Delek US Holdings (DK) Q1 2020 Earnings Call Transcript

Delek US Holdings (DK 0.51%)
Q1 2020 Earnings Call
May 06, 2020, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Delek US first-quarter 2020 earnings call. [Operator instructions] And now, I would like to hand the conference over to your speaker today, Mr. Blake Fernandez. Thank you.

Please go ahead, sir.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Thank you and good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings first-quarter 2020 financial results. Joining me on today's call, Uzi Yemin, chairman, president, and CEO; Assi Ginsburg EVP and CFO; Reuven Spiegel incoming EVP and CFO; and Louis Labella EVP and president of refining, as well as, other members of our management team. Presentation materials used during today's call can be found on the investor relations section of the Delek US website.

As a reminder, this conference call may contain forward-looking statements as the term is defined under Federal Securities Laws. Please see slide two for the Safe Harbor statement. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to be comparable to GAAP results, which can be found in the press release, which is posted on the investor relations section of our website.

Our prepared remarks are being made assuming that the earnings press release has been reviewed and we're covering less segment and market information that is incorporated into the first-quarter press release. On today's call, Assi will review financial performance, I will cover capitalization and guidance, Louis will cover operations and capex, then Uzi will offer a few closing strategic comment. With that I will turn the call over to Assi.

Assi Ginsburg -- Executive Vice President and Chief Financial Officer

Thanks Blake. On an adjusted basis for the first-quarter 2020, Delek US reported a net loss to of $128 million or $1.74 per share, compared to a net income of $129.4 million or $1.64 per share in the prior-year period. Our adjusted EBITDA loss was $29.7 million in the first-quarter 2020 compared to $244.1 million gain in the prior-year period. Adjusted results include $106.1 million of headwinds or $1.44 per share.

This is comprised of a pre-tax other inventory loss of $90.8 billion. I would like to point out that this is a separate from the LCM inventory charge that is already excluded from adjusted results. Additionally, there is a $36.1 million tax headwinds, resulting from applying the annual estimate effective tax rate to the quarterly results. On Page 4, we provide cash flow waterfall.

In the first quarter of 2020, we generate cash flow of approximately negative $144 million from continuing operation, which included working capital benefit of $102 million. Finally, cash capital expenditures in the quarter were $190 million including the, Big Spring turnaround. With that I will turn it over to Blake.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Thanks Assi. Slide 5 highlights our capitalization. We ended the first quarter with $785 million of cash on a consolidated basis and $1.4 billion of net long-term debt. Excluding net debt at Delek Logistics of $936 million, we had net long-term debt of approximately $496 million at March 31st, 2020.

Moving to Slide 6, we provide second-quarter guidance for modeling. Based on actions taken to optimize operating costs and limiting overhead through hiring freeze, we expect a 10% reduction or 100 million improvement and cost structure on a full-year basis in 2020 versus 2019 levels. This is comprised of $75 million reduction in operating costs and $25 million decrease in overhead. With that I will now turn the call over to Louis to discuss operations and capex.

Louis Labella -- Executive Vice President and President of Refining

Thanks, Blake. During the first quarter, our total refining system crude oil throughput was approximately 240,000 barrels per day, which reflects the major turnaround at Big Spring and downtime at Tyler for reform work. In the second-quarter 2020, we expect crude oil throughput to average between 230,000 to 250,000 barrels per day approximately 80% utilization at the midpoint. On Slide 7, I want to highlight our capital spending.

Capital expenditures during the first quarter were $190 million, reflecting the major turnaround at Big Spring. As a result of a market volatility, we are lowering our full-year 2020 capital program to approximately $250 million. This represents a $75 million reduction or 23% from prior-year guidance. Recall capex excludes JV investments like Red River, as well as, the Wink to Webster connector where financing will be provided by joint venture.

The bulk of the spending reductions are coming from retail Permian gathering and differing or canceling discretionary projects. The 2020 capital program is broken down by segment as outlined in the slide. I would point out that roughly 75% of the full-year capital program was completed in the first quarter leaving minimum outlay for the balance of the year. Next, I will turn the call over to Uzi for closing comments.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Thank you, Louis. Good morning, everybody. Please move to Slide 8. The energy industry is facing dual headwinds between demand impact from Covid-19 and excess global oil supply.

We're taking aggressive steps to improve our ability to compete through a lower cost structure and spending profile leading to $175 million reduction collectively. While macro conditions have been volatile, our niche product markets have remains somewhat insulated and the economy is opening up in our original footprint, mainly Texas. Feedstocks advantages have moved in our favor. Especially with a steep contango curve where we benefit on every well run through our system.

These factors are allowing us to run our system above the industry average utilization rates near-term. In the midstream, Delek recently sold the Big Spring gathering business to DKL. This transaction demonstrated -- demonstrate our support for DKL and increases our ownership to 71% including the GP interest. We are committed to maintaining a strong balance sheet with ample liquidity and we are well-positioned to witness -- to withstand macro volatility.

We're maintaining our quarterly dividend payment of $0.31 per share. At this point, I'd like to thank Assi Ginsburg for his long-term with us as a company. His 15 years with us as a company were full of dedication, smartness, and love. And I'd like to thank him again for everything he did for the company and emphasize our personal friendship.

With that, I'd like to welcome again Reuven Spiegel, our incoming CFO who I'm sure will do great for our company. Before we open the call for questions, I would like to acknowledge that CVR Energy is taking a position in our stock and we welcome them as shareholders. We have no further comments in this regard so we would appreciate you keeping your questions to the first-quarter results and outlook. With that, Lee, would you please open the call for questions?

Questions & Answers:

Operator

[Operator instructions]. And your first question comes from the line of Ryan Todd. Your line is now open.

Ryan Todd -- Analyst

Great, thanks. Good morning, everybody. Maybe if I could start with something -- we've seen a lot of volatility in both Midland differentials and crude contango structure over the past month or so, could you talk a little bit about one: I mean, I think whether you feel, I think the market probably focuses too much on Midland basin but maybe not enough on contango. But can you talk about how you view the dynamics of those playing out in the coming months? How it relates to the export market? And then, I have a follow-up question.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, good morning, Ryan. As discussed before, we believe that we need to look at the value chain all along from Midland to the export market. As we see in the marketplace, export today is anywhere between $7 to $9, so everybody can focus on one part but in order to see the full picture, you probably want to look at Midland, contango, as well as, the Brent TI, which it depends on the size of the -- or which part of that value chain is in favor at any given moment. At this moment, Brent TI is as we all know around $6 to $6.50 and contango is around $2 -- little more than $2.

That brings up immediately strength not only to Midland, but if you look at what happened in any grades in the United States, including the Medium Sour, including Maya, that is blended in the United States. All these grades are very, very strong. So, Mark, I think yesterday it was $3.5 before, I didn't check this morning. And so, the value chain if you capture every part of the value chain, it doesn't matter actually where you get it.

Now in our case, we just need to remember that when we have Midland as premium now is $2.50, this is on a portion of the barrels, we get the contango which the CMA, which has a little less than $3 maybe around $3 on every barrel. So overall, the current environment is actually very positive for Delek US now. I don't know how long it would last, but between Brent TI of $6 in contango $3, that more than offset the strength in the grades, including Midland.

Ryan Todd -- Analyst

I appreciate the color there. And then maybe as a second question, and I appreciate the guidance for the second quarter. I mean, it looks like your going to be targeting utilization rate that's probably roughly around 80%, which is you highlighted as above there industry norms. Can you talk about what you're seeing -- the strength that you're seeing in niche markets.

Maybe what you're seeing locally in terms of gasoline and distillate demand, and how -- in what ways you view those markets has been resilient, whether from a pricing or from a logistical access point of view relative to other parts of the country?

Avigal Soreq -- Analyst

Absolutely. Good morning, Ryan. It's Avigal. So far we [Inaudible] are basically serving in niche market.

Obviously, because in U.S. we've seen less impact all over area, which our refinery is working at. At the beginning, we saw most of the impact on the gasoline side but starting two or three weeks ago, we have seen that decline starting to come back up. In the beginning, obviously, we saw some decline in diesel which was less significant than the gasoline, but gasoline is obviously leading the chart and that kind of correlated with what we see with the EPA number, and at this point, we're serving the niche market and the demand over there mostly on the gasoline side is working for our favor.

Ryan Todd -- Analyst

Good. Thank you.

Operator

And your next question comes from the line of Brad Heffern. Your line is now open.

Brad Heffern -- Analyst

Hey. Good morning, everyone. A question on inventories. So, it looked like in the first quarter, there were a lot of sales out of inventory, can you talk, I guess, first of all about how those contributed to profitability in the quarter, and then sort of related, you guys did have a working capital benefit during the quarter which is sort of odds with what other people are reporting.

So, can you explain the dynamics of that and if that's something that we should expect to reverse? Thanks.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Hey, Brad. In the quarter, we had the Big Spring turn around so that was obviously a big component and tends to throw things off in terms of the inventory. We also had some reformer work at Tyler, and so, utilization there was a bit off. So, I'm not sure specifically if you had something in mind, but those are two things I would point out that maybe skewed things a bit in terms of sales versus typical utilization rates.

And then, I think your second question was on working capital?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Yeah. This is -- hi, Brad. Working capital was impacted by two tax credits. One was -- not credit.

One was a reversal of 52 million of fourth-quarter excess -- fourth-quarter provision and the other one was 85 million biodiesel tax credit. So, the number that you see on Slide 4 is 102 is reflective of these tax credits.

Brad Heffern -- Analyst

OK, that makes sense. Thanks for that. And then just a question on detail. So you know, obviously, it's recovered a lot, but it's still trading into 20% yield, how do you see the value of that entity at this point? Is there a chance that if this continues on that you could buyback in? Or do you think that ultimately with more scale and maybe linked to Webster that will solve the problem I assume? Thanks.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, strategically, we look at the midstream is something that we need to look at very carefully. That's the reason we continue to look into that. However, 20% cost of capital is very hefty. It's extremely expensive.

So, as we look at the capital structure of the company, we do need to think about if it doesn't recover over the longer period of time, which just happened, then, we probably won't think if this thing make sense. However, I want to make sure that we all understand, we have the DKL situation unfolding, if you will, our target is around $400 million of EBITDA with this latest drop down in the results. We're talking about now on an annual basis, $230 million to $240 million, we still have ideas how to drop down things to DKL and we will continue to look at that as a tool to create value.

Brad Heffern -- Analyst

OK. Thank you.

Operator

And your next question comes from the line of Manav Gupta. Your line is now open.

Manav Gupta -- Analyst

Hey, guys. First of all, Assi, you will be missed. I think you were a second pillar of the company and whenever we can be choosy, you always help us out -- went out of the way to help us. So, you will be dearly missed.

We will really miss you. So with that, the first question, Uzi, we understand the contango benefit. I think in the past you have tried to provide some sensitivity. I don't remember the exact number but if it stretches for like a $1 for the entire year, it's like $80 million to $100 million, can you help us quantify that benefit?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Absolutely. It's a little more than $100 million for every dollar, call it $100 million.

Manav Gupta -- Analyst

OK. Perfect. Second question, $75 million of capex reduction, can you provide where that came from and should we assume that as a run rate going forward? So, should we assume Delek would be running at a lower $250 million kind of capex going ahead?

Fred Green -- Analyst

Hey, Manav. It's Fred Green. So, the $75 million cuts mostly came out of some of our growth initiatives for the year, including the Delek Permian gathering and also retail where we're just not going to build new stores. And I think, we still look at our ongoing sustaining capital at roughly $20 million to $25 million per refinery per year.

And then, you lay your turnaround on that where we have typically one a year, but we're not changing our base capital levels going forward.

Manav Gupta -- Analyst

OK. And the last one for me. The Big Springs is a very good asset, it's some of the best assets out there. That margin capture in this quarter did not reflect the quality of this asset.

So, I'm just trying to understand was it just the turnaround or something rather against you because I certainly don't expect that kind of capture rate going ahead. That's a much better asset and what was shown in 1Q results.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, when you have a refinery that is down for 60 days were major, major turnaround, including capital project, with no intent to touch it over the next five and maybe even six years, then, it's a reflection of the situation. Even if you look at the capital or the capex of the company in the first quarter, most of the capital of this year was spent already in the first quarter, just because of the fact that we wanted to put one of our best assets in good shape for the upcoming challenges in the marketplace. I want to be clear. It is still our best refinery and it is performing very well since we came up from turnaround, actually it's running pretty much full.

Manav Gupta -- Analyst

Perfect. That's -- so basically, it was all that turnaround which caused the captive to go haywire and as the refinery runs much better in 2Q, it goes -- it should go back to the historical good capture rate.

Unknown speaker

Thank you.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Absolutely.

Manav Gupta -- Analyst

Thank you.

Operator

And your next question comes from the line of Paul Sankey. Your line is now open.

Paul Sankey -- Analyst

Hi. Good morning, everyone. I'm sure this is a good joke about missing and whether I can miss as badly as Manav will, but I feel the best, I think it's about the 50th time we've typically bid you farewell. But anyway, thanks a lot mate.

Uzi, this is a specific question about the SPR, can you just talk a little bit about that? Just as if a very detailed question?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, it was in the press and I don't mind telling you that we bought some barrel and put that in the SPR. This is about my last question from earlier, when you do that, you can actually play the contango. And that's the reason, we are -- when he asked if it's $100 million, I said a little more than $100 million. While we have other places that we can put inventory, that's one of the reasons why we are so comfortable with DKL and the fact that we changed the -- we increased the dividend and also maintained the dividend here.

We enjoy the contango in several aspects. One of them is SPR and we tapped our [Inaudible] into that business. That business also support, if you will, the pay line, as well as, the Red River part line that we own in and some of it we operate and some of it we won't operate. So for us, it's a great business and a way to make money and another tool in our toolbox.

Paul Sankey -- Analyst

Great, thanks. And then a further follow-up to Manav's question which is a big and difficult and long question, which especially with Manav asking about Big Spring. But can you try and -- obviously, we drove off a cliff two months into Q1. Difficult to make sense of Q1 results going forward.

Can you try and do that? Can you talk to us about the -- firstly: how the extent to which the world has changed and how we normalize; and secondly: something, if anything, you can say about where you feel that post-Covid where your normalized earnings will end up and I know there is a hundred moving parts, but I'd be very interested by your perspective. Thank you.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Hey, Paul. It's Blake. I'll take a stab at it. But you know, since the Covid impact began, we actually saw the market move in our favor in terms of pecking order relative to the group I would just say.

Obviously, we've seen an expansion in contango, we've seen periods of midland moving in and out, and then of course, the crack spreads moved all around. Without going too far on guidance, I would just say looking forward, when I see 2Q estimates at a loss of $0.56 a share, I would just say we are very confident that that's a very achievable number. And I would probably leave it at that. The only thing I would just tell you and remind you is that historically, we look at the Gulf Coast 532 as the kind of a benchmark crack and we normally realize about 70% to 75% of that.

And the difference is when you have contango or midland, that feedstock component, you actually capture 100% of that. So, we would actually much rather a lower crack spread and an expanded contango market that's going to help our capture rates going forward. So I hope that gives you some color.

Paul Sankey -- Analyst

Yeah. Thanks, Blake. And obviously, thanks for the efforts you made last night to try and clear up the results. Please do get rid of this combination of LIFO and FIFO, it's insane.

Uzi, can you talk a bit about where you think things will settle in without going specific to earnings? Blake's obviously handled that, but do you think we are in a world of more gasoline demand in wider spreads, whatever? Thank you.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, without being too optimistic here, we just need to make sure that we do have some data already coming from the State of Texas. And while in Texas, which is one of the first to open, while it was at about 40% decline, today, we are in an environment of less than 20% decline in gasoline demand in Texas. So, at least in the areas that we serve, we don't serve all the areas in Texas. So, as the states start to open up, we will have more data.

One thing that -- I don't want to be too optimistic, but I saw your note up, Paul, the other day, saying that gasoline will be winning and we saw already this -- at least API yesterday showed another draw of gasoline. That would be driven by several factors as you mentioned yourself. The fact that people don't want to use maximum quotations, the fact that people don't want to fly, the fact that people will probably want you to pull cost, will be offset some by people not going back to offices as much as they used to. But in general, I think gasoline can be winning here pretty quickly.

And as I said, Texas used to be minus 40% as of two days ago, it is on a weekly basis minus 20%. So, we already cut and Texas only opened or start to open few days ago. So, we may be too optimistic here but we do have that data coming from Texas.

Paul Sankey -- Analyst

Thanks, Uzi. Thanks guys.

Operator

And your next question comes from the line of Theresa Chen. Your line is now open.

Unknown speaker

Hi, thank you for taking my questions. I guess just a follow-up on the discussion around the deceleration in the pace of decline, Uzi. You mentioned the 20% is in your markets specifically relative to the 40% at the trough in decline. Can you talk about, just in terms of your markets, are there any qualifiers or factors that we should consider why that maybe be better than industry or national average? Has -- does that have to do with population density or consumer behavior? Is there any color you can share?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, absolutely. And again, I'm not sure that we have the data for New York City or for L.A., we don't. So, we are just talking about our areas. We mainly serve rural areas.

And in this rural areas, as you well know, people in order to do something, they need to get into their car and we see it on -- in Texas, as we mentioned, and also in Arkansas, which Arkansas was never minus 40%. It's actually in the area that we are in minus 27% to 28%, and now, it's improving. And that's the reason we are saying that the 80% -- we are comfortable with 80% utilization rate for the quarter. I want to remind everybody, many of us were here during 2008, 2009 and that was the case at the time as well, that rural areas don't -- didn't get hurt that much or less.

I shouldn't say it's still very strong, but less. I -- we had some data on big cities. We see that in big cities, the decline is little more severe, but that's again, one of our strategies. Also, I want to emphasize one more thing, the impact of the virus on -- and I know, most people are not interested in our convenience stores, but the same-store sales inside, inside the store jumped significantly over the last four to six weeks as people don't want to go and stand in lines in big boxes, and people really don't want to be exposed to a lot of people.

So, they come in and out to these stores. Now, this is data only for four weeks or six weeks, we shouldn't take it to the bank. We need to be very cautious, but we do see the change in behavior and people inside the store.

Unknown speaker

Got it. But leads to my follow-up, in terms of your retail strategy, so you're seeing better same-store sales but later to change in consumer behavior in this pandemic. I think on the DKL call there were some comments about West Texas demand being down 15% or so, and then, you know, your earlier comments about this post-COVID world, yes, people are going to stop taking flights and using mass transits. Perhaps driving more but also balanced with the consideration of social distancing being a social norm going forward and maybe people are going to stop driving to work as much.

How do you think about your retail strategy going forward in light about that?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, it's a -- it's a combination of factors. And I'm going to take it very shortly here. We just need to remember that in some area, the big box retailers stop accepting customers 24 hours and we see it in West Texas, we see it in Arkansas. I don't know.

We didn't check every area in the country, but in these areas, the other retailers because of social distancing and because of different -- of their decision. Now, all of a sudden, we see after hours 9:00 pm, 10:00 pm, 11:00 pm, much more traffic than it used to be in the past. Now, I don't know if big boxes retailers will change their mind in the next two weeks or two years or two months or whatever it is, I really don't have a clue. But as long as their behavior is their behavior, we are the beneficiary.

So, I'm going to be bold here because I'm a little surprised in terms of enjoying the traffic, we are -- we don't -- we're not afraid to put our neck, if you will, outside there. Let's say, we are going to see a better demand and that's the reason we say the -- we're going to run the refineries better than the industry average. We are going to -- we think that retail will be a big beneficiary, and also as I mentioned earlier, the contango, which I don't know of any company or maybe there are companies that enjoy 100% of the contango in their crude slate. So, I'm really surprised how it's not being looked at a little better but maybe this is me just being naive.

Unknown speaker

Well, I'm not surprised at your boldness at all Uzi. Thank you very much.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

And your next question comes from the line of Roger Read, your line is now open.

Roger Read -- Analyst

Yeah. Good morning. Thank you. And Uzi, like some of the other guys, I'm happy to say thanks for all the help along the way and good luck in your next endeavors.

With that, I'll kick down to the question. Uzi, dividend, we've seen a few companies in this space make some cuts, results like Q1, obviously, are not indicative of the future but if they were to continue at that level, we'd all wonder about the dividends. So, I'm just wondering how you think about dividend sustainability going forward and how that fits within the overall capital allocation.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, Roger, first quarter was horrendous for everybody including us. We took it a little harder just because of accounting issued with FIFO and LIFO. I know that it's hard to explain that to all of you, and maybe one day, we need to clean this thing. But ignoring the inventory, which is pretty much in line with everybody else.

First quarter was a loss of, call it $0.30 and I know that there was a lot of noise around it and it's hard to get to that number, but it is minus $0.30. Now, with the capital, like Fred mentioned, the capital project behind us, and from now on to the end of the year, we are talking about probably $60 million of capital. With the combination of contango which is very strong in the second quarter and I know midland is out of favor, all the great are out of favor right now. But until a week ago, midland was very weak and we took advantage of that for the quarter.

And also, the fact that we see DKL doing much better in terms of coverage, as well as, leverage and the convenience stores performing, I'm not afraid to say, the systems will be above everybody expectation for this quarter -- for the second quarter. I'm not afraid of -- or we are not afraid to continue the dividend. There is no reason not to continue the dividend. Obviously, if this continue -- if first quarter will continue and some negatvie -- negativity, we will need to look at it.

But second quarter doesn't show any indication of cash burning. So, I'm -- we don't think that dividend should be touched at this at this time.

Roger Read -- Analyst

All right. Thank you, very clear defense. The only other question I had was a kind of a follow-up modeling thing to understand the contango crude storage play that you were referencing. I believe it was with Paul's question, but is that going to be something classified inside of DKL, inside of DK? Or is it split between the two? Or there are opportunities that both entities will do and some of them involve the SVR storage and some other options?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, SVR is not the only inventory play that we can play. As we all know, we have a lot of tankage and especially when you don't run 100%, you have capability to enjoy the contango. So, it's a combination between DK and DKL. Obviously, we own 71% of the -- of DKL, own 100% of the GP.

So, we look at DKL as very -- it's something that we need to protect as well. So, the inventory play will be between the two entities and that should be looked very carefully over the next few months if contango continue to play itself of the way it is.

Roger Read -- Analyst

Great. Thank you.

Fred Green -- Analyst

Do we have any further questions? Operator?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Operator? Operator?

Operator

This is the operator, sir. We have a question coming from Neil Mehta. Your line is open.

Carly Davenport -- Analyst

Hi, good morning. This is Carly on for Neil. Thanks for taking the questions. My first one was just around the midstream growth strategy.

How, if at all, have your views evolved on increasing exposure to the midstream business given how expectations around the U.S. production growth trajectory have changed in the last month?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

That's a great question Carly and we need to look at it on over longer period of time. We still believe that the United States will need that oil. Our assumption is that export won't be as cheap anymore because the outside countries like Russia or OPEC won't allow the United States to export as many barrels that it used to be. But at the same time, oil will be needed inside United States.

So, that -- we are going to look at that [Inaudible] in light of not only export, but all that is needed in other places of the country and how other people will modify their behavior.

Carly Davenport -- Analyst

Got it. That's helpful. Thank you. And then the follow-up is just around the split between gasoline and diesel.

We've seen some pretty dramatic swings between the strength in the margins for those two products. Can you just remind us what flexibility exists and the DK system to shift between gasoline and diesel production. And then, any thoughts on your views on relative demand for those two going forward?

Louis Labella -- Executive Vice President and President of Refining

Yes. Thanks, Carly. This is Louis. Currently, we've been in max disciplined mode for a while now and our activity range between 38% to 40% and we can probably swing to toward gasoline about 10%, if the the economics dictate.

Carly Davenport -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Doug Leggate. Please ask your question.

Unknown speaker

Hey. Good morning, guys. This is Cleon on for Doug. I've got a follow-up question on the strong utilization rates.

Wondering if you can talk about how you see the cadence trending from April to June, provide any regional color. And also, let us know a bit any of this product that you're producing is being put into tanks rather than being sold.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, I don't know that we are breaking that down by month. If -- the question if we are building inventory, absolutely not. We're not building inventory.

Unknown speaker

OK. Thanks.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Yeah. We're not given regional details by refinery or throughout. But I think a fair assumption would be just somewhat similar utilization across the board for the system.

Unknown speaker

OK. That's pretty fair. I'd like to --

Uzi Yemin -- Chairman, President, and Chief Executive Officer

And Cleon, I'd like to say one more thing. I mentioned that, obviously, one of our -- one of our best assets is Big Spring and with the fact that demand over there is coming back. It's fair to assume that a Big Spring would be running very close to capacity.

Unknown speaker

Got it, OK. Also, just wondering if you can provide any details around the opex cuts that you had announced yesterday and confirm whether or not these will be sustainable posed to recovery.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Yeah. Cleon, it's Blake. I'll kind of to cover that. So I think the best way to look at it as a reference point for 2019, opex was about $682 million.

And we're looking at roughly $75 million coming off of that. If you look at the first-quarter actual and then the guidance we're providing for 2Q and kind of extrapolate that for the second half of the year, that gets you right in the zip code of kind of where we think we're going to land for the full year. And I would just say that the only thing embedded in that is a little bit of downtime, obviously, at 80% utilization you're running the system a bit below normal. That's probably about a $5 million impact from a variable cost standpoint.

So, I would just say that you know maybe 2Q's about $5 million lower and that might come back up a little bit in the second half of the year. On the overhead side again, similar reference point last year was $275 million, if you take the 1Q actual and then 2Q guidance and again extrapolating that second half of the year, I think that gets you in a good landing point there and that should definitely be sustainable both of those going forward. So --

Unknown speaker

Got it. So, when do you expect to hit a run rate on those savings?

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Well, like I say, if you take the 2Q guidance, all we really need to do is maintain that level for the rest of the year and we'll be at the full-year guidance.

Unknown speaker

Got it. Thanks, Blake.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Yeah.

Operator

Your next question comes from Jason Gabelman. Please ask your question.

Jason Gabelman -- Analyst

Yeah. Hey, good morning. I wanted to circle back on the refining utilization guidance which is a bit stronger than peers. First, if you can give any insight into what you're running at right now.

And then in terms of strength in your individual product markets, are you insulated from other competitors from selling barrels into those markets? I understand that demand in your more rural markets are strong, but I guess the question is, do competitors have an opportunity to ship products by pipeline into those markets and have you seen that happening potentially eroding some of the margin benefit you're seeing from stronger demand and I have a follow-up. Thanks.

Avigal Soreq -- Analyst

Yeah. Hey, Jason. Good morning. It's Avigal.

So obviously, we have a cost advantage of supplying our [Inaudible] to our refinery. Some of them isolated, some of them had some supply that's coming into the area, but having a refinery in a rural area always, does that present an advantage. As we mentioned earlier in the call, on those areas the options that people has to move is very much dependent on the gasoline demand. And we have seen in the beginning some decline in demand, but we obviously see some very strong trends that shows us that the demand is coming back.

We see that in Arkansas, East Texas, and West Texas, all of them. So, we are very optimistic about the demand coming back in our areas and we are seeing -- we have seen -- we have a very strong customer that rely on us and we are happy to serve them as much as we can.

Jason Gabelman -- Analyst

Got it. Is there optimism baked into that 80% utilization rate, you got it to?

Fred Green -- Analyst

Jason, I would say that's actually fairly conservative. Obviously, at this point, we have some data in hand and we are trying to be fairly conservative in terms of the way we are guiding you.

Jason Gabelman -- Analyst

Got it. And thanks for that color. My follow-up is on the results, specifically, on the cash flow. There was a lot of noise because of the inventory movements and it seems like those inventory movements flow through the income statement whereas for some competitors, because the way their accounting is done, it flows through working capital and maybe gets kind of taken out of underlying earnings.

So, can you just discuss how those different accounting policy has kind of impacted your underlying earnings and cash flow? And specifically, I noticed the lower cost or market adjustment wasn't classified as non-cash and I think it typically is, so -- just if you can elaborate on what happened there and if that was in fact a non-cash item? Thanks.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, when price of inventory or when you have inventory at one price and it comes down, then, you have different ways to treat it from an accounting standpoint. In different ways, some do FIFO, some do LIFO, some do moving average, whatever they do. It doesn't change the fact that all refineries, including us, are long working capital. We're all -- we have much more -- many more payables versus the receivables.

If it's not unique to delicate everybody, we pay for crude on the 20th of the following month, that's on average 35 days of payables while receivables are usually between four to five to seven days. So when prices come down, the working capital, all -- the entire working capital because we are long working capital, everybody is, then, the working capital is coming down. That obviously changes and we already see it when prices recover. When prices are are coming down, working capital is shrinking.

When prices are coming up, working capital is expanding. It's not unique to Delek. It's 100% of the refineries, regardless of the accounting method that we use. Regarding our accounting method, we are using some FIFO and some LIFO, and that's the reason we tried to call out both the LIFO and the FIFO within the other inventory, as well as, LCM.

If you combine these two numbers and I'm sure you -- you can do it much better than we do. You will see that compared to our peers, we're pretty much in line, and everybody has the same LCM. In our case, some of it is inventory. But the accounting method doesn't change the fact that we all long working capital.

Jason Gabelman -- Analyst

Got it. OK, thanks for the color on that.

Operator

Your next question comes from the line of Matthew Blair. Your line is now open.

Matthew Blair -- Analyst

Hey, everybody. Glad to hear you all safe and sound here. I had a question on the valuation of the Big Spring gathering drop. Could you just talk about this from DK's perspective? It looks like the multiple came in maybe a little bit less than 5 times.

And then on the DKL call, you mentioned to expect to another drop in the near future. What kind of valuation or multiple do you think would be appropriate there? Thanks.

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Hey, Matthew. It's Blake. So on the drop for the gathering business, I would remind you we took about 5 million shares or so and the implication there was we thought the DKL was a very good value. And if you look at DKL is basically doubled since that time.

So, in essence that -- it went from, call it $150 million transaction $250 million, and would have brought the multiple in line with kind of industry averages. So I guess, I would just answer it in terms of a big component of that was taken equity in DKL, which we felt was very depressed price. And I don't think we're going to get into any kind of alluding to multiples on future drops, but obviously, I think we've demonstrated that DK is very supportive of DKL and I think we'd probably just leave it there.

Matthew Blair -- Analyst

Sounds good. Thanks and then, Assi, could you explain that $36 million tax hit a little bit more and if your earnings improve, does that get reversed out in future periods?

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, Assi is here, but we are trying to give him some vacation time as he is transitioning out. So, Reuven will take that question, if this is OK with you, Matthew?

Matthew Blair -- Analyst

Sure.

Reuven Spiegel -- Incoming Executive Vice President and Chief Financial Officer

Well, the $30 million and change was based on our outlook for the remaining of the year and the full rated tax rate that derived from that. So, I think that shows are anticipating for improved results over the next quarters and that will reverse the amount.

Matthew Blair -- Analyst

OK. Thank you.

Operator

And the next question comes from the line of Paul Cheng. Your line is now open.

Unknown speaker

Hi, good morning. It's Davis on for Paul. Thanks for taking the question. Can you tell us, what was the realized hedging gains [Inaudible] for the quarter?

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Hey, it's Blake. Yeah, it was $68 million.

Unknown speaker

OK. Thank you. And my follow-up is just regarding the cost reductions that you highlighted, has any of this has been realized in 1Q or will we kind of see it come through over the next three quarters of the year?

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

It's really more of a progressively kind of 2Q and beyond. I think, you'll notice the guidance for 2Q is starting to indicate a downward trend. Although, I would point out 1Q I believe came in pretty -- pretty much lower than 4Q had. So, the trend has started but I think you're looking at additional steps in 2Q, and like I say, in order to achieve guidance for the year, we really just need to maintain that 2Q level and I think we're trying to bake in some conservatives in there.

So --

Unknown speaker

OK. Thank you. That's all I had.

Operator

[Operator instructions] And there are no further questions at this time. Presenters, you may continue.

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Well, first I'd like to apologize for the power interuption during the call. I'd like to thank my colleagues around the table, board of directors, you investors for your confidence in us. But mainly, I'd like to thank each one of our employees who make this company, the great company it is.

Duration: 52 minutes

Call participants:

Blake Fernandez -- Senior Vice President of Investor Relations and Market Intelligence

Assi Ginsburg -- Executive Vice President and Chief Financial Officer

Louis Labella -- Executive Vice President and President of Refining

Uzi Yemin -- Chairman, President, and Chief Executive Officer

Ryan Todd -- Analyst

Avigal Soreq -- Analyst

Brad Heffern -- Analyst

Manav Gupta -- Analyst

Fred Green -- Analyst

Unknown speaker

Paul Sankey -- Analyst

Roger Read -- Analyst

Carly Davenport -- Analyst

Jason Gabelman -- Analyst

Matthew Blair -- Analyst

Reuven Spiegel -- Incoming Executive Vice President and Chief Financial Officer

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