of Midland sourced crude. If we include our access to locally source crude we now have approximately 105,000 barrels per day of cost advantage crude at about 140,000 barrel per day capacity. We also completed our rail offloading facility at the El Dorado refinery, giving us the ability to offload approximately 25,000 barrels per day of light crude oil or approximately 12,000 barrels per day of heavy crude oil or some combination of the two. We also continue to have access to an additional 20,000 barrels per day of light crude oil loading capacity through a third-party rail operation adjacent to our refinery. In June of 2013, approximately 70% of the rail supplied crude was offloaded to our own facility. I’d like to provide some information related to work that we will be able to perform at each refinery during their respective plan to turnaround in 2014. We’re planning to replace the FCC reactors at each refinery with state-of-the-art technology. These FCC reactors have been fabricated and are awaiting delivery to each site. On a combined basis, the expected cost is $18.3 million and we believe that the annual contribution margin will be increased by approximately $30 million based on current economics. On our last conference call, we highlighted two new projects that our engineers had identified at El Dorado. I wanted to provide additional details related to these projects. The first project will be bottleneck the…

Thank you, Fred. This has been a record first half performance for Delek US. Now that we have implemented the majority of our good flexibility initiative, we look forward to the project plan out our refineries through end of 2014. Based on forward curve prices, these projects should generate in excess of $60 million of contribution margin between production increases and yield improvements. And we believe we can identify other opportunities to improve our facilities during the upcoming turnaround. Our integrated system mitigated the effect of RINs on our operation in the second quarter and we will continue to work to minimize the effect of freight volatility on us through the year. We achieved record crude run of 64,000 barrels per day in our Tyler refinery. Our financial position remains solid and gives us the flexibility to continue to focus on creating value through a combination of investment in our business, returning cash to shareholders and exploring third-party acquisition opportunities. With that, Dennis, will you open the call for questions?

(Operator Instructions) Your first question is from the line of Evan Calio with Morgan Stanley. Please go ahead, sir.

Hi, guys. This is [Munaf] for Evan today, morning. On the call you mention that had you ran about 21,000 barrels of crude by rail and 3,600 or something was heavy. So just trying to understand what kind of differentials are needed for this 3,600 to actually go up to 10,000 to 11,000? I mean what is the rail economics -- when does the rail economics actually breakeven in terms of differentials.

Well, the he heavy, first of all thank you for the question, the heavy crude is being influenced heavily by the price of asphalt. As you know, the portion of asphalt in these crude is 30%, 40%, 50%. And this was very wet season and asphalt demand is not doing very well. So we look at these barrels not only in terms of the differential to WTI but the yield structure and the yield structure at this moment doesn’t support running much more heavy crude because of the price of asphalt. If I that answer you question?

No. That’s actually very helpful. I’m just trying to understand on the asphalt part, do you think this is weather related issues have pushed the demand forward, so in case would the sales volumes come back in the third quarter, or this is kind of more in terms of this might not happen this year?

Well, I -- honestly, I don’t know to predict. We do have orders on the book. But the people that do the work, we have more than last year orders on the book. But if the weather continues the way it is and it is wet, then these people cannot conduct their work. So it’s a matter of extending maybe just seasonal base, but so far it was a very, very wet season.

That’s very helpful, guys. And just on the El Dorado capture rate, were there some like one-time items because of which you saw a sequential compression in the gross margin or it was basically lower differentials?

Well, that will bring the story of RINs to the table. If you and let me give you some color about that. The entire system of Delek during the second quarter, the impact of RINs was $2 million, that’s it $2 million for the entire Delek system, 2.5 maybe…

Okay.

But if we breakdown the entire system, you will see that while Tyler is basically mutual, there’s no impact. Retail made $3 million out of the RINs and Wholesale made $2 million out of the RINs. So if you look at El Dorado, El Dorado lost $8 million because of the RINs and that’s $8 million obviously are being captured in the margins that you see. So two influences were on El Dorado. First, low demand for asphalt and second, $8 million hit on the RINs -- of RINs on that facility.

No. That makes a lot of sense. Thank you so much, guys.

Your next question is from the line of Jeff Dietert with Simmons. Please go ahead, sir.

Good morning.

Good morning, Jeff.

Thanks for your explanation on the El Dorado that was very clear. Question on crude quality at El Dorado. I believe El Dorado has flexibility to take medium sour crude, as well as light and I believe historically, you’ve used medium sour crudes from the Gulf Coast? With your increased access to Midland and Permian barrels via new pipeline, does it make sense to bring West Texas sour in as an alternative or would you prefer to use your pipeline capacity to bring in light crude since WTI, WTS have been trading at close proximity to one another?

Well, that would -- that is a great question, Jeff. Obviously, we -- the agreement we have allows us to deliver either IOTF. Now let me be clear. If you look at the screen and we do look at the screen in West Texas every day like you do. You will see that TS is basically pipe not more expensive because of other reasons then TI. So with the amount of asphalt that is being produced by TS, it doesn’t make sense to do it at this very moment. However, if the market conditions change, we will have the ability to move TI. We’ll look at the LP side if you want to with that, we look at the LP almost every day to make sure that we don’t miss anything. At this movement, we don’t feel that we need to run TS. Do you want to add anything to that?

No. That’s exactly right. I mean, we factor in that pipeline capacity from West Texas and allow the model to tell us what makes the most sense, Jeff. sour barrel and maybe exposing additional capacity in the top of the crude tower or running all sweet.

Great. And for separately for your crude purchases I assume all your WTI based contracts are under the CAM type contract. Is that in fact true and for your non-WTI based contracts, are they under CAM contracts or not?

All of them are under CAM contract besides the 22,000 barrels of the local barrels.

Okay.

And those around the posting.

And the local barrels are basically fast. So if you ask about the liquidation, I assume that this is the question.

Yes. That’s right.

So, yeah. 22,000 barrels are fast, all the others are CAM.

All right. And Fred, in your discussion on ethanol RINs, you mentioned there was more pressure, more competition and pressure on gasoline prices in July and August. Is that reflected in the 3-2-1 indicator margin or is that weakness in addition to what 3-2-1 indicator margin has shown?

Yeah. The weakness is in addition to that and it’s really related to how the various companies are pricing their racks, so they can capture those RINs at the various terminals. So the cracks 3-2-1 is based on the pipeline batches, so it doesn’t include that discount.

So effectively, people are attempting to sell more blended barrels and generate RINs themselves rather than ship it up colonial as a non-blended barrel and have to purchase RINs is that effectively what’s happening?

Yes.

Okay. Thanks for your comments.

Sure.

Your next question is from the line of Robert Kessler with Tudor, Pickering. Please go ahead.

Hi. Good morning, guys.

Good morning.

Good morning.

See if I could get a little bit more color on the El Dorado capture rates, if you will. One on the feedstock side, you have obviously a big transition in the quarter with ramping up your access to midland crude. Is there a way to say for your Midland-based WTI crude deliveries in the quarter, what was the average price relative to the benchmark that we see posted in Midland.

In second quarter?

… you see on a spot basis, yeah, Q2 versus today.

Its roughly the same, I’m going by memory, I think that -- I looked at yesterday Midland was $0.35 under and for the quarter I think it was like 49 through something like that very similar.

Okay. And then volume you mentioned obviously…

Please remember…

… you had big ramp-up in the light volumes that were accessed by pipe from Midland in the quarter. So just trying to get a sense for the quarterly average, like laid in price for your El Dorado refinery relative to Midland posted price.

Well, please remember that in the second quarter we only started 35,000 in June. So you don’t see a full quarter with Midland in El Dorado for the second quarter. Obviously, that would -- that has changed in the third quarter and we should expect, everybody should expect 35,000 on a daily basis for the entire quarter. I’m going by memory, if I -- you don’t mind me saying that and we can correct the numbers later on. But in April we were in El Dorado, 10,000 barrels, in May 18,000 and in June, 35,000. So if you use that average, that average is 20 versus 35 today, obviously a big improvement.

Is there a way to say, if you would have looked back and run the full 35 over the whole quarter, how much more money would you have made, maybe…

We tried to calculate that but there is a difference in yield.

Okay.

So it’s pretty hard to do it going back, you can do it going forward using different prices, but the change in the yield, obviously, when we run more TIs there will be less asphalt. So it’s hard to do that. We can try to calculate that number.

Okay. And then going back to, I think, Jeff’s question on the deliveries into the product pipelines and the degradation in the refine product price out of El Dorado relative to say the benchmarks? Is there a way to quantify that, how much on a per barrel basis have you seen a deterioration versus the benchmark crack?

Well, let me be clear about something. Fred mentioned two things, two different elements in the El Dorado refinery. And one is positive and the other one is negative. Let me start with the negative. The negative is the pressure in the rack wholesale prices because shippers are trying to capture the RINs. So they push the wholesale price down. We still captured the RINs. We’re just our racks in a couple of markets are down. Mainly, call it El Dorado -- I’m sorry mainly a Little Rock, a little bit north of Little Rock. However, there is something else that happened on August 1st, as Fred mentioned that. The Enterprise Pipeline or Enterprise decided to convert one of their pipelines that’s used to go from the Gulf north to move other project from north to south. That leaves El Dorado in a very good position, advantage position to supply our distillate products across Arkansas without too many barrels coming from the Gulf or barrels that used to come from the Gulf. So, obviously, that helps us dramatically on that side. So, we do see the rack on gasoline under pressure but on the other hand, we see demand for our distillate products going up in these local markets. So, these are one against the other. You can obviously get the numbers, the posting numbers like any other person via the internet.

Okay. Thank you very much.

I will just add a little bit that, overall, RIN prices have started to come down in the last few days. And as those come down, we expect some of that pressure on the gasoline to go away.

Yeah. Of course, makes sense. Thank you.

Your next question is from the line of Roger Read with Wells Fargo. Please go ahead.

Good morning.

Good morning, Roger.

I guess, kind of keeping along the lines of looking at the logistics side of things. 3600 barrels of kind of Canadian heavy crudes, we’ll just say WCS to keep it easy. When Keystone XL’s south opens up, is that going to do anything to improve deliverability of WCS or other heavy crudes into El Dorado?

Roger, this is Fred. Initially, no, because we’re not connected in to Keystone XL but we do own the property where that pipe crosses the Nettleton pipeline, Delek Logistics’s Nettleton pipeline. So, there’s an opportunity on a go-forward basis to consider connection and receipt of Canadian barrels there close to Longview and bringing those across.

Okay. So, maybe that’s more of a ‘15 event than a ‘14 potential event, just in rough timing of being able to get permits and attach end of the line and all that.

Yeah.

Okay. And then the other question following-up on the pipeline changes around El Dorado. Anything you can offer us and if I missed it, I apologize but kind of -- what are the volume potentials of what’s been taken out of that market and what you will be able to supply into Southern Arkansas on the distillate side?

Well, I assume that the question is around El Dorado supplying Arkansas with distillate. Is that correct?

Correct.

Well, this change only happened August 1st. We’re seven days into this thing. We don’t really know. We obviously see the demand coming up pretty substantially. We don’t know what it will do going forward. We just know that barrels that used to come from the Gulf are not coming at this moment. We don’t know have any way to know how many barrels used to come from the Gulf. So, we’re just looking at it today as a great opportunity for our company, probably one of the biggest for 2014. We just don’t know yet the magnitude of that opportunity.

All right. Well, I guess we’ll stay tuned on that one. And then my final question. Approximately $95 million from the drop down at the end of July, what’s your plan with the cash? And how free and available is that cash? I mean you said you’re still essentially a consolidated company and all.

Roger, great question. The cash is free sitting at Delek U.S. Holdings. So, it was basically a sale of assets to -- from Delek Refining to Delek Logistics. And the cash will keep us with a strong balance sheet, will enable us to continue and do all the project that Uzi spoke in the latter part of the conference call that we expect to have at least $60 million of contributions coming from them. The cash will help us continue and do all the other projects that we planned around Delek U.S. and enhance our liquidity. So, there’s no limitation on most cash at Delek U.S. at this point.

Okay. And I’m going to sneak in one more if I could. Can you help us on the impact of the turnarounds in 2014 again, to whatever extent the possible for, I believe, most of it in Q1 but some of it also later in the year?

Well, we’re still finalizing these numbers. If you will, you probably won’t for planning ideas, plug-in around $150 million for our refineries including the project, including the turnaround for next year, just this is a rough number. It may change because we’re looking for -- one, can we spread around the turnaround more than -- and not condense it, especially in light of the fact that we don’t want distillate in Arkansas to be under huge pressure. That’s one thing. And second, as we mentioned, we do look for other projects. And we believe these projects exist. We’re not comfortable at this moment to quantify numbers and returns with this project. But for this moment, let’s use $150 million as a number for turnaround in projects of the refinery system.

And I think just as a rough rule of thumb, maybe consider one month of down time at each refinery, Q1 for El Dorado and late Q3 for Tyler.

Okay. That’s helpful. Thank you.

Thank you.

Your next question is from the line of Arjun Murti with Goldman Sachs. Please go ahead.

Thank you. Just switching gears a bit in terms of the cash distributions to shareholders. You guys have been very good about having both the regular and the regular special dividend, with spreads obviously narrowed here and perhaps free cash flow a bit less. Just if you have any comments on how you’re thinking about I guess in particular the regular special dividend is that going to be a function of free cash flow. You do have a very strong balance sheet so some ability to absorb debt to cap increases and then how you are thinking about the stock buyback as well? Thank you.

These are great questions. So thank you for your interest. I’ll try to take them one by one. First, spreads are under pressure. That’s a fact. That’s the reason we were planning our balance sheet for these days. We were very conservative in planning our balance sheet. With that being said, we will continue the regular and the regular special as we think about it today. We are visiting this policy every six months. There’s no reason to believe that in three months we won’t visit it again. And we won’t do another good change under the market conditions the way they exist today. Second quarter was impacted by several factors. There’s no reason after making $0.80 not to continue return cash to the shareholders. We feel that the reason we didn’t jump up and down is we want people to believe in us. And we will continue to visit that policy. And we will as we said today, we intend to continue giving back both the regular and the special -- our regular special. That’s for your first question, Arjun. The second one is stock buyback. We have a plan that the Board approved. And obviously, we will look at the stock price every day. And if needed, we will continue like we did six months ago, buy more stock. However, let me be clear about that. The project that we identify in El Dorado and in Tyler brings tremendous amount of return to shareholders. And we target at least 100%. And so far we were able to deliver at least 100%. We had a record yield if you will at Tyler, got to 64,000 versus a year ago only 54,000. This is a result of the improvements that we’re doing in both refineries. We think that there are other projects that we will deliver a great return i.e. close to this 100% benchmark. So as long as we have these projects on the books, we want to maintain the cash and continue investing in our facilities. And obviously, as the market comes under pressure, these opportunities, the acquisition of third-party opportunities that didn’t exist a year ago will open up.

That is very helpful. I’m very clear with you. Thank you so much. Just one follow-up question regarding your retail business. I think a few years ago, it might have been ‘08 or ‘09 there was some talk about whether you made IPO that I think strategically assuming with this RIN issue and we can debate whether its going to weigh or not. But it’s probably been a benefit to have had some of those assets in the blending capability. How are you thinking about retail today? There has been a lot of spin outs in IPOs of retail operations. Can you talk about how it fits into Delek U.S. Holdings? Thank you.

Guy, again, another great one. Retail from strategic standpoint, I was clear in the past -- we were clear in the past for many years. The way it existed with retail, with four -- [MPGs] of 2000 square foot store is going away. I don’t know if it will disappear in two years, five years, or 10 years, but it is going away. And we are changing our business model in regard to these stores. We are building mega stores. Some of them produce 4 million or 5 million gallons a year and $2 million inside, that’s not our target by the way. And they should support the retail system. In the initial phases of converting our system to these mega stores, that’s the reason we invest all that money in these megastores and so far we are happy with the results. So we will continue doing that and see if we can duplicate the -- if you will prototype to either market, especially in Arkansas with everything that is going on over there. But it’s really premature to think about IPO of this system since we’re just now converting the business model to a much more sophisticated convenience store than what we used to have five, seven years ago.

That’s very helpful. Does this business have an acquisition element to it as well I assume?

Only if we see future stores. We are not going to buy the path. So yeah, only if we find good stores, big stores enough that we can implement our loyalty, private label food service strategy.

That’s terrific. Thank you so much.

Your next question is from the line of Paul Cheng with Barclays. Please go ahead.

Hey, guys. How are you doing?

Good morning, Mr. Cheng.

Good morning. Say a quick question for Fred. You said in your well operation, how flexible in terms of your contract term with the loading terminal operator or with the well operator, when the market conditions change, how quickly that you can change either the destination -- source of your crude that you come from or that you otherwise stop it. Is it every 30 days or 60 days or does it take longer?

I assume that we are talking about the well operation, right?

That’s correct, for El Dorado. When market conditions change, how quickly that you can decide whether you want to ship it or not to ship it? Is there any contractual obligation to stop changing it?

Great question. We can change it within 30 days. However, please remember, we had some leases. These leases usually are very short term as well. So that’s the reason we didn’t went -- we didn’t go and bought 2000 railcars but we did a system that we can change very quickly. As I said that’s the flexibility, 30 days, maybe 45 days with some barrels, but that’s it.

30 to 45 days that you can change it. And you’re saying that you have some leases for the railcar I assume that how many railcar that you are under the take or pay leases and what is the duration of the leases on average?

I’m going by memory. I think we’re talking about 650 and the average is $1700. I’m going by memory. We can give you that number. It’s not a huge number. These are not really…

Right. What’s the term? You say that three months term or one year, two years?

No, no. Usually three months, six months, nine months, it’s shorter than the one year.

Okay. And earlier that I think you guys were talking about the total RIN cost for the company is $2 million in the second quarter. And I think you have said in -- not just that you reported $2.1 million of the RIN benefit. And in retail, I think you mentioned there is three and then El Dorado is eight. So does that means that Tyler actually have a benefit?

No, no. I said or we said El Dorado negative eight.

Negative eight.

And the entire system is minus 2.5…

Right.

…for the second quarter. $3million -- if you look at the balance of minus 2.5, $3million came to the good from retail. $2 million came to the good from logistics and $8 million to the bad came from El Dorado.

Right. So Tyler have no impact.

No, no. We blend every drop over there.

Tyler has a very slight surplus because we’re blending all of our gasoline, the ethane and all of our diesel to B5.

And Paul, that again -- this is going back to the flexibility. Please remember that Tyler sells everything across the rate by truck basically. And we are probably the main supplier or the only supplier in Tyler, Texas, around 100, 150 miles. So there’s not much impact of RIN on Tyler.

Okay. So and that -- Fred earlier that you were talking about, I presume you referring to the wholesale margin in El Dorado was being negatively impacted. So based on what you guys just mentioned here that we should not assume that Tyler have a similar impact at all?

Not at this point, Paul. We’ve got more contract sales at El Dorado and Tyler. And those contracts are clear on how that gets allocated. So no impact at Tyler.

Right. And on -- Assi, do you have the advancing item inventory, the market value of the book?

Yeah. It’s approximately $37 million.

$37 million? All right. And Fred, you mentioned that we should assume one month down time in both El Dorado and Tyler next year. And doing that down time is the whole plant down or that is just a portion of them?

It will vary a little bit, Paul, but for simplicity you can assume that the entire plant is down for a month.

Okay. So both El Dorado and Tyler. That’s somewhat unusual. You said that we should not assume every year that you have the whole -- each refinery to have their whole month down?

Paul, historically, refiners have tried to do smaller turnarounds or turn around a portion of the refinery. El Dorado and Tyler are both very tightly integrated refineries. There is not a lot of duplication of capacity and not a lot of excess tankage. So in order to blend products that meet the specs, for example, all your hydrotreaters have to be operating. So I think, from our perspective, the full plant turnaround is the best route and the shortest route.

And that should be every four years?

Four to five.

Is that a four-year cycle or a five-year cycle that you guys use?

We’re on a five-year cycle.

You’re using five-year cycle. And on that basis then, I mean, Fred, given the volatility in the refining margin in north end, does it make sense from that standpoint for you to build up some of the duplicate capacity so that you have more flexibility?

Well, let me take that one, Paul. We do have some ability to store products. So even though the plant will be down, because of the excess capacity in different places, we will build tremendous amount of inventory ahead of time. That’s the reason we are planning it the way we are planning it and one plant will support the other. So you -- we shouldn’t expect that there will be zero sales during that time. This is not a Gulf Coast refi -- these are not Gulf Coast refineries. These are refineries that will continue to support the local markets even during a turnaround with the inventory that we’re going to build.

And a final one, Uzi, you said the current WCS discount and also the asphalt margin is not economic for you that you well heavy oil into El Dorado. How about the light oil? Is it at today’s defense of that economic for you to well it in?

Are you talking about Midland or Gulf Coast or, well, what are you talking about in El Dorado or maybe everything?

No, everything. I mean, are you -- in other words, based on today’s economics, do you find it economic for you to well light oil whether it’s from the Permian or from the Bakken into El Dorado at all?

It depends on economics. I mean, from the Bakken, probably, at this very moment, no, a week ago, yes. So we check it every day. Today, probably, it’s too tight for us to run Bakken.

And how about Permian?

By rail? I need to check it. I don’t know the answer for that moment. A week ago, it was economic.

I see. All right.

Paul, one of the icings were crude price is on an ultimate base. And when it reached to $108 on the WTI base, it probably it didn’t make any sense. Since then, in the last few days, we’ve seen oil prices are coming down. If we go back to $95 where we were in Q2, it was advantageous to bring rail even in today’s more or less experts.

Assi, can you explain a little bit why that the absolute prices, is it because of your inventory cost?

Because the portion of the residuals, not just the asphalt, is part of what we produce from it. So you still have in El Dorado approximately 14%, which is not gas or diesel. If you look at gas and diesel today the crack spread around them are $10 and $20 almost.

I understand, but, on margin about the light oil in this case. So that if you’re well into light oil, your asphalt or your receipt portion actually is lower. So I thought a higher oil price actually make it more economic incentive for you to well into light oil.

No. There’s is residual in every crude. And so (inaudible) value be around 10% and the ultimate price of oil make a difference.

Got it. That I understand. Well, we will take it offline. Thanks.

Thank you, Paul.

Your next question is from the line of Edward Westlake with Credit Suisse. Please go ahead.

Hi. This is actually Rakesh Advani. Just had a question on your El Dorado performance in the second quarter. And you’ve mentioned you had issues with asphalt pricing, et cetera. But I guess, in a normalized environment, how hard can we expect you to run those crude units on a like a normal utilization level?

Well, obviously, we are trying to -- in an environment where the crude is $85, $90 to $95, the max light that we can run with the 10%, 11% visit is 72, 73. Now that’s exactly what Fred mentioned earlier that during turnaround we’ll take the opportunity and expand or do the pre-flush tower and expand the GHT to allow ourselves to run 83 with light crude. So that’s the reason we are doing the work. But under the scenarios of asphalt being depressed, you should expect 72 to 73 of light crude.

Thanks. And just another one on the Logistics side of the business, granted you guys have a lot of value within the Logistics business. Is there any other projects that you guys are possibly looking at beyond the 25 to 30 that you had highlighted before in potential dropdowns, and granted you’ve done about 10 or so last month. Is there anything else besides the Paline or the rail facilities that you’re looking at?

There are a few projects, as Fred mentioned, we are looking right now at the potential of developing some receiving station to connect to the -- to another pipeline. Those are not small investment and they’re probably going to be done by Delek U.S. and will be dropped down later. The $25 million to $30 million EBITDA that you mentioned has in it, as you know, the rail facilities, so that’s part of it. Paline is still a huge opportunity for us, not just the main line. There’s another portion of Paline that we now operate. So overall, we are very optimistic that there’s still lot of value of logistics that hasn’t come up yet and we’ll perform well in the next few years with that.

And I want to be clear about that because we are being asked many times, so why don’t we just put it on the table. We targeted $150 million of EBITDA from the IPO. There’s no reason to believe that we will not get the $150 million of EBITDA three years from the IPO.

Thank you.

Your next question is from the line of Blake Fernandez with Howard Weil. Please go ahead.

Good morning, guys. Thanks. Uzi, I wanted to go back to Arjun’s question on the retail spin. If you look at the forward multiples for some of these retail companies, they’re well above where your stock is trading. And I guess what I’m just trying to understand, it seems to me like the business is probably free cash flow positive. So you could probably grow on an organic basis as a stand alone, may be you can correct me if I’m wrong there. But is there a certain size or scale, maybe number of stores that we should be thinking about that you feel is justifiable as a standalone?

Well, let me be clear. Delek U.S. should support the retail because we are building these megastores. The structure we’re doing is we have a $3 million project including the land. Everything is $3 million all in. And a $1 million comes from Delek U.S. equity and $2 million coming from standalone, a boring 5% side by side. That’s how we finance the stores that we’re building. But still, it’s $3 million that should come for the megastore. I mentioned that in the past and I’m trying to be consistent here. I’m not sure all that we can. We think that at least we need at least 100 megastores to be able to justify this business. And obviously, at this moment, we are 20, 25. We’re going to build 10 this year and probably shoot for the 20 next year. So and again, we’ll try to make it. I don’t know if we can make it this fast. But by the end of the day, we will not -- I don’t think that we can justify this business without 100 -- at least 100 megastores.

Okay. Very clear. Thank you.

And at this time, there are no further questions. Please go ahead with any closing comments.

Well, Dennis first of all thank you for helping us with the technical difficulties this morning. Second, I would like to thank my colleagues around the table. I would like to thank everybody that participated in this call. But mainly, I would like to thank our employees and my colleagues for this great company for helping us achieving our goals. We’ll talk to you soon. Thanks.

Ladies and gentlemen, this does conclude today’s conference call. Thank you for joining. You may now disconnect.