HollyFrontier Corp (HFC) Q3 2021 Earnings Call Transcript

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HollyFrontier Corp (HFC)
Q3 2021 Earnings Call
Nov 3, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to HollyFrontier Corporation's Third Quarter 2021 Conference Call and Webcast. Hosting the call today from HollyFrontier is Mike Jennings, President and Chief Executive Officer. He is joined with Rich Voliva, Executive Vice President and Chief Financial Officer, Tim Go, Executive Vice President and Chief Operating Officer. Tom Creery, President Refining and Marketing, and Bruce Lerner, President HollyFrontier Lubricants and Specialties. [Operator Instructions] It is now my pleasure to turn the floor over to Craig Biery, Vice President of Investor Relations. Craig, you may begin.

Craig Biery -- Vice President of Investor Relations

Thank you. Rein. Good morning everyone, and welcome to HollyFrontier Corporation's Third Quarter 2021 Earnings Call. This morning we issued a press release announcing results for the quarter ending September 30, 2021. If you would like a copy of the press release, you may find one on our website at HollyFrontier.com. Before we proceed with remarks, please note the Safe Harbor disclosure statement in today's press release. In summary, it says statements made regarding management expectations, judgments, or predictions are forward looking statements. These statements are intended to be covered under the Safe Harbor provisions of Federal Security Law. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the earnings press release for reconciliations to GAAP financial measures. Also please note any time sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I'll turn the call over to Mike Jennings.

Michael Jennings -- President and Chief Executive Officer

Hey, thanks Greg. Good morning everyone. Today we reported third quarter net income attributable to HollyFrontier shareholders of $281 million or $1.71 per diluted share. These results reflect special items that collectively increased net income by $71 million. Excluding these items, adjusted net income for the third quarter was $210 million or $1.28 per diluted share versus an adjusted net loss of $67 million or negative $0.41 per diluted share for the same period in 2020. Adjusted EBITDA for the period was $408 million, an increase of $300.2 million compared to the third quarter of 2020.

The refining segment reported EBITDA of $295 million compared to a $39 million loss for the third quarter of 2020. And consolidated refinery gross margin was $14.87 per produced barrel, a 140% increase compared to the same period last year. This increase was primarily due to stronger product demand across the markets we serve. Third quarter crude throughput was approximately 416,000 barrels per day, above our guidance of 380,000 to 400,000. We recently completed planned turnaround work at our Tulsa Refinery, which was on time and on budget. At the beginning of October, we began a significant turnaround at the Navajo Refinery, which is scheduled to be completed in mid-November.

Our Lubricants and Specialty Products segment reported EBITDA of $168 million for the third quarter versus $61 million reported in the same period last year. Excluding an $86 million gain on the sale of property at our Mississauga plant, adjusted EBITDA was $82 million. The rack back portion of this business continues to see outstanding margins and earnings driven by a combination of strong demand and limited global base oil supply due to a number of factors. In the rack forward portion, despite strong sales volumes and price increases, the continued rapid rise in base oil prices through the quarter compressed margins.

Overall, we're encouraged by the consolidated earnings performance of the Lubricants and Specialties business this year and we're optimistic that we'll see a solid finish to the year as demand for both base oils and finished products remains strong. Holly Energy Partners reported adjusted EBITDA of $83 million for the third quarter compared to $86 million in the third quarter of last year. HEP delivered solid results in the quarter, supported by record volumes on the Salt Lake City and Frontier Pipelines in the Rockies region. During the quarter, we completed the Cushing Connect pipeline project, which will replace third-party providers as the primary source of crude supply for our Tulsa Refinery.

Now I'd like to update on strategic business initiatives. Earlier this week, we closed on our previously announced acquisition of the Puget Sound Refinery for aggregate cash consideration of $613.6 million, which consisted of a base cash price of $350 million, hydrocarbon inventory with an estimated closing value of $266.2 million, and other closing adjustments and accrued liabilities of $2.6 million. This purchase price represents an attractive acquisition multiple of 1.5 to 2 times EBITDA net of inventory, based on the refinery's historical financial performance. The Puget Sound Refinery has a strong record of financial and operational performance that we believe will complement our existing refining business. The refinery supplies, transportation fuels into the premium Pacific Northwest region and sources advantage to Canadian crude, further enhancing and diversifying our refining asset base. We're committed to the continued safe and environmentally responsible operations of the facility and I'd really like to welcome Puget Sound highly skilled workforce to the HollyFrontier family.

In our Renewables segment, I'm pleased to announce that we are progressing ahead of schedule on the Cheyenne Renewable Diesel conversion project. The 6,000-barrel-per-day renewable diesel unit is expected to be mechanically complete later this week, and we expect to run our first batch of feed by the end of the year. Given current economics between refined soybean oil and other feedstocks, we prioritize completion of the pre-treatment unit located in the arch at the Artesia New Mexico, facility. And we now expect to complete the PTU in the first quarter of 2022, a full quarter ahead of schedule, allowing us to run a more favorable mix of feedstocks. The Artesia renewable diesel unit is now expected to be completed in the second quarter of 2022. We are still on budget and expect to spend a total of $800 million to $900 million for all three projects.

In regard to our previously announced acquisition of assets from Sinclaire, we still expect to close in mid 2022, subject to regulatory clearance and the satisfaction or waiver from all other closing conditions. We look forward to further diversifying our asset base with Sinclair's branded marketing, renewable diesel, refining and Logistics businesses. Looking forward, we remain focused on executing these strategic initiatives which we believe will allow us to reward our shareholders through the capital return plans we previously announced in August. With that, let me turn the call over to Rich.

Richard Voliva -- Executive Vice President and Chief Financial Officer

Thank you, Mike. As previously mentioned, the third quarter included a few unusual items. Pretax earnings were positively impacted by an $86 million gain on the sale of property at our Mississauga facility, partially offset by $4 million of pre-close acquisition integration costs, $7 million of charges related to the Cheyenne Refinery conversion to renewable diesel production, and severance charges totaling approximately $200,000. A table of these items can be found in our earnings press release. Cash flow from operations was $249 million in the third quarter, which reflected-- which included, excuse me, $65 million of turnaround spending, and a $94 million increase in working capital driven by the start of planned turnarounds at our Tulsa and Navajo refinery. HollyFrontier's stand-alone capital expenditures totaled $196 million for the quarter.

As of September 30, 2021, our total liquidity stood at approximately $2.8 billion comprised of a stand-alone cash balance of $1.5 billion, along with our undrawn $1.35 billion unsecured credit facility. As of September 30, we have $1.75 billion of stand-alone debt, with a debt to cap ratio of 23% and a net debt to cap ratio of 4%. We anticipate recovering between 60-- excuse me, $50 million and $60 million in cash tax benefit in 2021 from the loss carry back under the CARES Act during the fourth quarter of this year. EGP distributions received by HollyFrontier during the third quarter totaled $21 million. HollyFrontier owns 59.6 million EGP limited partner units representing 57% of ETPs LP units at a market value of approximately 1.1 billion as of last night's close.

With respect to capital spending in 2021. We are decreasing our guidance specifically in the renewables segment based on updated project timelines, and in the turnarounds & catalysts bucket due to strong overall execution and some scope production at the Navajo turnaround. We now expect to spend between $550 million to $600 million in renewables for the full year of 2021 versus our previous guidance of $625 million to $675 million. In total, the renewables projects remain on budget, and we anticipate the remaining $175 million to $225 million to be incurred in 2022. We still expect to spend between $190 million to $200 million for capital at HollyFrontier Refining, and $40 million to $50 million HollyFrontier Lubricants and Specialty Products. We now expect to spend between$290 million to $320 million for turnarounds & catalysts versus our previous guidance of $320 million to $350 million.

At HEP, we now expect to spend between $15 million and $20 million for maintenance capital, $40 million to $45 million for expansion capital, which includes our investments from the recently completed Cushing Connect joint venture, and $2 million to $4 million in refinery processing unit turnaround. Given record base oil prices and more importantly, the speed of their increase in 2021, we have updated our rack forward guidance to reflect short term margin compression in the finished product side of our Lubricants and Specialties segment. We now expect to earn between $65 million to $85 million in income from operations, and $115 million to $135 million of EBITDA. We expect the rack back earnings to remain at these elevated levels in the fourth quarter based on the favorable supply demand dynamics. Within our Refining segment for the fourth quarter of 2021, we expect to run between 450,000 and 470,000 barrels per day of crude oil, which includes expected volumes from the Puget Sound Refinery in November and December. And with that, Rein, we're ready to take questions.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from my Manav Gupta from Credit Suisse. Go ahead.

Manav Gupta -- Credit Suisse

Hey Rich and Mike. My first question to you is, about six months ago you gave us the Puget Sound acquisition and at that time, the guidance was $150 million to $200 million, and I'm just trying to understand if anything has moved for that guidance to change. And the reason I'm asking this question is, in the past, we have heard assets being acquired from mergers and a high guidance number being given, and when the results actually start coming in they're pretty disappointing. And that's why there is a slick sentiment on buying of ESCO assets from a major. So just trying to understand, has anything changed for your guidance on the Puget Sound acquisition?

Michael Jennings -- President and Chief Executive Officer

Yeah, Manav, we're sticking with our guidance. The biggest variable is probably RINs pricing. The market demand out there is recovering as you can probably see in the regional numbers, still probably 10% below 2019 levels, but the trajectory is upward. As we've gotten to know the asset better we like it more, and we're sticking to our guidance.

Manav Gupta -- Credit Suisse

And the second question, since you mentioned RINs was, we the release out there from Reuters which kind of put out some RVO numbers, which were actually very supportive of T4 but not so supportive of D6. Now as I understand, once your RDs facilities start, you would be long before-- you'd still be short D6, but maybe a little net short D6. There is a price spread difference between before D4 to D6, so D4 premium goes up. You could still meet all your obligations. Can you just walk us through that match one more time.

Richard Voliva -- Executive Vice President and Chief Financial Officer

Yeah, no it's Rich. So, yes, you're right. We will be long D4 RINs perspective of the renewable diesel facilities coming online. As Mike alluded to Puget Sound brings a little more obligation to us. And then once the Sinclair transaction is closed, we will be long D4, short D6, and basically balanced on an absolute number basis. To your point, from our perspective, a higher D4 price versus D6 price is beneficial.

Manav Gupta -- Credit Suisse

Thank you so much for taking my questions.

Michael Jennings -- President and Chief Executive Officer

Thanks, Manav.

Operator

Your next question comes from Ryan Todd from Simmons. Your line's open.

Ryan Todd -- Simmons

Thanks. So performance of the business both in refining and lubes just continue to exceed expectations since you announced the PSR acquisition earlier this year, including your cash flow of $250 million this quarter. If the relatively constructive and refining environment holds, how are you thinking about the dividend going forward and what do you need to see to feel comfortable in restarting the dividend? And any thoughts on that timing.

Michael Jennings -- President and Chief Executive Officer

Yeah, Ryan, thanks for the question. You're right, the refining and lubricants environments are both constructive for us and building, as well our performance operationally in both is doing quite well. So looking forward, we're sticking to the capital plan that we laid out, the return of capital guidance that we laid out in August, which is return of the dividend after the 12-month hiatus and repurchase as suggested in that guidance. So how it develops from there, how aggressively we lean into it as we go forward, we'll see. But we're very much sticking with the plan that we've laid out. And if anything, we're more constructive.

Ryan Todd -- Simmons

Great, thanks. And then I guess, you gave some some guidance on capex, which is helpful. And then as we think about I guess maybe a couple of comments on the 2021 capex, the renewable diesel number coming down is that-- that's just clearly a matter of timing and as we think about 2022 capex, any high-level thoughts in terms of what the updated kind of maintenance capital? You've got a lot of moving pieces in your portfolio, what's a good idea for-- or a good rule of thumb for maintenance capital in 2022? And what the net growth capex wedge might look like as well?

Richard Voliva -- Executive Vice President and Chief Financial Officer

Good morning Ryan. So to your point on renewables. Yes, the overall projects are still within an $800 million to $900 million range. So we'd expect that balance to flow into 2022. At a high level, capital spending and turnaround spending will decline in '22 versus '21, we expect to issue formal guidance in December. So we'll have some numbers for you in a few weeks.

Ryan Todd -- Simmons

Okay. Thanks Rich and Mike.

Operator

Your next question comes from Phil Gresh from JP Morgan. Your line is open.

Phil Gresh -- JP Morgan

Yes. Hey, good morning. The first question, I appreciate the update on the renewable diesel side of things. What are your latest thoughts on kind of the feedstock mix you're looking at, at this point in time?

Tom Creery -- President Refining and Marketing

Yeah. Phil, this is Tom. We're still sticking to our guns on that one. For Cheyenne, we're looking at a combination of soy and tallow and just to make it clear, we have secured feedstocks at this time, start-up, and we're in good shape. We haven't had any trouble buying feedstocks and as the PTU comes up, we will look at buying additional feedstocks, both degummed and low CI material. And we're doing analysis on an ongoing basis to find the feedstocks that have the best value for us, just not price, because it's more about value than anything else at this point in time.

Phil Gresh -- JP Morgan

Okay, got it. And then just one question. When we read through your proxy filing, the guidance for the pro forma EBITDA of the company was a bit lower than the slide presentation you had given. So is that just conservatism or anything we should be thinking about there? Like I guess, how would you suggest we think about your pro forma mid cycle versus what was stated?

Richard Voliva -- Executive Vice President and Chief Financial Officer

Yeah. Phil. It's, Rich. So it's important to emphasize that was a point in time snapshot from July, and it was best market views and frankly the best forward curves we could come up with at the time. Clearly, the market has performed better than that and it does not affect our view of mid cycle. That's what we had in July, largely based on where we were market at point.

Phil Gresh -- JP Morgan

Okay, so you suggest we stick with kind of mid-cycle provided in Slide 3?

Richard Voliva -- Executive Vice President and Chief Financial Officer

Absolutely. And to prove that point further. I mean, obviously our third quarter earnings in several segments were above mid cycle already.

Phil Gresh -- JP Morgan

Right. Right, OK. Thank you.

Operator

Our next question comes from Paul Cheng from Scotia Howard Weil. Your line's open.

Paul Cheng -- Scotia Howard Weil

Hey guys, good morning. Two question please. Mike and Rich, there's a number of transaction happening in the midstream consolidating and some people use either selling downward or rolling it up. When we're looking at HEP, it's a grand daddy in the MLP. And at this point, does it really make sense for you to stay as an independent? Or that from the cooperation standpoint, would it be more advantageous to simplify your corporate structure and just roll it in? And yet you don't really need the control. Should you may be that time just sell then you consolidate? That's the first question. The second question is related to the midpoint, is a really strong result. And is there anything unique in this quarter other than, say, the real price is down, that lead to such a strong margin capture? As well as the overall footprint is so strong. I want to see, is the third quarter is a good base point to use for the midpoint region going forward?

Michael Jennings -- President and Chief Executive Officer

Okay. Paul. We're going to take that on. We're going to ham an egg at among us. Rich and I will address the question around HEP deconsolidation. I will start with just how integral those assets are to our business strategy in terms of their ownership and their use as we connect our refining assets to own supply sources end markets. So very strategic for us to own and operate those assets. The structure of ownership, I'll ask Rich to speak with around deconsolidation or retention of the MLP.

Richard Voliva -- Executive Vice President and Chief Financial Officer

Thanks, Mike. So, look, Paul, I think we demonstrated the value of the HEP of a financial vehicle in the Sinclair transaction. But, look, we're going to do the right thing for the shareholder here, whether HEP is-- as a financial vehicle is rolled up, consolidated, whatever. This is essentially a corporate finance discussion. To make any transaction like that accretive would require an incredible amount of cash, which we think is probably spoken for better by our shareholders. But look, we'll continue to monitor this situation, respond to the market, do the best thing for our shareholders.

Michael Jennings -- President and Chief Executive Officer

There is a second question, Paul. Are there any sort of unique good [Speech Overlap].

Paul Cheng -- Scotia Howard Weil

Can I just ask some questions?

Michael Jennings -- President and Chief Executive Officer

Oh, absolutely, Paul.

Paul Cheng -- Scotia Howard Weil

Rich when you say that you take the roll-off cash if you want to roll it up, why that? Yes, I mean, PSXP, they just take one by issuing to the share of PSXP in exchange for their ATP. So that's really cash. If anything then, they have a higher dividend then you guys obviously exchange that you didn't have any dividend. Even after we instate, they probably still have a higher dividend than you. And so from that standpoint on a going forward basis, rolling it up actual really improve cash flow.

Richard Voliva -- Executive Vice President and Chief Financial Officer

So Paul, we've done the math, we keep the math live. For us, it would not improve our cash flow diluted on a per share basis. I feel like we've got a very wide valuation difference between HollyFrontier and HEP. That could easily change over time and changes discussio. To your point, ATP trades at a much lower dividend yield than PSXP does, for example. That colors this discussion. So you're headed down the right path here, the math from our perspective does not work currently for that kind of transaction, but we will continue to monitor it.

Michael Jennings -- President and Chief Executive Officer

Yeah, I think the other comment is that it would be a levering transaction to do so. Just in respect of capital structure, HEP supports 3.5 times debt to EBITDA, while our target on the HFC side is considerably lower in order to maintain our investment grade credit rating. So I think we have to look at both cash flow and the immediate cash impact of the transaction. And for us, it would be a levering transaction. As Rich, we think that capital is better return to our shareholders than in a buyout of ATP.

Paul Cheng -- Scotia Howard Weil

Thank you.

Michael Jennings -- President and Chief Executive Officer

Yeah, so. Second question was around refining results in this quarter. I'll ask Tim to speak to that and then whether there are any particular good guys rolling around in 3Q or is this a good model for going forward.

Tim Go -- Executive Vice President and Chief Operating Officer

Yeah, Paul, this is Tim Go. We're very pleased with the Mid-Con performance this quarter. The three biggest factors, stronger gasoline margins associated with stronger demand, stronger base oil margins which I know you've been watching, and then of course lower impacts to the region. But you're asking, should we expect this type of performance going forward? Really, if you look back to the second quarter, we also demonstrated strong kind of results then, both on volumes and demand in margins. So I think you're seeing improved performance, just overall, over the last six months. Seasonally, we'll see some weaker demand in the winter that you would expect. But overall, we've been trying to take full advantage of larger markets in the group. But we've also been able to see some of the strong margins in the Rockies and move some of our barrels that direction as well, and we hope to be able to continue to do that in the years to come.

Paul Cheng -- Scotia Howard Weil

Thank you.

Operator

Our next question comes from Theresa Chen from Barclays. Your line is open.

Theresa Chen -- Barclays

Good morning. I wanted to ask about the lubes business. And given the updated guidance in the rack forward portion that just was curious, is this purely as a result of needing time to pass through the higher base oil costs or is this likely to persist for some time for the stable period? What is your outlook there?

Unidentified Speaker

Your assumption is correct. So base oil prices are ramping at a faster rate than we can apply price and pass price increases for that. Specific component in this business. We have a fair proportion of finished lubricants clients that are contracted, and so there is some limiters on the timing. It's not that we can't push the price through, but on the timing, and so you see a lag between the ability to raise the prices finish side versus the instantaneous impact of the base oil markers increasing.

Jason Gabelman -- Cowen

Got it. And on the renewable diesel side, Tom, I was hoping if you can go back to your comments about feedstocks and understand that you had no trouble buying the feedstock for start up at this point. Can you just give us a sense of the execution around that on a go-forward basis? Are you going to be in the spot market perpetually? Is any of it bought forward or bought on a contracted basis? What are your expectation as you begin start up?

Tom Creery -- President Refining and Marketing

Okay, Theresa. We'll give it a shot here. We are buying spot right now. And then by spot, I'd say it's not very long, maybe term of three months to six months on some contracts, but mostly, would call, spot. However, we are investigating other opportunities. For example, we are looking at participating in crush plant economics to get a little further back in the value chain. So we've been talking to various partners in that field trying to learn what's going on and whether there is room for us, and we've kind of role that we could play on a going-forward basis. We've also been talking to producers of DCO as well along the same vein. Early phases at this point in time. We're still evaluating the markets, but it's definitely one of those things that we are looking at, as we move forward and become regular offtaker.

Theresa Chen -- Barclays

Thank you.

Michael Jennings -- President and Chief Executive Officer

Thanks, Theresa.

Operator

Our next question comes from Connor Lynagh from Morgan Stanley. Your line's open.

Connor Lynagh -- Morgan Stanley

Yeah, thanks. Just trying to piece together the sort of phasing of the renewable diesel projects here. So as we think through the sort of mid cycle target that you guys have laid out there, is that a number that we should expect sort of hit a run rate of, in 2022? Do you think it takes some more time to iron out the kinks in operations, etc.? How should we think about when that's a realizable earnings number?

Michael Jennings -- President and Chief Executive Officer

It's going to be realizable in the second half of 2022 as we start the PTU up, line out Cheyenne and debt the RDU at Artesia. It's going to take us some time and we're going to have to get into it. So definitely over the second half of 2022, that would be our expectation.

Connor Lynagh -- Morgan Stanley

Okay, that's helpful. Maybe just pivoting to the Puget Sound. I'm just trying to piece together some of the comments you made, just in terms of, obviously, the market was improved, RINs are still a challenge, net, do you feel that asset is operating at or near the mid cycle level that you've put out for that? How should we think about sort of the near-term earnings contribution of that?

Michael Jennings -- President and Chief Executive Officer

Yeah, the short answer to that question is yes. You probably understand that there is seasonality, particularly in that geography throughput in the winter is lower. But in terms of the overall market structure and margin opportunity versus what we've put out, yeah, we see it consistent with the guidance we've given.

Connor Lynagh -- Morgan Stanley

Okay. So maybe a little bit lower in the near term, but moving toward that in 2022?

Michael Jennings -- President and Chief Executive Officer

Yeah.

Connor Lynagh -- Morgan Stanley

All right, thanks very much.

Richard Voliva -- Executive Vice President and Chief Financial Officer

Hey Connor, just a follow-up. I think if you look at the proxy statement we put out in association with Sinclair, there are numbers for Puget Sound up through the first half of 2021 that probably give you some help there.

Operator

Our next question comes from Roger Read from Wells Fargo. Your line's open.

Roger Read -- Wells Fargo

Yeah. Thank you. Good morning.

Michael Jennings -- President and Chief Executive Officer

Hi, Roger.

Roger Read -- Wells Fargo

Just like to catch up on the lubes business, maybe a little bit understand the rack forward, rack back and your supply base oil relative to the amount of product you sell. In other words, are you 100% sourced, 80% sourced 120%? Just trying to understand the balance in this business as things transition from type base oil into, I don't know, I guess, we'll call it more normalized market hopefully in '22.

Unidentified Speaker

So our base oil production is fully capable of covering all of our fresh lubricants business as well as our formulated such as railroad engine oil business as well. And we are of course in the specialty area, heavily backward integrated into our own feedstock suppliers. That also, but we do purchase some feedstocks like waxes and other base oils externally for some of these former Sonneborn products that are in the specialty business. That's why we have a portion of the business that is an excess of finished that we sell as just base oils.

Roger Read -- Wells Fargo

So reasonable to presume as the base oil market normalizes and the pricing catches up on the rack forward side, the level of performance you're seeing now could slip a little bit, but for the most part, it ought to remained fairly strong?

Unidentified Speaker

Yes. So we think that's the case. And of course it's a little bit of in this pricing in between the two, a bit of a left pocket right pocket in that sense. So as rack forward recognizes the full extent of the price increases of the catch-up with the clientelle, even if the base oil was declined a bit we make it up on the other side.

Roger Read -- Wells Fargo

Okay, thanks, that's helpful. And then I don't know if this question is for you Rich or not. But the guidance of remaining, I shouldn't say necessarily remaining, but the total capex guidance and then thinking about what's remaining on the renewable diesel projects. The range of 800 to 900, I'm surprised it's still quite so wide this far through the projects. What are the remaining sort of risk factors that would affect the higher or lower end of that range?

Michael Jennings -- President and Chief Executive Officer

Let me take a first pass at this and ask Tom to add on if I miss anything. Roger, there's really two issues. Right now we are seeing the universally applicable supply chain issues right now and they pop up unexpectedly, to be honest. So that's still out there and obviously then COVID and our ability to keep workforce on site and working can really affect schedule and by extension cost.

Tom Creery -- President Refining and Marketing

Yes, the only other thing that I would add, Roger, is that we're getting into winter here in the northern hemisphere, and that's going to have an impact. We've already seen it in our Cheyenne operations. It had snowed a couple of times, freezing rain which impedes our ability to get workers out in the field, and we expect to see that as we go forward at Artesia as well. So that's a big unknown at this point in time.

Roger Read -- Wells Fargo

Okay. I appreciate it. Thank you.

Operator

Your next question comes from Neil Mehta from Goldman Sachs. Your line is open.

Neil Mehta -- Goldman Sachs

Good morning, team. Nice quarter here. The first question I had was around refining, specifically around crude differentials. We've see Brent TI trade pretty tight and we've seen some backwardation show back up in this market. Just your thoughts on the outlook for Cushing and navigating the crude differential environment.

Tim Go -- Executive Vice President and Chief Operating Officer

Yeah, Neil, this is Tim. I'll take that. We are definitely seeing the tightness of short-term at least in the Brent TI diff, all the things you talked about, the low Cushing inventories, the backwardation, capline reversal, all of those contributing, we believe in the short term. But if you look at the long-term structure and long-term fundamentals, we still believe the Brent TI spread's going to be in that $3 range. If you look at our kind of our assets though, it helps to look at each one to understand what the impact of this Brent TI spread really means to each of them. So in El Dorado's case, because they have 30% of the crude slate associated with WCS and the WCS spread as you see has widened,it's providing some offset and some some cushion, I guess, over at El Dorado. If you look at the Permian in our Navajo refinery, the WCS spread has weakened significantly here. As you see the market discounting the WCS and high sour crudes, that's helping our Artesia Refinery, and of course we talked about Tulsa little bit already. The base oil margins are strong still and we'll continue to justify the tighter spread of the Brent TI spread. So if you look at our assets that are mostly affected by the WTI Brent spread, we still are very positive going forward.

Neil Mehta -- Goldman Sachs

Okay. And you think $3 is the right number over the medium term tanker to be stock transportation economics?

Tim Go -- Executive Vice President and Chief Operating Officer

That's right. Yeah.

Neil Mehta -- Goldman Sachs

Okay, that's helpful. And Rich the follow-ups for you just around capital returns, To execute the recent M&A, there was obviously the decision to cut the dividend. So what is your perspective in terms of the resumption of capital returns? And in what form? Whether it be buybacks or a dividend payout.

Richard Voliva -- Executive Vice President and Chief Financial Officer

So Neil, we reiterate the guidance we gave concurrent with the Sinclair acquisition, which is we'd expect to return the dividend, as Mike said, in the first half of 2022. Through the first quarter of '23, we'd expect to return $1 billion of total cash to our shareholders in both dividends and share repurchase. And then through 2023 and beyond, we intend to go to a 50% payout ratio of net income based on both dividends and share repurchase.

Neil Mehta -- Goldman Sachs

Thanks, Rich. Appreciate it.

Operator

Your next question comes from Kalei Akamine from Bank of America. Your line is open.

Kalei Akamine -- Bank of America

Hey, good morning guys. Standing in for Doug. Thanks for taking the question. Maybe first off, I'm interested in the marketing options at Puget Sound. So my understanding of the Vancouver is advantaged over Seattle. So I'm wondering about your ability to sell there as a way to step up margin. And additionally, what the crude differentials look like for the Canadian medium that you run up there, noting that WCS has widened out, but they're not exactly the same.

Tim Go -- Executive Vice President and Chief Operating Officer

Yeah, this is Tim. I'll take that question on Puget Sound. We do have the ability to move products into Canada, and we do so even today. We'll continue to look for those opportunities. Typically, they go on smaller margins as we move them up onto the West Coast there. But we have ability to move just both into Canada as well as in the California. As we see the gasoline market improve, we'll have the opportunities to play into that market too. As far as crude, we still believe that the Canadian crude represents price-advantaged opportunities for us. We generally tend to blend that Canadian crude mix to match kind of an A&S type quality as we bring it into the end of the Puget Sound Refinery. But we do see opportunities to continue to bring that advantage crude into Puget Sound.

Kalei Akamine -- Bank of America

Thank you. And my follow-up is just on capital expenditures, again. I think your guidance implies a big step up in renewables spend for first quarter of '22. So I'm just hoping that you could put it all together for us, the outflows for this quarter and next considering that this will be the peak period for spend and Puget Sound just closed.

Michael Jennings -- President and Chief Executive Officer

So, call it, as we said, we would expect to spend between $500 million and $600 million for 2021 in renewables. That leaves about a $150 million to $175 million to go in 2021. And then as guided for 2022, we'd expect to spend between $175 million and $225 million in renewables.

Kalei Akamine -- Bank of America

And is most of that going to be in the first quarter or the furst half?

Michael Jennings -- President and Chief Executive Officer

First half. We'll be done in the first half. I don't have enough insight of a quarterly split at this point.

Kalei Akamine -- Bank of America

Okay, that's perfect. Thanks, Rich.

Operator

Your next question comes from Jason Gabelman from Cowen. Your line's open.

Jason Gabelman -- Cowen

Hey, good morning. Thanks for taking my questions. I first wanted to ask on the Rockies, or I should say the West region. The indicators have held up pretty well, and as demand kind of normalizes this year in our Refining environment they looks different with some assets gone. Can you just discuss if there is a step change in the supply demand balances in those West regions relative to where they were pre-COVID or if there were some transitory items benefiting into 3Q and similarly as we move into 4Q. And second I wanted to ask about the Sinclair acquisition, understanding there is some sensitivities as you're going through the closing procession has been vocal on looking more closely at oil and gas mergers, and I'm wondering if that has resulted in a more indepth process, I guess I could put it, relative to what you would have expected or, Mike, even relative to when Holly and Frontier combined in 2011. Thoughts if you could compare this process versus that one. Thanks.

Michael Jennings -- President and Chief Executive Officer

Sure, I'll give you a little insight on question 2, I'll ask Tim to speak to your first question. It won't surprise you that at this point we are deep into the regulatory process and frankly, we look forward to serving these customers. But as to how the FTC is seeing it and what questions they're asking, that's a little too intimate right now, so we'll pass on that piece and we're working hard at it. Tim.

Tim Go -- Executive Vice President and Chief Operating Officer

Yeah, Jason. On your question on the West Refining region. Again, we're very pleased with the execution that we've had, not just in the third quarter, but the second quarter as well. We saw stronger gasoline margins, stronger diesel margins, and then again lower RINs costs that we're basically boosting our capture on the West. Structurally as you pointed out, we've taken out a lot of fixed costs by converting our Cheyenne Refinery into the renewable diesel project and that's basically helping our overall economics in the West as we continue to serve those markets just with one less facility.

Operator

[Operator Instructions] You're next question comes from Paul Cheng from Scotia Howard Weil. Your line's open.

Paul Cheng -- Scotia Howard Weil

Hey, Mike, just a curiosity. A number of your peers, they're independent refiners, including some small, some bigger one said,, due to the energy transition they really have no plan to further expand their refining footprint, neither in the organic investment or that inorganic. You guys probably are just the exception here. So from your standpoint, after you finish Sinclair, do you think that you have sufficient of the capacity or that, say after you digest it, you will still be interest if that's a great opportunity to further expand your refining footprint? And how you see that evenly compared to your peers on that.

Michael Jennings -- President and Chief Executive Officer

Yeah. Well, Paul. Obviously, every company has its own strategy and ours is not intentionally contrarian but we actually do believe in petroleum fuels. And those of the fuels of today and most of consumers still use gasoline and diesel. And so our intention is to serve those customers reliably, safely, and in a very reasonable cost. At the same time we're not ignorant to energy transition and we're doing things inside our company around renewable fuels, the supply chain around feedstocks, and potential opportunities around carbon capture. So I think we have a portfolio outlook that also includes specialties like lubricants in our own integrated transportation network. What we're trying to be is very competitive company that generates high returns internally and ultimately with cash to return to our shareholders. It doesn't favor renewables relative to petroleum fuels.

We believe in both. And what we want to do is to produce both really well in markets that reward us for that. So I hope that describes the strategy from a very high level. Obviously as time goes forward, we'll look at individual opportunities. We don't believe in generic capacity acquisition for its own sake. But at the same time, when we're able to add solid assets like that of Puget Sound Refinery that can really help our portfolio with operational capability and serve a premium market, you bet we're going to do that. So, yeah, that's what we're doing going forward. Right now we've got a very full plate. Execution is our mantra, and we really need to focus on bringing these things that we've committed to across renewables Puget Sound and Sinclair home to the benefit of our company and our shareholders, and that's what we're working on doing.

Paul Cheng -- Scotia Howard Weil

And my second question is that from a high level, some of your peers, when looking at the energy transition, they also expand into maybe beyond or outside the traditional refiners, and then maybe also doing the CCS. How does HollyFrontier looking at those? I mean, if those over the next five years that the company may be interested to branch out beyond your carbon business mix or that over the next five years you're going to stick with your current business mix?

Michael Jennings -- President and Chief Executive Officer

Yeah, so Paul, our principal skills are in liquid fuels production and distribution. So that's what we're going to favor. And also look inside the fence line in terms of scope one and potentially invest in carbon capture and storage. Batteries, that feels like a stretch for us. I'd like to never say never, but really we're going to focus on those things that we can provide skill and advantage to, and I think I've called those out here.

Paul Cheng -- Scotia Howard Weil

Thank you.

Michael Jennings -- President and Chief Executive Officer

You bet.

Operator

There is no further question at this time. I would now like to turn the call over to Craig for closing remarks.

Craig Biery -- Vice President of Investor Relations

Thanks everyone. We appreciate you taking the time to join us on today's call. If you have any follow-up questions, as always reach out. Look forward to sharing our fourth quarter results with you in February.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Craig Biery -- Vice President of Investor Relations

Michael Jennings -- President and Chief Executive Officer

Richard Voliva -- Executive Vice President and Chief Financial Officer

Tom Creery -- President Refining and Marketing

Tim Go -- Executive Vice President and Chief Operating Officer

Unidentified Speaker

Manav Gupta -- Credit Suisse

Ryan Todd -- Simmons

Phil Gresh -- JP Morgan

Paul Cheng -- Scotia Howard Weil

Theresa Chen -- Barclays

Jason Gabelman -- Cowen

Connor Lynagh -- Morgan Stanley

Roger Read -- Wells Fargo

Neil Mehta -- Goldman Sachs

Kalei Akamine -- Bank of America

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