CVR Energy Inc (CVI) Q4 2020 Earnings Call Transcript

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CVR Energy Inc (CVI -0.48%)
Q4 2020 Earnings Call
Feb 23, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the CVR Energy, Inc. Fourth Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Roberts, Senior Manager of Financial Planning and Analysis and Investor Relations. Thank you, sir. You may begin.

Richard Roberts -- Senior Manager, FP&A and Investor Relations

Thank you, Christine. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy fourth quarter 2020 earnings call. With me today are Dave Lamp, our Chief Executive Officer; Tracy Jackson, our Chief Financial Officer; and other members of management.

Prior to discussing our 2020 fourth quarter results, let me remind you that 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 facts may be deemed to be 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, except to the extent required by law.

Let me also remind you that CVR Partners completed a 1-for-10 reverse split of its common units on November 23, 2020. Any per unit references made on this call are on a split-adjusted basis. This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures including reconciliation to the most directly comparable GAAP financial measures are included in our 2020 fourth quarter earnings release that we filed with the SEC and Form 10-K for the period and will be discussed during the call.

With that said, I'll turn the call over to Dave.

David L. Lamp -- Chief Executive Officer and President

Thank you, Richard. Good afternoon, everyone, and thank you for joining our earnings call. I'd like to begin today's call with a brief discussion of our accomplishments in 2020, then discuss our operating performance for the quarter as well as for the year. 2020 was a challenging year for United States, our industry and our company. That the pandemic shut down the country and reduced demand for refined products and were forced to adjust our strategy and adapt to the conditions we were presented. Despite these challenges of the year, we have a number of accomplishments worth highlighting. We maintained safe, reliable operations and back office functions during the COVID crisis. We successfully completed $1 billion notes offering in January of 2020, which have provided us with additional cash and liquidity at attractive rates. We completed a major planned turnaround at our Coffeyville refinery during the beginning of the COVID crisis and deferred turnarounds at Wynnewood, in both fertilizer plants.

We completed an ERP modernization project on time and on budget. We realigned our business strategy with a focus toward sustainability, with Board approval -- with the Board-approved renewable diesel project at the Wynnewood. We planned to reduce refining capacity and retool for renewable diesel production, while also transitioning to a lighter gravity-gathered crudes at our refineries. While we intend to maintain our current capabilities in refining, we are focusing new investments toward growing our renewable diesel business and reducing our carbon footprint.

We achieved significant reductions in SG&A operating costs, capital expenditures companywide, exceeding our goal of $50 million annual reduction in SG&A and operating expenses. We announced the acquisition of Blueknight Energy's crude oil pipeline assets in Oklahoma, which closed in early February and expands our crude gathering reach at the wellhead. We evaluated multiple acquisitions in PADD IV, but maintained our capital discipline and refused to overpay for assets when we felt the bid-ask spread was still too wide.

In our trucking business, we began hauling LPGs to our plants to reduce costs. We appealed the misguided Tenth Circuit Court ruling to the Supreme Court, which has agreed to review the case. Earlier today, CVR Partners' CEO, Mark Pytosh announced the following accomplishments for our Fertilizer segment in 2020. Record ammonia production of 852,000 tons between the two plants, posting a combined utilization of 95% for the year. Certification of CVR Partners' first ever carbon offset credits as a result of nitric oxide abatement efforts and our long-term air separation contract with Messer was renewed with favorable conditions, including the addition of a new oxygen surge tank, which will further improve reliability of our gas fired Coffeyville.

Yesterday, we reported CVR Energy's full year and fourth quarter results for the full year of 2020. We reported a net loss of $320 million and a loss of $2.54 per share. For the fourth quarter, we reported a net loss of $78 million and loss per share of $0.67. EBITDA for the year was a negative $7 million and for the quarter was a positive $1 million. Weaker crack spreads, as a result of demand destruction from the pandemic and dramatically higher RIN prices weighed heavy on our results for the full year and the quarter.

The market remains volatile and uncertain, particularly in regard to RIN prices, which currently consume a significant portion of the refining margin available in the market. As a result, the Board of Directors did not approve a dividend for the fourth quarter of 2020. On the last few earnings calls, I've discussed our focus on preserving our balance sheet and liquidity position in light of the ongoing pandemic as well as potential acquisition opportunities that we were evaluating. Although we got far down the path on a number of acquisitions that we viewed as attractive, ultimately the bid-ask spread proved to be too wide. And at this time, there are no active discussions on these potential transactions.

We've also made it clear that we do not currently have any interest in acquiring Delek. Although as its largest shareholder, we continue to see the stock as undervalued and have some suggested actions Delek should take to improve its business. We also notified Delek of our intent to nominate three directors for election to Delek's Board in it's upcoming Annual Meeting.

As we get more visibility into the sustained rebound in the refining market, we continue our discussions with the Board around the appropriate level of cash return to shareholders and in what form. At current trading levels, there could be more value in buying back our own shares. For the Petroleum segment, the combined total throughput for the fourth quarter of 2020 was approximately 219,000 barrels per day as compared to 213,000 barrels per day for the fourth quarter of 2019. Both the facilities ran well during the quarter. Although the total throughput remained constrained by light naphtha processing capabilities, as narrow crude differentials continue to favor running light -- very light crude slate.

Across the board, benchmark cracks and crude differentials deteriorated significantly from the year-ago. Group 3 2-1-1 crack spreads averaged $8.44 per barrel in the fourth quarter of 2020. However, RINs consumed 40% of that at approximately $3.50 per barrel. The Group 3 2-1-1 averaged $16.65 per barrel in the fourth quarter of 2019, when RINs were only a $1.15 per barrel.

The Brent TI differential averaged $2.49 per barrel in the fourth quarter compared to $5.55 in the prior year period. The Midland Cushing differential was $0.37 over WTI in the quarter compared to $0.94 over WTI in the fourth quarter of 2019. And the WCS to WTI crude differential was a low $11.44 per barrel compared to $18.89 per barrel in the same period last year. Light product yield for the quarter was 103% on crude oil processed. Our distillate yield as a percentage of total crude oil throughputs was 44% in the fourth quarter of 2020 consistent with prior year period.

In total, we gathered approximately 117,000 barrels per day during the fourth quarter of 2020 as compared to 148,000 barrels per day for the same period last year. Our current gathering volumes are approximately 130,000 barrels per day, including the volumes on the pipelines we have recently acquired from Blueknight.

In the Fertilizer segment, we had a strong ammonia utilization at both of our facilities during the quarter, at 99% at Coffeyville and 103% at East Dubuque. Although fertilizer prices remained soft in the fourth quarter, year-over-year production and sales volumes were higher for both UAN and ammonia. With rally the in crop prices over the past few months, farmer economics have improved considerably and this is driven higher demand for crop inputs. As a result, UAN and ammonia prices have increased significantly since the beginning of the year, and the outlook for spring planting currently looks favorable.

Now let me turn the call over to Tracy to discuss our financial highlights.

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Thank you, Dave, and good afternoon, everyone. Our consolidated fourth quarter net loss of $78 million and loss per diluted share of $0.67 includes a mark-to-market gain of $54 million related to our Delek investment, and favorable inventory valuation impacts of $15 million. Excluding these impacts, our fourth quarter 2020 loss per diluted share would have been approximately $1.18. The effective tax rate for the fourth quarter of 2020 was 23% compared to 40% for the prior year period.

As a result of our net loss for the full year 2020 and in accordance with the NOL carry-back provisions of the CARES Act, we currently anticipate an income tax refund of $35 million to $40 million. The Petroleum segment's EBITDA for the fourth quarter of 2020 was a negative $66 million compared to a positive $135 million in the same period in 2019. The year-over-year EBITDA decline was driven by significantly narrower crack spreads and elevated RINs prices. Excluding inventory valuation impacts of $15 million, our Petroleum Segment EBITDA would have been a negative $81 million.

In the fourth quarter of 2020, our Petroleum segment's refining margin, excluding inventory valuation impact was $0.56 per total throughput barrel compared to $11.86 in the same period in 2019. The increase in crude oil and refined product prices through the quarter generated a positive inventory valuation impact of $0.76 per barrel during the fourth quarter of 2020. This compares to a $0.61 per barrel positive impact during the same period last year. Excluding inventory valuation impact and unrealized derivative losses, the capture rate for the fourth quarter of 2020 was approximately 20% compared to 79% in the prior year period. The most significant item impacting our capture rate for the quarter was elevated RINs prices, which reduced margin capture by approximately 71%.

Derivative losses for the fourth quarter of 2020 totaled $15 million, including unrealized losses of $23 million associated with Canadian crude oil and crack spread derivative. In the fourth quarter of 2019, we had derivative losses of $19 million, which included unrealized losses of $24 million.

RINs expense in the fourth quarter of 2020 was $120 million or $5.97 per barrel of total throughput, compared to $13 million for the same period last year. Our fourth quarter RINs expense was impacted by $64 million from this mark-to-market impact on our accrued RFS obligation, which was mark-to-market at an average RIN price of $0.89 at year end and other market activities. The full year 2020 RINs expense was $190 million as compared to $43 million in 2019.

For 2021, we forecast a net obligation from refining operations of approximately $280 million RINs adjusted for our expected internal blending volumes. We also expect to generate approximately $90 million D4 RINS from renewable diesel in the second half of the year, bringing our net RIN obligation for 2021 to approximately $190 million RINs. RINs expense for 2021 is expected to be comprised of the cost of this anticipated $190 million RIN obligation, as well as any necessary mark-to-market on any remaining accrued RFS obligation. Subsequent to year end, we have reduced our 2020 RINs obligation by approximately 8%.

The Petroleum segment's direct operating expenses were $3.99 per barrel of total throughput in the fourth quarter of 2020 as compared to $4.63 per barrel in the fourth quarter of 2019. For the full year 2020, we reduced operating expenses and SG&A costs in the Petroleum segment by approximately $62 million compared to the full year of 2019. The reduction in full year operating expenses and SG&A costs were a direct result of our cost savings initiative, most of which we believe should be sustainable going forward.

For the fourth quarter of 2020, the Fertilizer segment reported operating loss of $1 million and a net loss of $17 million, or $1.53 per common unit, and EBITDA of $18 million. This is compared to a fourth quarter 2019 operating loss of $9 million, a net loss of $25 million, or $2.20 per common unit, and EBITDA of $11 million. The year-over-year EBITDA improvement was primarily due to higher sales volume and lower operating and turnaround expenses offset somewhat by lower prices for UAN and ammonia. For the full year 2020, we reduced operating expenses and SG&A costs in the Fertilizer segment by over $23 million compared to the full year of 2019.

During the quarter, CVR Partners completed a 1-for-10 reverse split and repurchased nearly 394,000 of its common units for approximately $5 million. In total, CVR Partners repurchased over 623,000 of its common units for $7 million in 2020, and the Board of Directors of CVR Partners' general partner has approved an additional $10 million unit repurchase authorization. Total units outstanding at the end of 2020 were 10.7 million, of which CVR Energy owns approximately 36%. The Partnership did not declare distribution for the fourth quarter of 2020.

The total consolidated capital spending for the full year of 2020 was $121 million, which included $90 million from the Petroleum segment, $16 million from the Fertilizer segment and $12 million for the Renewable Diesel Project at Wynnewood. Of this total, environmental and maintenance capital spending comprised $92 million, including $77 million in the Petroleum segment and $12 million in the Fertilizer segment. Actual spending for the year came in at the low end of our expected range as a result of canceling or shifting certain projects into the future.

We estimate the total consolidated capital spending for 2021 to be $215 million to $230 million, of which $115 million to $125 million is expected to be environmental and maintenance capital and $95 million to $100 million is related to the Renewable Diesel Project. Our consolidated capital spending plan excludes planned turnaround spending, which we estimate will be approximately $11 million for the year in preparation of the planned turnaround at Wynnewood and Coffeyville in 2022.

Cash provided by operations for the fourth quarter of 2020 was $28 million and free cash flow in the quarter was $4 million. Working capital was a source of approximately $105 million in the quarter due primarily to an increase in our accrued RFS obligation. For the year, cash from operations was $90 million and free cash flow was a use of $193 million. In addition, in January 2020, we refinanced and upsized our notes, which generated a net $489 million of cash.

Turning to the balance sheet, we ended the year with approximately $667 million of cash, a slight increase from the prior year. Our consolidated cash balance includes $31 million in the Fertilizer segment. As of December 31st, excluding CVR Partners, we had approximately $929 million of liquidity, which was comprised of approximately $637 million of cash, securities available for sale of $173 million, and availability under the ADL of approximately $365 million, less cash included in the borrowing base of $246 million.

Looking ahead to the first quarter of 2021, our Petroleum segment -- for our Petroleum segment, we estimate total throughput to be approximately 185,000 -- excuse me, to 190,000 barrels per day. Due to the extreme winter weather and natural gas and power curtailments over the past two weeks, our Coffeyville and Wynnewood refineries both ran at reduced rates. We currently anticipate resuming normal operations at both facilities by the end of the month. We expect total direct operating expenses for the first quarter to be $95 million to $105 million and total capital spending to range between $65 million and $75 million.

For the Fertilizer segment, despite reducing operating rates that used to be last week due to the extreme weather conditions and natural gas pricing, we estimate our ammonia utilization rate to be greater than 90% for the quarter. We expect direct operating expenses to be $35 million to $40 million excluding inventory impacts and total capital spending to be between $4 million and $7 million.

With that Dave, I will turn it back to you.

David L. Lamp -- Chief Executive Officer and President

Thank you, Tracy. In summary, 2020 was a very challenging year, but we were able to navigate through this difficult environment and we believe we are well positioned to capitalize on any eventual upswing in market. Our mission remains to be a top-tier North American refining and fertilizer company, as measured by safe, reliable operations, superior financial performance and profitable growth.

Looking at 2021, cracks have improved to start the year, although most of the increase is being consumed by out-of-control prices for RINs. While vaccines are encouraging, so far we've not seen any meaningful increase in demand for refined products. Domestic inventories are generally balanced, but utilization is still low and starting to increase without a corresponding pickup in demand.

In the near-term, our outlook remains cautiously optimistic based on the market fundamentals that we see. Starting with crude oil, we've drawn down about 50% of the excess crude oil inventories worldwide. Shale oil production is still declining, but drilling is starting to increase. Crude differentials are still narrow, but Brent-TI spread has widened some, and backwardation is firmly in place supported by declines in inventories and the action takes -- taken by the Saudis.

Moving on to refined products, gasoline demand is down approximately 1 million barrels per day and vehicle miles traveled are showing declines. Jet demand remains low mainly due to little international travel. Domestic demand is approaching five-year averages. US inventories are near five-year averages, but still high overall, while inventories and demand in the Magellan system are near normal. Exports are weak and imports are high. RINs are ridiculous, approaching $5 per barrel, putting RINs cost above operating costs.

Looking at cracks, cracks have been trending up, but fairly keeping up with RINs. Diesel cracks are in contango, and the domestic refining utilization is still low at 83%. We believe cracks will remain relatively weak until demand supports utilization in the 90% plus level. The question is, what happens to RINs going forward? Right now, the industry is not generating sufficient free cash flow from refinery operations at these conditions considering sustaining capital requirements and turnaround spending.

Crack spreads and RIN prices are unsustainable at these levels over the long term. We believe we need to see more rationalization of capacity in order to see sustained moving -- sustained move higher in cracks. Today, we have seen approximately 5 million barrels per day and announced between permanent shutdowns, temporary idling and potential closures worldwide, with $1.1 million of that in the United States. While we remain cautiously optimistic on the market in the near- term, we continue on to focus on what we can control to put us in the best position to take advantage of any improved market. Safe, reliable operations remains a key focus for us as a company. We'll will continue to work to minimize capital spending on our refining system, other than what we consider critical to safe, reliable operations, and remain compliant with at the book regulations.

We are in the process of integrating our crude oil pipeline assets we acquired from Blueknight and working to maximize our value to our systems by reducing our purchases of Cushing common. We are executing on our renewable diesel strategy. Our primary focus now is on getting Phase 1 mechanically complete. We are currently in construction. We have everything ordered. We remain generally on schedule, although it is tight. As we move through construction, we will focus on completing soybean oil procurement and renewable diesel marketing agreements.

Next, we will begin development of Phase II, which would involve adding pre-treatment. We are currently evaluating different technologies and considering where we could build the unit and what capacities. We could potentially have a pre-treatment unit installed by the end of 2022 or sooner if we go through third-party, subject to Board and other approvals. We also -- we will also begin planning for the potential Phase III at Coffeyville. We will most likely wait until the first wave of large renewable diesel products are completed to see where the market goes before making a final decision on Phase III. We continue to believe that renewable diesel become a commodity over time and that there is a clear advantage will be in an early mover.

For the Fertilizer segment, we are more optimistic on the near-term outlook. Corn prices have rallied over 50% since October, significantly improving farmer economics and driving demand for crop inputs higher. We believe prices for the nitrogen fertilizers likely bottomed in 2022 and we currently expect demand for UAN and ammonia to be strong in 2021. The NOLA urea price has continued to increase as LNG and natural gas prices overseas have surged. As the business has improved in this credit market to strengthen, we intend to focus on potential refinancing of CVR Partners' senior notes at much lower cost.

Looking at the first quarter of 2021, quarter-to-date metrics are as follows: Group 3 2-1 [Phonetic] Group 3 2-1-1 cracks have averaged $12.77 per barrel, with the Brent TI spread of $3.11 per barrel, and the Midland Cushing differential was $1.5 over WTI. WTL differential has averaged $0.71 per barrel over WTI. And the WCS differential has averaged $12.60 per barrel under WTI. Corn and soybean prices have increased significantly and fertilizer prices have responded. Ammonia prices have increased to over $400 a ton, while UAN prices are $250 dollars per ton.

Renewable diesel margins have averaged $1.31 per gallon, quarter-to-date, based on soybean oil with the carbon intensity of 60, and includes RINs, blenders tax credit, and low carbon fuel standard credit. As of yesterday, Group 3 2-1-1 cracks were $17.77 per barrel. Brent TI was $3.67 and WCS was $12.85 under WTI. Although benchmark cracks have improved, as I mentioned earlier, most of this move was associated with increase in prices.

Quarter-to-date, ethanol RINs have averaged toward $0.94 and biodiesel RINs have averaged $1.5. In January of 2020, ethanol RINs averaged $0.16 and biodiesel RINs averaged $0.40, a nearly six-fold increase in the price of ethanol RINs in one year should be clear evidence as the RFS program is broken. EPA's refusal to rule on outstanding small refinery waivers for 2019 and '20, while failing to issue a renewable volume obligation for 2021 despite their legal obligations are significant factors in driving what we've seen over the past year in the RINs market.

We are encouraged that the Supreme Court decided to hear the appeal of the misguided Tenth Circuit ruling, and we do not believe they would have taken the case if they did not have serious questions about the ruling. The original intent of the RFS regulation was that small refinery waiver could be applied for at any time. We had an accrued RFS obligation at the end of 2020, which approximates our 2019 and 2020 obligations at Wynnewood, for which waivers have been applied. Without the mark-to-market effect of this position, our capture rate would have been higher by 38% for the quarter.

With that, operator, we're ready for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Prashant Rao with Citigroup. Please proceed with your question.

Prashant Rao -- Citigroup -- Analyst

Hi, good afternoon. Thanks for taking the question. First one Dave, RIN prices are high as elaborated quite in detail and we've been getting indications from the Biden EPA press release yesterday that they're going to change course on SREs versus the Trump administration. So it looks like; first, it could be in a higher end price situation structurally for the near-term. I wanted to ask with respect to your renewable diesel expansion, are these prices -- are these price levels we're seeing, is this exceeding your expectations when you thought about the economics of those projects that is, do they have more economic value in your current view of what the RINs market will look like over the next year or two years? Or is this sort of within the range that you thought?

David L. Lamp -- Chief Executive Officer and President

Well, I think there are higher than what we originally approved the project under. And I think, most of us in this business don't fathom and don't understand in any way how a higher RIN price benefit anybody, including the Renewable Fuels Association and and all their members. And it really, if you look at past history when they've gotten this high, they tend to be knocked back down by some other change of approach, just because essentially it's going to affect the consumer, and the consumer is not going to like it. so I think it's exceeding our expectations now. But my thoughts are, it will come down at some point.

Prashant Rao -- Citigroup -- Analyst

But given the short, I mean, it seems like when you've would have given a little low cost is a fairly short payback period project even under your original expectations. So I guess my next question is, if in the short-term in that time RINs remain elevated as the project comes online, there could be some excess cash generation. My question to be with that excess cash what would be the priorities, specifically putting it more toward the pre-treatment, it sounds like that's early 2022. But maybe to get more aggressive there? Or would you be looking at starting to pay down debt first or address a little bit on the balance sheet? How would you take excess, I guess savings or cash generation from the Wynnewood project in the back half of this year if the current environment persists?

David L. Lamp -- Chief Executive Officer and President

Well, I think, I mentioned in the prepared remarks that the Board looks at this every quarter, and they'll continue to do so. And they are evaluating right now whether we should be buying back shares or doing something else with the cash, including buying down debt if that made sense. So they consider everything every quarter, and we decided to do nothing this quarter. But that doesn't guarantee that will remain for the next quarter. If you look at our -- I think, I would say that we have too much cash on the balance sheet that's not optimum, and it's -- we think our minimum cash requirements are around $250 million. So, you can see we have excess cash, but we also have a lot of uncertainty in the marketplace. So we think cash is king in this environment to some degree.

Prashant Rao -- Citigroup -- Analyst

You makes sense Last question for me. The pre-treatment facility. Could you remind us, I think you've given us very clear numbers on how much the Wynnewood project reduces your RVO, and we can do now some sort of a savings on that based upon RIN price assumption. But how much more does the pre-treatment add to that? How should we be thinking about that in terms of cost reduction or just total net cash flows? If there's anything incremental you could offer that would be helpful?

David L. Lamp -- Chief Executive Officer and President

Yeah. Well, the big advantage for a pre-treaters getting the CI down of the feedstock. If you look at all the feedstocks to renewable diesel right now, they're all up, including the waste oils or all -- every single, every single parameter is up, but the CI is the real prize. And that's what the pre-treater will do for us. And typically we're still penciling in about $50 million to do that project, and that's probably getting clean terrain [Phonetic] in a dirty terrain. So, we have a lot of optionality. And really -- but if you really look at it, the really holy grail here is to get -- to create oils out of biomass of some sort. And the -- really the -- the values in that is really getting at the low-carbon fuel standard credits and even a cheaper feedstock to some degree.

Prashant Rao -- Citigroup -- Analyst

How much of it -- just one quick follow-up. How much of a CI score improvement with -- if there's a pre-treater add versus what Wynnewood would be when they first start up? Is there a ballpark range you could give us?

David L. Lamp -- Chief Executive Officer and President

Yeah. I think, we'll probably end up with washed and bleached soybean oil being around a 58. And if you go to corn, I'll just use corn oil as example, that's about a 28. So, a substantial improvement.

Prashant Rao -- Citigroup -- Analyst

Okay. Thanks very much for taking the questions. I'll turn it over.

David L. Lamp -- Chief Executive Officer and President

Sure.

Operator

Our next question comes from the line of Manav Gupta with Credit Suisse. Please proceed with your question.

Manav Gupta -- Credit Suisse -- Analyst

Hey, Dave. Hi. I wanted to ask you about a letter you sent to Delek on January 14th. We have gone through the letter, all of us. I just want to understand from you the perspective of the letter? What is the aim here? How you think these suggestions would actually help out Delek, and of course, you? Because you own such a large portion of Delek. So if you could walk us a little bit through your letter and what's the aim of the letter here?

David L. Lamp -- Chief Executive Officer and President

Well, I think we took on the Delek investment as an investment. And we thought they were undervalued at the time, and we still feel they are. But there has to be some cleanup, so to speak, of their activities and what they're doing. The two refineries that we've suggested are marginal, the Krotz Springs and El Dorado. And I think, if my math is right, they're probably going to present negative gross margins. And you really -- that in mind, is a big piece.

And as far as what the bottom line is, what we're trying to shift them from is a model of growth to a model of free cash flow, which I think is what CVI represents is -- mainly free cash flow generation is our main strategy. And that bodes well in a market that's not necessarily growing, but shrinking. And as far as what the letter says it says what it says. And I think you can read it just as well as I can.

Manav Gupta -- Credit Suisse -- Analyst

That's a fair one. Can you talk a little bit about the Board members you have recommended, and why you think those will be the right fit for Delek?

David L. Lamp -- Chief Executive Officer and President

Well, the Board members we have suggested are extremely experienced in this industry and are all around -- and their entire careers has been basically in value creation and free cash flow generation, and we think the refresh of the Board will help a lot.

Manav Gupta -- Credit Suisse -- Analyst

Okay. My last question here is, David, you talked about building a Phase 2 pre-treatment unit. And Phase 1 kind of cuts your RVO a lot, but there is still some obligation left there. And I was just wondering, is there any flexibility here where Phase 3 can start a little before Phase 2 that actually gets you long RINs? So, CVI, which has always been short RINs, becomes a long RINs and then can benefit from higher RIN prices. And I'm just trying to understand is there some flexibility here where the Company could prioritize Phase 3 over Phase 2 to get actually long RINs?

David L. Lamp -- Chief Executive Officer and President

Nothing makes me more upset than having to capitulate with the government on RINs. But they kind of force you into it, there is really no other option other than to grin and bear it. So, I think the way I'd answer the question on Phase 3 is that if I do the math correctly, I see announced almost 300,000 barrels a day of renewable diesel has been announced. How much of it gets built? I don't know, but probably if I go down the list, it looks like 80% of it will probably happen to me. And some of it's already in construction. Some of it will not get permits. Some of it will have other problems that won't happen, but 300,000 is a whole lot of RINs, number one, but is also a whole lot of low carbon fuel standard credits. And that market has to move -- everything has to move with it, of course, not to mention feedstock tightness is already occurring and probably will get even tighter.

So I think our view, or at least mine, of the -- and I think our Board views it the same way as we want to get in here early and get the Wynnewood up, then we want to watch the market for a little while. It will take us some time to develop the project anyway, so I don't think we're delaying it a lot by doing that, but we're going to, in another year, another two years, we're going to know a whole lot more about the renewable diesel.

Manav Gupta -- Credit Suisse -- Analyst

Thank you. That all makes perfect sense. Thank you so much, David.

Operator

Our next question comes from the line of Phil Gresh with J.P. Morgan. Please proceed with your question.

Nick -- J.P. Morgan -- Analyst

Hi, this is Nick [Phonetic] on for Phil. First question would just be around feedstock availability for RD. I guess, we're standing out right now trying to secure the supply for HVO, for Wynnewood, how are things looking? And then going forward, how do you see the feedstock market really developing?

David L. Lamp -- Chief Executive Officer and President

Yeah. Well, I think, this is an area of concern without a doubt for future projects coming on. But right now, there still exports of bean oil go up offshore. So, I think we really don't have a problem securing it in the short term. We have to get after it though, I mean we're very close to agreements with how we're going to do that. So, I don't think we have a problem securing it in the short term.

Longer term as we move to more of the -- more favorable CIs, I think that's really a question. The availability is there, it's just a question of being able to get it in there timely and get it secured correctly in the right quality. But longer term, I think this is, as I mentioned, there is really -- there is a Gen 3 coming, that's probably where the industry has to get to this biomass. There is a lot of biomass out there, it's just how to convert it. There is ways to do it, that needs more research. But it's the holy grail in this area. It's really taken biomass and converting it to liquid fuel that has basically a negative CI. And that will be the holy grail, so to speak.

Nick -- J.P. Morgan -- Analyst

Thanks. And second question, I know it was mentioned the Biden admin came out yesterday with the SRE opinion. You think there's any possibility of further RIN market reform coming under the admin may be limiting RIN market participants, or I guess, ex-RINs, is there any chance of a national LCFS standard that you've been hearing about?

David L. Lamp -- Chief Executive Officer and President

Well, I think anything is possible with the current administration. And the shift in strategy is pretty dramatic, and just by the evidence of that letter you mentioned. Normally EPA has to go through rule-making on all these things, and this is a 10-year history of doing waivers and interpreting the law the way they have. And now they suddenly come out and say, well, we're going to reinterpret it and say the Tenth Circuit was right. Well, that takes years of rule making to really get through the process.

So, I'm not sure what in the world they're thinking, but it's obviously confusing. And I think that's half the reason the Supreme Court took the case, because it's just blatantly wrong. And what -- if you read the law, it's pretty darn clear. There's two sections of it that talk about waivers. Ones, the extension of the exemption. The other is, at any time, you can apply for a waiver.

I'll give you, for instance, like it just look at what we're doing at Wynnewood, we can probably run more barrels there. We choose to keep it below the level that's required for a small refinery waivers. Well, with renewable diesel, we're going to cut the rate by another 20,000 barrels. We're going to be around 160,000 barrels per day. That's why that was put in there. You could choose to become a small refiner in the future for multiple reasons, and climate change could be one. And that the law was written to be flexible enough to allow you to do that. So it's just really, what RFS and has turned into is a political football. And Donald Trump did a great job for the first two years and then fell apart in the last two years on RFS. And Obama for many years was the same, no waivers. So its all political, its just -- that's no way to run a railroad, particularly in refining business.

Nick -- J.P. Morgan -- Analyst

I appreciate taking the questions.

Operator

Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Neil Mehta -- Goldman Sachs -- Analyst

Thank you. I appreciate the time this afternoon, guys. The first question is just around capital returns. Dave, you alluded to it on the call in your script. But now how do you think about the reinstatement of the dividend? Is that dependent on getting clarity on demand and RINs? What are the milestones that we should be looking for around capital return, especially as you alluded to? You got cash on the balance sheet, and then how do you weigh buybacks versus dividend? Just kind of walk us through the framework as we think about it?

David L. Lamp -- Chief Executive Officer and President

Well, I think our overriding principle Neil is just as -- is free cash flow with what we're all about. So I think our shareholders are interested in cash coming back either through dividend or if the price is right, stock buybacks. And furthermore, there would be more interested in diversifying our business and and coming up with an acquisition at the right price, will diversify our EBITDA, which we think would reflect in our stock price also.

So the priority is, I'll tell you what it was last year was to do an acquisition that makes sense. And then, as it evolves through the year kind of became renewable diesel. And again, we are kind of back into a corner with high RIN prices to do something. I call capitulation with the government, but others would probably call it something else. But I think it kind of tells a lot if we can't do any of those others, then it becomes excess cash and it either goes back as the latter too. But whether it's a buyback or its actual dividend itself.

Neil Mehta -- Goldman Sachs -- Analyst

Yeah, that's the follow-up is around M&A, you kind of give us the hint that, it sounds like you went down the PADD IV acquisitions and then the bid ask wasn't there. Can you just sort of unpack what you can say in terms of your acquisition strategy? What transpired? And how do you think about going forward? Is there a scenario where you come back and do a deal or is that just off the table for the foreseeable future?

David L. Lamp -- Chief Executive Officer and President

Well, I never can predict the future from the odd. Some of these deals may come back, who knows. We were up there as a lead candidate for a while and we fell off the page. So, you never know, it could come back at some time.

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Yeah, can I sneak one more in there if I could is just, we value your view on the macro, talk about how you think the path looks for distillate and margin in particular, where you have disproportionate exposure, and then Brent WTI looking out over the next year.

David L. Lamp -- Chief Executive Officer and President

Well, I think I'd tell you on the distillate side, as I -- I mentioned that diesel crack isn't contango with crude in backwardation. And do you see the distillate price continuing on the future is going up and crude to be falling down. And I think that bodes well. I think that says a lot for the industry about rebalancing. And I think we may actually be seeing some of the IMO 2020 coming into effect, where if bunker fuel ever recovered, it would demand more distillate. And so I'm kind of, even if you look at inventories and demands, right now it's pretty good on distillate worldwide. So I think that's recovered, at least it's been rebalanced, let's put it that way.

As far as the Brent TI goes, I'm a firm believer that you're shale oil reemerges, I think the Brent TI reemerges also, even with the pipeline capacity you'll have to drive more and more barrels offshore requires Brent TI to be higher and higher. If you look at a WTI price, Midland WTI and Houston, its a premium to Cushing and it needs to remain that way too, because it is a higher value crude than Brent. But that differential is driven by shale oil production.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Dave. Appreciate it.

David L. Lamp -- Chief Executive Officer and President

Sure.

Operator

Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Hey, good morning, everyone. I had a question on the outstanding RIN liability. It sounds like it's from Wynnewood here. So I believe it was $86 million at the end of Q3. Where did that stand at the end of Q4? And then you also have a number on where that stands today? I think. Tracy you mentioned, you had cut that down by about 8%?

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

That is accurate. That is what I said [Technical Issues] Yeah, the K that we filed tonight will have detail that outlines the accrued obligation specific line item.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Is it fair to say that -- I think RIN prices are up about 20% since the start of the year. So if you have cut it back by 8%, is it fair to say that today's obligation is higher than where you ended at the end of the year?

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Yes because we also would have had an abnormal obligation that built.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Right, right, OK. And then the -- I wanted to follow-up on the pre-treatment costs, was that $50 million and would that cover both the 100 million-gallon Wynnewood plant as well as the 150 million-gallon Coffeyville conversion?

David L. Lamp -- Chief Executive Officer and President

Well, that's one of the numbers we have, Matt, is really what do we do? Do we build one common plant or build two pre-treaters? And we haven't made that decision yet, but the $50 million is really just to handle the Wynnewood project.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Got it. And then last question. I think your share of regional crude fell to a 45% of your total throughput, which was the lowest in more than a year, and your share of WTI moved up to 36%. Was that just kind of like a temporary onetime dynamic? It seems like, in general, you've been moving more to the regional crudes. So what explained the uptick in more Cushing-sourced barrels in Q4?

David L. Lamp -- Chief Executive Officer and President

Mainly the pandemic as our gathering rates went way, way down in March, April, May, and they have been slowly recovering for a period of time, and now they are starting to drop again as depletion occurs. Without any drilling, the shale oil barrels are the ones that fall off the quickest. You'll see a slight uptick now with the Blueknight pipeline system added. That's 600 miles, we think that can get us up to 25,000 barrels a day, maybe even a little bit more once we get it up and fully running and all our crude procurement lined up and going. But it's still dependent on -- at the current crude prices, I think drilling will start again, although the E&Ps are much -- as you all know is the E&Ps are much more focused on free cash flow than they are while drilling campaign. So how much crude will decline in the United States is anybody's guess at this point, I think.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Sounds good. Thank you very much.

David L. Lamp -- Chief Executive Officer and President

You are welcome.

Operator

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

David L. Lamp -- Chief Executive Officer and President

Again, I'd like to thank you all for your interest in CVR Energy. Additionally, I'd like to thank our employees, contractors and the communities we operate in for their hard work and their commitment toward safe, reliable, environmental responsible operations. We look forward to reviewing our first quarter results '21 during the next earnings call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Richard Roberts -- Senior Manager, FP&A and Investor Relations

David L. Lamp -- Chief Executive Officer and President

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Prashant Rao -- Citigroup -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Nick -- J.P. Morgan -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

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