Delek US Holdings, Inc. (DK) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Amy and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Delek U.S. Holdings Third 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] Thank you. Keith Johnson, Investor Relations, you may begin your conference.

Thank you, Amy. Good morning. I would like to thank everyone for joining us on today’s conference call and webcast to discuss Delek U.S. Holdings’ third quarter financial results. Joining me on today’s call will be Uzi Yemin, our Chairman, President and CEO; Assi Ginzburg, our CFO; Danny Norris, our CAO 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 may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify our 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 February 4, 2016 by dialing 855-859-2056 with the confirmation ID number 55522141. 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 summaries of our third quarter of 2015 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 Uzi, to offer a few closing strategic comments. With that, I’ll turn the call over to Assi.

Thank you, Keith. During the third quarter of 2015, our Logistic and Retail segments performance improved on a year-over-year basis and we benefited from increased production at Tyler refinery. Equity income from a 48% investment in Alon USA was approximately $20.2 million on a pre-tax basis, which was reduced by $3.4 million of depression expense for a net $16.8 million on our income statement. We also incurred approximately $4.5 million in interest cost related to the borrowing associated with the acquisition of the ownership in Alon USA in May. The net effect of this owner ship on a pre-tax basis was approximately $12.3 million in the third quarter of 2015. For financial position remain conservative and we ended the third quarter with a $366 million of cash on a consolidated basis and $587 million of net debt. Excluding debt and cash at Delek Logistics, we had net debt position of $262 million at Delek US. On August 19, we began repurchasing shares and through the end of October we repurchased approximately $39 million or 1.3 million shares under our $125 million repurchase plan. This equate to approximately 2.1% of our share outstanding as of July 31. Now, I’ll turn it over to Danny to discuss additional financial details.

Thank you, Assi. For the third quarter of 2015, Delek US reported net income of $18.7 million or $0.29 per diluted share. This compares to a net income of $72.5 million or $1.22 per diluted share in the third quarter of last year. During the third quarter of 2015, we incurred $1.6 million hedging loss which included $5.8 million of unrealized hedging losses. In addition results were reduced by approximately $32.4 million from lower of cost or market inventory valuation and other inventory related charges associated with changes in the price of crude oil and products during the quarter. General and administrative expenses were $34.1 million in the third quarter of 2015, compared to $36 million in the prior year period. This decrease was primarily due to employee related expenses. Depreciation and amortization expense was $34.2 in the third quarter of this year, compared to $29.2 million in the third quarter of last year. This increase was primarily due to capital spending related to the Tyler turnaround and expansion project. Finally, our income tax rate excluding the non-controlling interest income associated with Delek Logistics of $6.7 million was a negative 2.7% in the third quarter of 2015. This low tax rate was primarily due to greater impacts of permanent differences as a result of lower pre-tax income during the third quarter of this year. We expect the income tax rate for 2015 to be 16% to 20% excluding the non-controlling interest based on current tax laws. This guidance for 2015 is lower than our previous range of 28% to 30%. Turning now to capital spending, our capital expenditures during the period were approximately $35.2 million, compared to $39.9 million in the third quarter of 2014. During the third quarter of this year we spent $23.6 million in our Refining segment, $4.1 million in our Logistic segment, $4.8 million in our Retail segment, and $2.7 million at the corporate level. Our 2015 capital expenditures are forecast to be approximately $227.1 million. This amount includes $172.4 million in our Refining segment, $16.8 million in our Logistics segment, $19.6 million in our Retail segment, and $18.3 million at the corporate level. This is a decrease from approximately $240 million in our previous 2015 forecast, which is primarily driven by lower logistics, retail and corporate spending. Now, I’d like to discuss the results by segment. A combination of factors decreased our Refining segment contribution margin to $47.4 million during the third quarter of 2015 from approximately$151.3 million in the prior year period. First, the differential between Midland and Cushing narrowed by $10.57 per barrel on a year-over basis as it averaged $0.72 per barrel premium in the third quarter of this year, compared to a discount of $9.85 per barrel in the prior year period. Second, $1.5 million loss from hedging activity was incurred during the third quarter of this year, compared to $27.9 million gain in the prior year period. Finally, there was a $32.3 million reduction in margin due to lower of cost or market inventory valuation and other inventory charges. Our Tyler refinery performance is benefited from the completion of its expansion project during the first quarter of 2015, as sales volumes reached approximately 80,200 barrels per day in the third quarter of 2015, up from 63,100 barrels per day in the prior year period. This was also an increase on a sequential basis from sales volume of approximately 71,600 barrels per day in the second quarter of 2015. A partial offset to the factors above was the crude oil futures market that was in contango in the third quarter of 2015 by $0.54 per barrel, compared to backwardation of $1.30 per barrel in the third quarter of 2014. Also, the Gulf Coast 5-3-2 crack spread averaged $16.41 per barrel in the third quarter of this year, compared to $15.05 per barrel in the prior year period. Now, I’d like to review our Logistics segment, which is comprised of the results from Delek Logistics Partners. Our Logistic segment contribution margin was $29.1 million in the third quarter of 2015, compared to $23.5 million in the third quarter of last year. On a year-over-year basis, results benefited from a higher contribution margin from the Paline Pipeline fees associated with the El Dorado rail offloading racks and the Tyler crude oil storage tank dropped down on March 31 of this year and the acquisitions completed over the past year. These benefits in the third quarter of this year were partially offset by lower margin in the West Texas wholesale business. Moving on to the Retail segment, Retail’s contribution margin was $21.9 million in the third quarter of 2015, compared to $16.4 million in the third quarter of the prior year. This change was primarily due to higher fuel margins and gallons sold, combined with higher merchandise sales. We ended the quarter with 64 large format stores out of our total store count of 355. Now, I’ll turn the call over to Uzi for his closing remarks.

Thank you, Danny. We continue to focus on cash flow generation from our operations. As we had discussed in the past, our capital expenditure needs have been declining following a large investment program in refining. Our total average annual capital expenditure amount estimate for 2015 is approximately $235 million per year. Based on our current expectations for 2016, we believe that our maintenance in regulatory capital expenditures will be in the range of $100 million to $110 million on a consolidated basis. As capital expenditure are reduced we have a potential for increased free cash flow from our operations. We believe that our financial position should allow us the ability to act quickly when growth opportunities are identified. But we can also remain patient in our investment decisions. As we continue to evaluate our options for capital allocations which include retaining capital to shareholders through share repurchases, potentially buying additional shares of Alon USA and go through acquisitions, we remain focused on creating long-term value for our shareholders. With that Amy, would you please open the call for questions.

[Operator Instructions] Your first question comes from the line of Phil Gresh with J.P. Morgan. Phil, your line is open.

Hey, good morning guys.

Good morning, Phil.

First question just on the results from the quarter, your peers this week have been pretty upbeat on the Asphalt Trends in the quarter as well as their outlook on the 2Q cost. I believe you mentioned you had 35 million headwinds in the first half from timing on Asphalt that you are expecting to recover in the second half. So Assi, I was just hoping if you give us an update on the progress of that margin recovery and your thoughts on the fundamentals there in general.

Sure, we had a very good quarter when looking at Asphalt. From an inventory benefit perspective we had $2 million gain, unfortunately it was offset by other loses and that’s why you saw that overall inventory impact was 32 negative in the quarter. On the margin themselves, from production we sold around 150,000 tons during the quarter, around 10,000 barrels and if you think about it, our margin was almost $100 a ton which we benefited on $15 million in Asphalt positive margins in line with the industry. Unfortunately, most of those were offset by losses in the Colonial pipeline plus the fact that some hedging gains at Colonial pipeline were offset by unrealized hedging losses in general in the system. So you can’t see it in the actual numbers because of they were offset part to it, but we had a good Asphalt quarter. Looking for the remaining of the year, right now we’re ending the year actually in a positive note. Last year we ended the year with more than a million barrels of Asphalt in our inventory and this year we’re probably going to have only half of that in inventory, so we shouldn’t see in 2016 what we saw in the $35 million that we saw in 2015. Also, margins in general are positive, of course towards the end of the season, most of what we produced goes to storage. I will say that on a positive note that we were able to reduce the Asphalt make at the El Dorado refinery over the last few weeks and that’s why our expectation for yearend is to stay with minimum inventory at the Asphalt segment.

Got it, that’s helpful and just on the Colonial pipeline comment, maybe you could just elaborate an issue that happened there, whether it’s truly something that you see as one and whether it could happen again this way that you can divest this issue from happening moving forward.

In general we’re making money at the Colonial. I will say that when the vapor pressure change in September it creates basically some losses and that’s what happened. We usually see the offset in the summer. On top of it the hedging gains inside that segment usually support the ongoing positive margin. So when you look at our numbers right now, they’re almost including the fact that we lost including hedging loses, 12 million in Colonial, which is usually a positive number. It’s a positive number because we generate [indiscernible] and also the net back on the Colonial system right now are much stronger especially when you see the issues in refineries in the Gulf Coast. So I’ll say that we’re more - when you look on an annual base Colonial usually contributes money to the company.

Okay, my last question is just a strategic one with respect to Alon and the timing and the potential for buying the rest of it at some stage. How do you think about the tradeoff between the value up lift of just getting something done now and starting to capture synergies faster versus waiting for a better share price ratio given the obvious resale weakness in Delek’s stock? There is up lift just to move forward in general, but obviously there will be higher up lift if your ratio is better. So may be just the tradeoffs and how you’re thinking about that would be helpful.

Yeah, that’s a great question Phil. First of all we do recognize the weakness in the Delek stock recently, in the last six months we underperformed the market substantially. Now, we believe that the market would - with [ph] Delek, Delek Solo, the market will turn and we saw some strength in the last few days, obviously Midland is getting weaker by the day and this morning Midland is around - less than but under, while in the third quarter it was in the positive territory to look to a back over. So that will get itself into more positive results for DK. So obviously we announced that the $100 million, these are about 100 to 110, call it $100 million, that’s our CapEx. So we know we’re going to generate substantial cash flow. The division we have in our head and that’s what we think is that we are going to dedicate more and more cash to the DK stock and when the time is right will do or will try to do mostly stock exchange with Alon. Now, obviously as we said in the past, when not in the business of holding 48% in another public company, I think that’s Alon and that’s an opportunity for me to give kudos to the Alon management. It’s performing very, very well, we’re very happy with our investment within Alon. Our sales deal agreement expires within, a little less than six months or around six months. I shouldn’t say less, around six months. So we are gearing up toward having detailed synergies and at the same time returning cash to our shareholders by buying more and more shares.

And is there any willingness to use the balance sheet a bit more, whether it’s for buy backs or it’s a consummated deal or –I know you’re likely going to do some kind of equity issuance as you move forward, but your balance sheet targets are reasonably conservative, so just wondering how you’re thinking about that?

Again as I said, more and more cash will be allocated towards buying our own stock especially with the weakness that we see in the stock and entering to the fourth quarter, now we’re loud again to buy more stock and which we’re going to act on that. At the same time, you’re absolutely right that we have conservative balance sheet especially with the CapEx. So that will allow us to be more aggressive mainly on the DK side, but we’ll see what happens with Alon as we get closer to the expiration of the sales deal agreement.

Okay, thanks many times.

Thank you.

Your next question comes from the line of Jeff Dietert with Simmons. Jeff, your line is open.

Good morning.

Good morning, Jeff.

I was hoping you could talk a little bit about the feedstock slide in the third quarter with WTI Midland going to a premium because of line pack [ph] and new pipes kind of a temporary phenomenon. How are you able to shift away from that and what flexibility do you have there?

We have little flexibility, Jeff. I’m going to be - and I know that the market is probably disappointed with the Midland situation. We are working on it, probably another solution to have the optionality to bring barrels from the Gulf Coast. However, we maintain our position and we see it in the fourth quarter now as you look at Midland. We maintain our position, that Midland should be cushion. Now, will it change for quarter or two? Absolutely, similar to the situation that we had $15 under cushion two years ago, well neither 15 under nor but 15 makes sense. Now, you may say that it will take time to clear the market. With the Gulf Coast grade as they stand today and the Brent-WTI narrowing, Midland has all the reasons in the world to get weaker, which we see it getting weaker. So changing direction when the growth of the well [ph] is Midland and doesn’t make sense at this point based on one quarter or two quarters. It doesn’t mean that we’re not disappointed with the results, we’re extremely disappointed. And many factors that got the results where they are, but at the same time some of these headwinds already changed in the fourth quarter.

I understand, thanks. On the Tyler expansion, could you talk about how it’s performing and how the Tyler market has been able to absorb this incremental capacity? Do you expect to run at full rates or are you managing capacity to kind of meet demand?

That’s a wonderful question, that’s actually one of the questions that we were hoping that who would ask this morning. On the third quarter - or during the third quarter, what we wanted to do to put ourselves that we can have that capacity for a longer period of time and that the market can absorb that. So we went ahead and we actually sold everything we built in the second quarter and more than 70,000 barrels. If you look at what we’ve sold, we’ve sold probably close to high 70s may be 80,000 barrels, so obviously to do that we lower the price for the marginal barrel, that’s the reason you see the weakness in the Tyler margin. As a matter of fact, we can give you that number it’s around - in order to excel the incremental, call it 5,000 or 7,000 barrels, we needed to lower the margin by almost $4. Now, obviously that - we don’t have 80,000 to sell to date because of no inventory, we came out of the market in the third quarter with less inventory, but what we’re doing now is managing the margin and Tyler, we’re going back to what used to be normality with the $0.04 or $0.05 over Gulf Coast with the niche versus what we saw in the third quarter.

Thanks for the thorough response Uzi.

Well, thank you for the question Jeff.

Your next question comes from the line of Paul Cheng with Barclays. Paul, your line is open.

Thank you. Good morning guys. Uzi and Assi, first I have a weak present, maybe an observation that we perhaps see a stat I think for all your investor would be extremely helpful if you break out the hedging in your loss from the refining margin and just keep refining margin as it is on an operational basis because I think both in internal and external it is how we evaluate how well or how poor the operation has done. And then having a separate eye on the hedging, that will be - [indiscernible] things up a lot and also that it will be helpful in your press release if you have a table to show that the pre-tax and after tax impact on the one off item by refinery as well as by settlement, I think that would be extremely helpful in the middle of the earning season for everyone. Several questions, first, you mentioned that in order to sell the incremental 5,000 barrel per day you have to lower the margin by about $4 on prices, is that $4 lower at tie for the entire sly [ph], means that the entire gas and in sales are presumed or just the incremental 5, 000 barrel per day?

Paul, this was just the incremental and please remember that the incremental is what came from inventory because we sold 5,000 almost more than what we produced.

Your next question comes from the line of Bill Carcache from Nomura. Your line is open.

Okay and Assi, maybe you can help me on that. When I’m looking at - we understand Midland discount have disappeared in this quarter, but if I’m looking Tyler, taking out on [indiscernible] $10, in the second quarter is about $13.80, so you’re down about $3.80 comparing to the full year 2014, you’re down about $7.80. If I’m looking Brickspring [ph] we find way from Alon, sequentially they’re down $0.50 and year-over-year - comparing to their full year 2014 they’re about flat. And if I’m looking at Western, El Paso, sequentially they’re down about $1.50 and comparing to their full year 2014, they’re about flat. So [indiscernible] though for whatever is the reason both sequentially as well as comparing to the full year 2014 was substantially was off than your competitor that both exposed to the Midland discount and any help you can give us in terms of that’s the reasons?

Sure, so I’ll start by saying that I believe our peers are selling their products in different markets. Well, we’re more Gulf Coast related markets, they’re more Midcon related markets, so the product value on the peers that you mention, I think the product value that they’re getting was higher in Q3. I think entering into Q4, right now Gulf Coast is trading, at least in November, [indiscernible] and that should give us some benefit. On top of it, when you look at their realized margin, we are negatively impacted by our ethanol blending activity, we locked fixed prices - we usually lock it at the beginning of the year diesel [ph] prices and we probably lost few million dollars in Q3 and material higher number in Q3 and Q1. Again entering into Q4, right now we have a positive impact from those, if you look at the ethanol prices they’re up to the - in Chicago to around $1.56 and I think last month on average was close to $1.60, so that should change slightly. On top of it as we mentioned earlier, the additional barrels in Tyler coming out of the Turon for the full year and entering into Q4, running in these levels, we’re not with the same margin as the other barrels. It’s a lot of small things, some of them that has changed already for Q4 and some of them will have to work long-term to improve the Tyler niche potentially even through a pipeline getting out of Tyler.

And next question on the same store sales in [indiscernible], I don’t know whether I read it correctly. You’re saying in the third quarter it was up 0.4%, we thought market is up somewhere in the 1.5% to 2%, so am I reading it correctly or that you’ve been losing market share there, how should we read it?

Paul, if you look at third quarter last year, 2014, we opened many new stores and what we did, we pushed the gallons very high. If you go back to third quarter last year, you’ll see that our same store sales jumped substantially. What we went - this time we went more after margin in order to - because these stores are more mature and we want to be more normalized on the EBITDA from the EBITDA standpoint. That number actually will change in the fourth quarter and even more in the first quarter. On a normalized basis we should assume between 3% to 4%, that’s the market share that Delek gains year-over-year on a regular basis.

Uzi, just from a strategic standpoint, the timing of the Alon [indiscernible] yes, I know you’re a bit unclear because due to a number of different condition that you may allow the timing to be faster on later. That’s in mixed sense from that standpoint too, maybe take that initial steps to form two joint ventures, one is combining all your refining operations from the two companies to one led by a joint venture, one is [indiscernible]. So by doing in this way you sell about - no you’re doing the initial step of the consolidation and be able to tick out all the expense in one more efficiently and then both company can benefit from that before a full fresh merger. Does it make sense at all?

Paul, we already have together Alon and in VW [ph] for public companies as part of - and holding four refineries in 700 communist origin and obviously we’re just exhausted. By the end of the day I think one of the problem with that they’ll have a hangover of Delek and a little bit Alon, if the complicated if you will the structure. Now, we can make it even more complicated, but I think by the end of the day our goal is to simply the structure. I told you and others in the past that it doesn’t makes sense to have all these little refinery companies and I think eventually all these companies need to come together. So while it may be a good idea under different circumstances, I think that - market expect and rightfully so it’s picked up to simplify our structure and not to make it more complicated, especially in light of the fact that the sales deal expires within six months and our CapEx is coming down dramatically.

Okay, perfect. Thank you.

Thank you.

Your next question comes from the line of Ed Westlake with Credit Suisse. Ed, your line is open.

Yes, stepping in for Johannas. Just on the Logistics side, any update on the RIO, Caddo pipelines any other sort of projects that you’re looking at?

Well, we mentioned - Good morning, Ed first of all. You made us laugh here a little bit, but your sarcasm is always nasty to have Ed [ph].

Thank you.

So, obviously as well - now, we’re laughing big time, so we need to probably stop the call and move on. But to answer your question obviously the two pipelines couple of them that we feel very good about them actually where they’re progressing is good, we have a little uptick one project firmly laid out [ph], that’s something that is big. But I wouldn’t say that this is something that we expect to continue to happen at this point. In terms of other projects, we put a goal of $150 million EBITDA, obviously we have and we all, already Alon press release yesterday, with their may be assets and obviously other projects that we’re working now as we speak now. As we said in the past we are - we want to be a little more conservative in an awesome project when they’re more mature. So just leave it to the fact that our Logistics assets or our Logistics arm is the main, main, main component of our growth, so don’t be surprised if we do something with this arm.

Okay and then just a small question on El Dorado, other folks are trying to move product into your market, obviously it’s been a bit protected, are there any issues in terms of product margins relative to history of something in the El Dorado market?

Not really, let’s be clear. The Midcontinent margins were very good, that influenced El Dorado a little bit. There was a weakness in the Gulf Coast, but we’re selling everything we produce and nothing that we see a change.

Right and then obviously Alon a large chunk of it and they’ve done relatively well. It’s starting to get out on the front foot about the logistics EBITDA they have about the self-help projects and some of those larger projects probably kick off maybe a little bit later, so maybe six-month delay until a standstill agreement is fine. But obviously investors would properly prefer you to execute quicker. What are the constraints on moving more quickly, just the ratios you’ve already expressed or anything else?

The ratio actually has improved a little bit. It went all the way to a 50. Now this morning, I haven’t checked the stock this morning, but it was around 50% yesterday or 0.6. I’m going to tell you that, first of all, we had this standstill - we can get it waved if the ratio makes sense and if it comes together. We are working very hard right now to look at the synergies. We understand that this - there’s a whole hangover our stock [ph] we’ve done - we believe that we can correct that by the end of the day with earnings as Midland and [indiscernible] improving together with the net debts and also us buying back our stock more aggressively than in the past.

Okay. Thanks. I leave it there.

Thanks, Ed.

Your next question comes from the line of Brad Heffern with RBC Capital Markets. Brad, your line is open.

Good morning, everyone.

Good morning.

Uzi, just calling up on the response to the previous question, I'm curious about on the synergies you said you're still working through them. Is there a chance that you would potentially talk about those synergies and maybe in conjunction with Alon before doing anything with regards to purchasing more Alon shares.

Probably not, that would require some more work and some and talking to some shareholders, it's obviously - some of the synergies are obvious. Anybody that look at the two companies know that there are synergies, but to come with detail plan, we’re obviously going to do it once we decide on moving forward with Alon.

Okay, I understand. And then looking at DKLs results, it looked like the El Dorado rail rack wasn't used this quarter. Can you talk about how you're thinking about rail sourcing of either Canadian heavy or light in the current environment?

Obviously, it's clear that rail doesn't make sense much now, because of the differentials. So with the differentials improving the Canadian market improve, we will continue to bring crude by rail, we have that flexibility, but in the current environment there is crude everywhere and differentials don’t make sense.

Okay and then maybe for Assi, just as a housekeeping item, can you give any PS number or maybe a tax rate X items this quarter? Obviously the tax rate looked like it was relatively distorted. So I'm curious what things would have looked like and what the tax rate was on the items?

The best thing that we can do at this point is to look at our 14.4% year-to-date rate that includes all the items. So when we look at the year, as we said earlier in the script, we're looking to 16% to 20% percent rate annually. So I think using anywhere in this, those ranges of rate would get you to the number that you're asking.

Okay. I’ll leave with that, thanks.

Thank you.

Your next question comes from the line of Chi Chow - Tudor, Pickering & Holt. Chi, your line in open.

Great. Thanks good morning.

Good morning, Chi.

Good morning. So just on the taxes again, I didn't understand that explanation on the Q3 tax rate, can you go over that again?

Chi, it’s Danny Norris. The Q3 effective tax rate included some increased tax benefit from the identification of some additional tax credits and the implementation of some planning opportunities that we did during the quarter. The impact of these additional benefits was amplified in Q3 three, because of the lower pretax income that during the nine-month period.

Okay. So these tax credits are not recurring that?

That's correct, yes.

Okay. Do you have a guidance rate on your tax rate for 2016 at this point?

We expect the right to be more normalized in 2016. I would anticipate based on current tax that we would probably be somewhere between 30 and 35%.

Okay, great. Going back to Tyler, Assi, I want to see if I can get some clarification on an earlier comment that you had I think to Paul's question. Did you say long-term that you may need a pipeline out of tech Tyler to move the incremental product out of the market long-term?

We just see it as an opportunity and we're looking into it. It's not a need. It’s just something that can take our net back [ph] even higher at the local markets.

Okay. I see. And then going for Tyler, so from what I'm hearing, you don't expect any sort of product price bases issues in your local markets and relative to say benchmark group three prices, is that accurate?

Correct.

Okay. And then I guess on hedging, can you talk at a high level where you are on your heading strategy and where your position at this point? There's obviously been a big shift in the gains we saw last year versus what we've seen this year so far.

Well, absolutely. And if you remember, Chi, we had a big Brent WTI position, which we are - actually we didn't collect the cash. So even though we got out of the position a year ago or a few months ago, we didn't collect the cash. So the cash is actually coming in. If you look at our balance sheet, it's pretty flat, cash coming in cash coming out in terms of the hedging. I would say that both were, as it shapes right now and obviously the markets can change any moment, we're talking about maybe $5 million of losses mostly on that similar to what we had in the third quarter. We are not doing a lot of hedging right now, because of the market structure and it doesn't make sense to play in the market especially before because of the contango. One thing we want to emphasize is that ethanol, which was a drag until this fourth quarter is actually now positive. We told you that we locked in the price of ethanol at a fair price. That was a drag all the way and it changed a little bit in the fourth quarter. So part of the weakness in Tyler is probably $2 swing in the realized margin related to ethanol that used to be positive became negative and now it's back to positive.

Okay, so it sounds like hedging out of Brent WTI, do you still have some positions on the Midland spread and ethanol anything on the products at this point?

Maybe little inventory, nothing much, no.

Okay. Okay, thanks, Uzi, I appreciate it.

Thank you.

Your next question comes from the line of Doug Leggate with Bank of America Merrill Lynch. Doug, your line is open.

Thanks. Good morning, everyone.

Hey, Doug good morning.

Uzi, I want to go back to your comments about Midland, we cover the [indiscernible] over here as well and few of them are telling is that the line utilizations on a number of [indiscernible] that have been put in place are running a bit late, so actually haven’t - they haven’t to pay over dues over dues on some of those. I’m just curious as to what gives you confidence or what your prognosis really is for the sustainability of a wider Midland differential as we go forward or the kind of medium term?

Great. Let me clarify, Doug. I wasn't clear enough. I don't think that we’re going to go to $4 or $3. That's not what we think. First of all, it is a fact. You said it right that some of the pipelines are running late and not full. Obviously, there are many TNDs that were signed for $2, $3 and so on and so on of people that want to shape and it’s not - and it doesn't make sense for them at this point. Also spot shipping is not - at large doesn't exist at this point because of the differentials. With that being said, the premium that we saw in the third quarter already cleared itself. And it doesn't make sense to have a premium to cushion or premium to other markets. So do I think that it's going back to or do we think that it's going back to $4? Probably not! Do we think that it needs to be anywhere between $0.75 and $50? That's probably where we think the market should land in the next few quarters. So I want to clarify that I didn't mean that Midland is going to go back to $5 under.

Great, I appreciate your clarification. One part of your business that we can source a bright spot this quarter was retail and we haven’t [indiscernible]. In the past, you've talked about the strength of your market share in Dallas and that being a source of potential sustained earnings going forward. I'm just curious if you can give us some characterization as to how retail looks so far this quarter and whether 3Q is really more, how much 3Q is a function of the relative collapse in the oil price at the beginning of the quarter? And I got one final one if I may.

That's a great question. I think I mentioned earlier that maybe I wasn't clear enough. If you compared third quarter this year to third quarter last year, you see the third quarter last year, we jumped with the percentage in terms of our same-store sales, because we opened new stores and we want to gain market share very quickly, not in the normal 3% to 4% that we usually want to gain. So if you compared Q3, 2014 to Q3, 2013, there was a big jump that corrected itself as we went after more normalized margins, which were healthy in the third quarter. Long-term in fourth quarter, the 3% to 4% should stand - within fluctuation between quarters depending on opening new stores.

Yes, really more about the margin, was the margin more of a wooden fall from the late pricing effect from the declining trend at the beginning of the quarter another. In other words, where are you seeing your retail margins now compared to Q3?

I'm sorry. I missed that. October is very good month, November obviously price rises. So margins are being squeezed. So I would say that the margins, if we continue to see the fluctuation in the marketplace going up going down, the way we see it, we will continue to have healthy margin. If we stay in the flat environment, that's where retail margins are being squeezed.

Great, so final one if I may. I don't know if you will be able to answer this conscious or not. But on Alon, obviously that we're still some way away from seeing what you would do if you did end up owning the majority of the stake, but to the extent you can, when you look at their asset base, is there anything that you conceptually would change or is that not a question you can answer at this point?

I prefer not to answer that at this point and obviously since Alon has a great CEO, he has been doing great job for the company and the company is doing very well. That's probably a question for him to answer.

Alright then things are okay. Thanks a lot Uzi, take care.

Thank you.

[Operator Instructions] Your next question comes from the line of a participant with Goldman Sachs. Your line is open. Please state your first and last name.

Hi, Uzi. It’s Neil Mehta here.

Hey good morning.

Good morning, good morning. So, Uzi, I want to go back to the point that you made at the beginning of the call about buybacks and that being an opportunity. Can you just flush that out a little bit? How do you think about, how aggressive you want to be with buybacks into 2016 of CapEx rolls over, especially because the stock has materially underperformed? And you provided some early comments on that, but some more details?

Absolutely, I salute. Mehta, you're absolutely right. That's a fact. That materially substantially underperformed. We are rolling off capital budget. Already CapEx is coming down and it will come down substantially in next year, in the following year 2017 as well. So our peers are more aggressive or were more aggressive than us buying their stock. We have a program. There’s no reason to believe that if we want, we will go to the board and would discuss about that with the board to up the program if we feel that their weakness continues. In the fourth quarter obviously, we will continue to buy the stock. I think that this is something that investors expect from us rightfully so. And obviously the fact that the crack plays and the Midland market changed to our favor now. That gives us great confidence that we should be more aggressive in buying stock.

Okay. Thank you. And then Alon yesterday outlined $71 million of EBITDA, MLP EBITDA and they don't have mechanism right now to monetize those assets. They don't have a DKL right. So do you see that as an opportunity to drop down assets from Alon where you're the chair into DKL over time? It seems like it could be potentially a win-win for both organizations?

First of all, Alon is a new public company and we - if anything is being done with Alon, it’s an arms link deal. So, that’s something that we just need to remember that Alon to act and react to the benefit of its own shareholders. With that being said, it's obvious that if we own the 48% of the company and it’s obvious and we say we're not in the business of owning 48% for the rest of our lives that’s part of the ideas that we have is Alon the logistics assets. So that’s something that it's obvious to us and should be obvious to the market that that's an opportunity for both companies.

Alright, thank you, Uzi.

Thanks, Neil.

And your final question comes from the line of Phil Gresh with J.P. Morgan. Phil, your line is open.

Yeah, thanks. Sorry, two quick follow-ups here. First one is just on the capital spending number, the reduced levels in 2016 and 2017. At this stage relative to that maintenance and sustaining capital number you've given, would you anticipate there being any growth capital? Or is it pretty much going to be 110 million to 120 million at this stage?

We would say 100 to 110. We are in the final stages of looking at the CapEx. We're doing our budget right now for 2016 and preparing our budget for 2017. If anything, that depends on one thing the number of stores that we want to build and to the return on cash with shareholders, so that's a combination between the two and that's the only thing that we can change if anything building number of stores. So, obviously, right now we believe that our stock is not performing well enough. So we will dedicate more cash to buying back our stock.

Okay, thanks. Sorry for saying the wrong number there. The follow-up is just given the continued weakness in the stock even today, wondering if a larger ASR one-time is something you consider, if you prefer a more gradual approach to buybacks.

Well, I won’t rule out any options, because I do believe that some of the weakness is completely unjustified. So we won’t rule out any options. We’ll see how it plays in the next few months or a couple of quarters.

Okay. Thanks a lot.

This concludes our question-answer-session. I would now like to turn the call back over to management for final remarks.

Thank you, Amy. I’d like to thank my peers along the table. I’d like to thank our employees for their great effort during the quarter, they’re doing great job and I appreciate everybody’s questions and interest in our company. Have a great day.

This concludes today conference call. You may now disconnect.