Delek US Holdings, Inc. (DK) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. [Operator Instructions] At this time, it is my pleasure to turn the program over to your host, Doug Leggate.

Thank you, Eric, and I'm delighted to welcome Delek to our afternoon session. And Rosy Zuklic, who has recently joined as Head of Investor Relations, an old friend of our firm, we're delighted to have her facilitate this session. So guys, thank you for being here. Our guest speakers, we have Todd O'Malley and Mark Hobbs from the company. And basically, we're going to -- I'm going to hand this one over to Kalei for a lot of the macro questions.

But guys, I did want to kick off with one big picture question, which I think is on everybody's mind. There's been some management changes. Obviously, there's a sense that things are changing at Delek. So I wonder if you could just kind of walk us through from a corporate level thought on what the right business structure is. What message do you want to get to the market right now? What are you thinking in terms of the go-forward strategy for the company?

Yes, Doug, I'll -- this is Todd, I'll kick it off and then hand it over to Mark to maybe delve a little deeper into the details. But I think you're spot on. We've had a CEO transition with Avigal coming back into the company. Indeed, it's a new day here at Delek. We've obviously reworked our financial reporting structure, which we kind of finalized and just rolled out on this most recent earnings call. And look, we're in full growth mode, right? We've been very public about the fact that we're subscale in the Refining segment. We have a lot of opportunities in front of us on the Retail side of the business. And I think as -- I'll let Mark talk about unlocking that sum of the parts value disconnect that we've been suffering from over the last, I don't know, a couple of years at a minimum. It really has us energized. It has the management team laser-focused. And we're looking forward to coming back to you as well as the investors with a lot of exciting announcements in the coming future.

Yes. I appreciate that, Todd. So Doug, looking forward to the conversation today. I joined the company, as you know, in the first week of October, so I'm [ just 5 ] months in. After spending over 20 years covering this sector on the investment banking side, working on a lot of the transformational consolidation, which took place over the years, frankly, with a lot of entities that Todd worked for over the years as well. So I was really energized to come into this situation because I think the foundation of what the management team over the years has built here is one where it positions us uniquely to take advantage and be very proactive around growth opportunities, both the senior management team is here, is on board with that. Our Board of Directors understands that and is on board with that. So really engaged, and I'm looking forward to taking this company to the next level.

Well, guys, I don't want to dwell too much on things that you haven't maybe completely finalized yet. But let me ask big picture-wise, is there anything off the table in terms of things that you may or may not consider? For example, the retail organization has been a topic of discussion as to how you might position that either to get bigger or to sell it. What are the other kind of major buckets of potential initiatives that you think could release value?

Yes. So when we talk about the sum of the parts broadly as an initiative and what -- it's been my sole focus since joining the company and just looking at our business across Refining, Midstream and Retail. And obviously, on our fourth quarter call, we specifically mentioned Midstream and Retail as areas of focus for us around what we call sum of the parts initiative. And we clearly have 2 publicly traded vehicles. We own the GP and almost 79% of our midstream company. So there's a very visible public marker kind of out there as far as valuation on that business. But like the reality is, it's in a very illiquid position, right? So -- and when we comp out, we comp out is if you just look at the metrics on a consolidated basis is a very levered refining company, right? So what we -- what our objectives are around just beyond do we grow or sell retail, it's really a bigger initiative for us, if I can say it that way, is around how do we crystallize or illuminate the value in the midstream business, which has grown well beyond a drop-down refiner sponsored midstream, MLP, right, and unlock that value and think about it. And so right now, we understand why the look-through value, in our opinion, isn't manifesting itself in the stock price, but we also believe that there are some moves that we can make to unlock that and [ illuminate that value ].

I don't want to spend too much time on this because obviously, it's evolving. But have you gone so far as to evaluate things like tax leakage?

Absolutely. Doug, we're taking everything into account as we think about how the chess pieces can move around. I mean clearly, we have very strong advisers that are helping us think through, what are the tax implications of different avenues that we can take. We obviously were a drop-down story. And we need to think about if we do go down a path that ultimately results in any sort of a deconsolidation, kind of what does the stand-alone refining company look like, make sure that it's not overburdened contractually, supporting a midstream company that we now, in that scenario, don't necessarily control and have potentially a smaller ownership. So we're taking all those things in...

And I think the interests are, for better or for worse, Doug, aligned, right, because of the simple fact that right now, the parent company owns 80% of the drop-down vehicle, right? So it wouldn't be doing a good service to the shareholders at Delek if we didn't turn every stone over in terms of looking at tax leakage and looking at permutations on how we put things together. So we're myopically focused on putting as much value to the bottom line for both companies as humanly possible.

Okay. Well, we're -- I guess, I was going to say we're going to watch with interest. Is there a time line that you want to commit to in terms of when you expect to have some decisions with?

No. Look, I mean, we want to be as transparent as we possibly can. I mean a lot of the things that we are considering basically will run their course on their own time frame. And so we'd like to be back to everyone as soon as possible because we're more realistic about it. Our CEO has been talking about this for some time now. So we realized that there were some expectations even on our call earlier this week, where we would come out and be a lot more direct and what we're intending to do, and we're just not in a position to do that. So I don't really want to get ahead of ourselves and commit to a time line, but I can tell you that we're focused on it. We're working hard on it, and we hope to be back before too long on what we intend to do, what we're going to do...

True. I apologize, I've got one more on this, and then I'm done.

No problem. Happy to answer.

You've been at Delek, Todd, since early, I guess, '21, right? If I recollect.

Yes. That's correct.

Why now? Why is this all happening now?

Yes. I think a very fair question, Doug. Look, part of it is the leadership transition. New people with new and different ideas. Part of it is obviously rolling into '21. We were still suffering heavily from the impacts of the pandemic. And it wasn't just unique to Delek, obviously. That was industry-wide. So I think for many of the same reasons that Mark joined, those were some of the reasons that drove me to come in to Delek. I thought there was an immense amount of opportunity. We've got a good asset base. We have the ability to grow it pretty much across that base. And I think now the time is right. We've had a management team change. The margins have helped overcome the terrible events of the pandemic. And I think right now, we also see an opportunity that in my career, I've maybe only seen one other time in terms of -- we've seen this huge wave of consolidation on the Refining side, maybe for wrong reasons. Some of those people, I think, are in a position now where they want to rationalize some of their fleets. Retail again has strong demand in the U.S. And the reality of it is we've -- before Mark joined, we made the step of really diluting the revenue generated from the parent company at the MLP level through the 3Bear transaction. I think that was kind of the foundational step. And digesting that gave us the ability to now dream bigger and say, well, we've actually done what we needed to do to get ourselves on that path and now we have the ability to really truly work on unlocking the value that's inherent in our ownership stake and the value in the business that we're just not being recognized for right now.

Sure. I know those are tricky questions to answer. So elegantly done, guys. Thanks very much indeed for taking them. So let's turn it to the [ macro ], Kalei. Do you want to take it from there?

Thanks for having us, Doug. We really appreciate it, by the way.

Well, we're not done yet. We've got some time. But, Kalei, go ahead please.

Maybe before jumping in straight into the macro, if you allow me, I'll take two attempts to prime more information from Mark. So Mark, you touched on this, and I think it's very deep. What does the Refining business [indiscernible] for corporate look like? So to put you on the spot, when you run through your mid-cycle analysis, what does the free cash flow capacity look like for DK?

Yes. We -- we're not going to touch on that specifically, right? I mean one of the things that we are hypersensitive to, as I mentioned earlier, and I'll build upon that a little bit here. The one thing is I don't want to commit to is what exactly free cash flow and what the go-forward mid-cycle looks like for this business because I think our view on that is still evolving. I think one thing that's safe to say is that our view is strongly in the camp that the go-forward mid-cycle level is going to be substantially higher than what historical. Mid-cycle levels look like for margins in the U.S., just given some of the structural things that have taken place over the last 4 or 5 years. I mean the way that I would answer that is we're thinking about the chess piece is moving around potentially and what we're trying to achieve to unlock the -- what we see as a sum of the parts discount in our stock. The one thing that we are super focused on is making sure that each one of our businesses, whether that's midstream or refining, is set up from -- structurally, from a liquidity standpoint to continue to be growth vehicles because we see opportunities out there to do that. And so as we think about -- and I think this may be where the question is going is, if you have a standing up the Refining business as a stand-alone entity, right, and you have this drop down MLP business out there, we're clearly like everybody else that had a refinery-sponsored MLP, we're dropping all kinds of refining associated or refining affiliated assets into that MLP and contractually burdening the Refining business to pay that going forward. I mean we -- we're focused on making sure that we take that into account in anything that we do such that the refining -- stand-alone Refining business is well positioned to weather any cyclical storm that we tend to see kind of in our business. right? They're not overburdened by a cost structure, if you will, for lack of a better term. It puts them at a disadvantage. And so that's kind of how we're thinking about it, but I don't want to commit to a mid-cycle free cash flow right now.

I appreciate that. I think when you think about the midstream business perhaps being undervalued and the Refining business perhaps being in need of the cash flows that were dropped down to DKL previously, there is a lot of [indiscernible] thing. So we'll keep our eyes open there. When Marathon and [ Suncor ] both went through the exercise of trying to identify whether or not this is enough that they want to split out, their bias was towards keeping it. It is like 14x multiple of the pride MPC's Speedway business away from hit. So when you're going through your analysis of whether or not retail could stand alone, what are the integration -- what's the integration value that you're wrestling with? And does it make sense for that business standalone? Or is there an argument that says it makes sense for Delek to keep it because it's a natural outlet for its own product.

I have to take the first part.

Yes, you take the first part, and I'll take the second.

So I'll talk about the integration piece of it, Kalei. And then I think Mark can talk about the kind of broader implications of M&A or divestiture. Look, I mean, it's no secret that we are, let's say, on a completely different scale than either [ Suncor's ] retail or Marathon's retail. We did, however, if you remember, have a significant retail package that we did sell for 13.5x in the form of MAPCO that we use the proceeds to consummate the final acquisition of the balance of Alon that we didn't own. You are right in your statement that there is a lot of intrinsic value for us having the wet-barrel outlet direct to [ The Street ], right. Why is that important? Well, we're operating in niche markets and a lot of those markets, those outlets are critical pieces of clearing the refinery. We also get the benefit of the RIN capture by going direct to our own company-owned and op stores. In addition to that, as we regularly share with you and the investors, the margin on [ The Street ] over the last couple of years has been robust, right? And even the margin inside the C-stores has been very solid. So we're actually upgrading the value of that barrel by owning that retail short. Now the question is, with 250-ish company-owned and operated stores and 5 new-to-industry stores that we've built out, is that the right scale and scope of the operation? Or do we need to look at something bigger? Or do we need to look at potentially divesting it? But I'll let Mark jump in and talk about that.

Yes, I'm happy to. This is one that's sort of near and dear to my heart, just given my history because when I was a banker, I actually worked with the team that advised Marathon on looking at a separation Speedway the first time when they ultimately decided not to do it. They decided to retain it and then worked with Valero. Valero took a different course from what Marathon actually ended up doing with Speedway and selling it as you rightfully said for a really high multiple, 100% cash, which really reset Marathon's balance sheet, right? Because again, a much bigger version of what we have, obviously, but they were comping out with MPLX being such a big size midstream company relative to Marathon is having quite a bit of leverage. So bringing in all of that cash allowed them to not only return a bunch of it to shareholders through buybacks, but also delever the parent company significantly. Yes, Valero took a different course, right, spinning it off to their shareholders and retaining a 20% stake and then selling that later, which we, I was fortunate enough to work on them on selling the equity into the market after the spin-off. But in both of these cases, the company has got comfortable separating the retail businesses by entering into long-term fuel supply agreements. And so what I would say in anything that we would do around retail, the one thing that is critically important for us is exactly what Todd was talking about, and that's maintaining connectivity, maintaining that integration through either wholesale branded or otherwise to those sites on a longer-term basis so that we can effectively evacuate those barrels out of our system and potentially even grow that. If we were to do that, if that business grows in the future, having the ability to supply that larger company and having effectively like a product [ shortening ] in those markets. So having that connectivity is exactly what Valero did and what Marathon did when they separated. So we would take a similar attack if we were to go down that path.

Yes. Look, Kalei, we, I mean, there is a precedent, right? We've sold the retail before. If somebody wants to back the [ Brink's ] truck up to the front door and dump, it's fair. And we're certainly going to have a look at it, but there may be some other strategies that we want to assess in terms of potential growth opportunities.

Look, the reality is we see retail businesses going for 10 to 12x in the private market. That business right now is being -- like I'm not saying ours necessarily would fetch that kind of a multiple, but that is right now being -- you could argue being capitalized in our stock at sub-5x, right? So there's clearly some value there, potentially to unlock. And if we say that our midstream company is appropriately valued in the form of DKL and how it trades either on a multiple or on a yield perspective, we don't believe that we're getting that look through value in our stock either. And so that's really how we think, and I use the term moving chess pieces around, but how we think -- what are the things that we can do to unlock that value. I think there are things that we can be proactive around doing of eliminating that value and setting up all of our business segments on a path to be growth vehicles, to be successful [ growing ].

Thanks for all the details there, guys. That makes a lot of sense. Am I going to take a third attempt at extrapolating -- extracting some information from Mark here. So if you can talk about [indiscernible] DK, [indiscernible] cycle margins are for DK refining?

I'm sorry. I missed the question. I think maybe somebody else spoke.

If you cannot talk to us about the mid-cycle EBITDA for DK, can you talk to us about the mid-cycle margins for DK.

Maybe I could add, Mark, before you answer that, let me add to that question. Our whole theme, if you like, for the last couple of, last year, is this idea of a regional golden age of U.S. refining. Our thesis is that whatever you thought the historical mid-cycle was, there's a lot of advantages that U.S. refining has today, whether it be natural gas, incremental dependency on imports and the overall continued tightening, especially we're going to see Lyondell shut their Texas refinery at some point this year. So when we're thinking about mid-cycle, we're not really necessarily looking for you to tell us what do you think Delek can do going forward? It's really your view on what do you think your mid-cycle earnings capacity is going forward relative to what it used to be based on the macro environment [indiscernible]?

Yes, Doug, I appreciate that, and I'm completely aligned with your way of thinking about it. And maybe I'll kick it off and then have Todd speak a little bit, maybe more specifically about Delek. But my view having looked at the sector for over the last couple of decades is that we're going into a period here with where we're going to be [ struck ] where we are, frankly, from a product supply standpoint, structurally short in this market for a couple of reasons. One, if you go back to around the time that the Philadelphia refinery went out, you can argue that we permanently idled about 8% of the refining capacity in this country. If you look at where exports were out of this country and net exports are back to and above where they were pre-COVID, right? And if you take in that volume, that's probably close to another 8% of the capacity that we have the ability to supply in the U.S. It's moving to Latin America, particularly South America and Mexico. And look, I think that the demand pool on that side is going to continue to be strong and effectively grow. And so I do truly believe that we're going into an elongated cycle here, where the normalized margins or mid-cycle cracks and whatever you want to call it, is going to be substantially higher than what we've seen historically. So we need to think about our company or ways that we can position ourselves to operate reliably, consistently and take advantage of those opportunities. And to Todd's point earlier, this is a segment or a sector, as you guys well know, that benefits from economies of scale and geographic diversification. We, as a company, right now, don't necessarily have much of that. And so I do think as some of the larger peers of ours, whether they're major integrateds or some of our larger downstream peers that have grown significantly over the last 10 years through consolidation. We'll be looking to concentrate their resources on what they view as the core of their core assets, and that will create opportunities potentially for us to grow ourselves and increase our geographic diversification. So being proactive around that is something that I'm very focused on as well. But maybe I'll let Todd weigh in on his view.

Yes, sure. I mean, look, Kalei, I think you probably remember a year ago, we would sit and talk about, okay, what is mid-cycle? Is it an $18-ish dollar, 532. Are there RIN costs that need to be deducted from that? Are there op costs that need to be deducted from that? Do we assume that Midland is flat, there's no backwardation? And that gets us to the Refining segment earning $400 million, $500 million a year kind of ratably. To Mark's point, structurally, things have obviously changed in the market vis-à-vis inventory levels, demand has been robust. We actually see relatively low flat price at the pump right now going into driving season. We've seen a lot of turnarounds, renewable diesel projects that took actual refining capacity off the market and are not even when they come online, going to add back on a one-to-one basis are actually not coming online or if they are, they're running it 15% to 25% of what their capacity is because of feedstock issues. So we feel very good about that. We think from a Midland perspective, Midland is being tied more and more every day to the Brent marker, right? And it's becoming more and more of a pole of that barrel out of the U.S. That's a tailwind for us, right? Because, yes, we pay higher price on crude because the differential goes up. But at the same time, because of the transportation, et cetera, to get that crude to Europe or other markets and then run it the product pricing is more than compensating for that, right? So we're seeing crack expansion because we're paying WTI-linked and payment term-based pricing on that crude, but we're ultimately selling our products in a market that's being set by [ delivered Brent ] vis-à-vis the Gulf Coast products markets. So I think that's a benefit to us. So structurally, that $18 should be higher, natural gas costs, which were elevated on a relative basis, have now completely corrected themselves. I mean, we recently saw a couple of days of Waha, where it was basically at 0 in the middle of February. So natural gas costs, or lack thereof, even on a relative basis now becomes even more of a tailwind for us. And then obviously, we're doing things internally inside of our system to help optimize the business, right, looking at converting on-road fuel-type material, I think kind of a naphtha [indiscernible] barrel into a chemical type netback and margin barrel, right, getting an uplift there, looking at -- optimizing our clean fuels portfolio, selling incrementally more premium gasoline than we have in the past. So I think, again, all of those to say, the market is giving us some of it. We're doing self-help to give ourselves some of it. So is the mid-cycle higher for longer? We firmly believe that's the case. Do we want to put a hard number on it? Not really. I mean, right now, the 532 swap, swap is trading 30-ish, $30 to $35 for the balance of the year. When you blend it together, does that seem like a fair value for right now? I think it does. I would argue that there is, in my view, a good opportunity for gasoline to outperform and surprise the market as we go into real driving season. But I think we'll leave it there.

All right. So there's a lot there to unpack. So let's stay here for a second. So Delek has always been a preferred vehicle to get exposure to inland U.S. crude spreads. And you touched on this, that there's a bigger pull from Europe going on today because of what's happening with Russia. You need to [ refill ] those barrels, so they're looking here to the U.S. to get this get those supplies. Perhaps you can help quantify for us before I think the consensus was WTI Brent should be anywhere between 3% and 5%. Given this new normal, what does that look like today?

I mean, look, I think there's no question it needs to be higher than that, right? There's obviously some risk premium that needs to be built in. Freight costs have been relatively high, although they've [ eased ] here in the recent past. There aren't as many bottlenecks anymore, especially at the dock level. So in our view, we think Brent-TI probably sitting somewhere between that [ 5 50 to 7 50 ] range, depending on what kind of geopolitical events are out there that might cause it to move a bit wider, but pretty firm floor under it here kind of around that [ 5 50 ] level. And then again, depending on what happens in rest of world, as China ramps up, maybe we even see a return to levels higher than that [ 7 50 ] level.

So guys, can I pick up on one of the things you said there, Todd, about I guess, gasoline could surprise to the upside. It wouldn't surprise you the year, we're of a similar mindset, but you guys are -- have got the highest diesel yield of your peers. What -- how are you running your system right now? And because cracks are still favoring diesel [indiscernible]?

Yes, they definitely are, Doug. We're at max distillate, like I would more or less expect everybody to be still across the industry. I think for us, the interesting kicker has been the outsized performance in jet, right, both in the Gulf Coast cash market as well as in the New York Harbor cash market. I think everybody got caught a little flat-footed. There was some off-spec jet during the fourth quarter. That caused supplies to be very, very tight. We then had some refining issues, obviously, during the freeze. Values have come down from $0.50 to $0.70 per gallon premiums, but they're still very robust. They're outperforming honestly, under any metric, anything out there on the board. And we've seen demand in our system go actually back over 2019 levels on the jet side. So we've actually effectively been able to move barrels that maybe we were sluffing into the gasoline pool back up into the distillate cut because of the jet rebound. And we think that's going to continue, right? We think China reopening. I don't know if you saw the stats earlier this week, but the flights are back over pre-COVID levels in Asia. We think there's going to be, based on the people we talked to, very strong demand as we head into the traditional summer travel, air travel season. And as long as jet continues to outperform versus diesel and even on an RVO adjusted basis, that probably goes a long ways towards keeping people in max distillate mode and ultimately creating again what we think is going to be a constructive summer driving season for gasoline.

I appreciate the perspective. Go ahead, Kalei, sorry.

Do you think you have enough low sulfur materials globally to key markets balance? I mean you're getting a picture where diesel demand has been strong, jet demand is increasing as China reopens and gas in demand seems like it's normalizing as well. So there seems to be a pull from 3 different areas on this low sulfur stuff. Do we have enough? And if we don't, how do we balance?

Yes. Look, I think a very good question, and you obviously don't even throw into the equation that you just mentioned, the fact that we're not there yet, but soon we'll be in hurricane season. So any weather disruptions further add potential fuel to the fire. I think, look, we recently saw a dip in diesel margins coming off the kind of the highs that they were at for the Q1 strip at least. A lot of that was based on inventories being built in anticipation of the go-live of the prohibition of shipping Russian clean products, largely distillate, into the Northwest European market. I think you're seeing those barrels start to be weaned down. You're seeing floating storage come onshore and be consumed. And I think by the end of March, especially now that April forecast are starting to trend colder, you could also see a sneaky little pop in the distillate cracks as you head into kind of like the beginning of Q2. How do we balance? I think, look, the U.S., as Mark said, is going to continue to be the export engine, especially given what natural gas here in the domestic market has done recently. So I think it's rest of world that's ultimately going to have to balance. I think domestically, we'll be okay, but I think it ultimately means higher prices across the board for longer in terms of rest of world is going to call out for the barrel, they are [indiscernible] open, people will load vessels and move them, and the U.S. market is going to have to try and catch up to that in order to keep barrels domestically and satisfy that demand. I think you'll also, depending on what levels we get into, you'll also probably, like you always do in these scenarios, see some form or fashion of cheating over and above what's happening right now vis-à-vis Russian products getting into the market.

Let's turn our attention to the refinery maintenance season here in the United States. We've aggregated some data, and it looks like this season is going to be one of the most intense turnaround cycles in a very long time. You are obviously finished with your turnaround at Tyler and are well positioned for the balance of the year? But when you look at your peers and what they're planning to do, do you see a strong -- do you see a lot of outages ahead of out of the summer when things are about to tighten up? Or how would you characterize the season?

No, I think you're spot on, Kalei. It's very much as you've laid out and as the research that you've compiled kind of depicts. We had a view that we wanted to be early in the turnaround season because we felt like there was going to be some softening kind of in the traditional doldrums of the January, February time line. We completed the Tyler turnaround on time, on budget. Most importantly, no safety incidents, no process safety incidents. So love to give a shout out to the employees who worked in very difficult winter conditions to make that happen as well as our contractor partners. But we are, I believe, from everything, all the research I've done, set up to have the cleanest slate ahead of us from now with our next major plant turnaround, not until sometime in Q4 of '24. So I do think that's also another reason that for me, it's easy or relatively easy to be constructive to market. In addition to that, you throw in things like the unfortunate circumstances in Toledo, where that plant continues to not come back online. You've got still some niggling issues in the Gulf Coast on the back of the winter freeze. I think, again, it's just a little more fuel to the fire, if you will.

I'm sure I'm off mute. Guys, one of the things we've been trying to understand today is the portfolio strength or the variability within the portfolio. You talked about you have 300-plus thousand barrels a day, and you think you're subscale. It seems to me that a lot of your peers are quite happy with their portfolios. So my first question would be, if you think there's opportunities to grow refining, are we thinking private? Or are we thinking portfolio high grading for the public. So I guess that would be my first question. And my second follow-up related to that, we don't get access to the Solomon associates data. How would you characterize where your refineries sit? And what's the spread between them in the portfolio?

You want to take the first one.

I'll take the first part, Doug, and I'll turn it over to Todd to address the Solomon side. We don't see -- I think it's really more of the former than the latter, if I got that right and kind of how you laid it out. We believe that there will be opportunities. And I truly believe that personally a box, the larger public refiners, the larger public energy companies to -- as Todd said earlier, to look at their portfolio, I mean, they grew significantly. Going into COVID, kind of hunker down, borrowed some money. They are now doing well. They like their portfolio, as you rightfully said. But I do think there are some areas where they can pare back and rationalize some of that portfolio, right, because they're maybe smaller, maybe inland refineries that they want to focus on the larger export, close to refineries. That can create opportunities for us and potentially for them going forward is where they concentrate their focus. And so our focus is solely on the U.S. We've had some questions over the course of today where we look international. I don't think that's the right strategy for us given the opportunities that we believe are going to be in front of us in the U.S. And so it's not really much in the way of private companies because there's not really a lot of refining assets that we think would be attractive to us. They are in the hands that are privately held in the U.S. So it's really more of some of our larger peers rationalizing their portfolio and opening up opportunities for us to get some scale in geographic diversification and extract some synergies across our portfolio. That's kind of how we're looking at it.

And Doug, on the Solomon side of it, look, Solomon is a great metric. The one thing I would say is it's always backward looking, right? So in light of the comments that we opened up with in terms of we have a new management team, new focus, new energy around the business, I'm not sure I would draw a direct correlation between what Solomon says versus what we see as the future state of the business or even the current state of the business. Because of the way Solomon works, we're not at liberty to necessarily discuss exactly where our rankings fall. But I will point this out Krotz Springs, just celebrated 5 million man hours without lost time injury. We just had the site in the fall, recertified as a VPP Star site. What that means is it's one of the safest sites in the country. That's a rating that comes between the refinery and OSHA working together in a very rigorous process to get that certification. I think everybody on this call is aware that safety has direct correlation to reliability and ultimately, reliability has direct correlation to profitability. So we have a plan in place to begin the certification of our other 3 sites going down that VPP Star path. So for me, again, we have that plan in place. We've just finished our major turnaround on time, on budget and most importantly, with a clean bill of safety. And we're very, very well set up to capture the macro. I think if you look at us in 2022, we ran above nameplate capacity. We ran hard. We ran safe. We ran reliable through challenging weather conditions, through excessive heat. We had an unfortunate performance at Big Spring. There's no question about that during the fourth quarter. But we've fixed that, the plants back up to full rate. I think Tyler coming out of turnaround was 8-plus years in the making, has a lot of potential to surprise to the upside. So I feel very good about where we're at now. We've got the right personnel in place. We've got the kit really fine-tuned and ready to run to capture the macro.

Well, guys, thank you for that. We've got about 6 or 7 minutes left. So I'll just have a couple more and then I'm going to throw it back to Kalei to close this out. So my first one is kind of an obvious question perhaps, but one that just occurred to us. So when we look at some of the discussions we've had today with some of your peers, Marathon in particular, they talked about how they're really making efforts with their commercial organization. They've opened a Houston office, a Singapore office, a London office, yada, yada, yada. And it's actually a question that came in on the line. You just hired a commercial officer. Was that a replacement position, a new position? Or what are the implications of that? Is it -- are you trying to trade around assets? What are you trying to achieve with that?

No. Great question, Doug. And I'm glad someone saw the announcement about us adding Pat Riley. He's a very experienced executive coming from the optimization side of the business at BP, chemical engineer by training, but has morphed his career into being on the trading side and helping build out teams. That responsibility previously fell under me, but with me taking on more responsibility inside the company, honestly, I didn't have enough time to adequately help manage that business. So we felt it was the right time and place to bring in a highly-qualified candidate. I think -- look, built into the DNA of Delek over the years has been a very entrepreneurial, very optimization focused kind of commercial culture. Does that mean to say that we were always the best? No. Can you always improve and get better? Absolutely. I think much like adding Mark, Pat is another very, very critical piece of the puzzle for us to bring in and help take the company to the next level. But yes, we're constantly focused on optimization all around the refining assets, right, whether that's on the crude input side, whether that's the energy side vis-à-vis natural gas, whether that's looking at how we place our clean products in the market, whether that's, as I mentioned before, thinking about how do we shift an existing stream, like a naphtha-type material, into a higher margin, higher netback, chemical feedstock. So I think, again, it's -- for a company our size, we need somebody in that role. And I think Pat is the perfect fit. We're very happy and excited to have them here.

I appreciate the answer. It's -- I mean, we've seen it with some of the very large integrated, what they can do with their trading businesses. So we'll watch with interest. So last one for me, and I'm going to throw back to Kalei, it goes back to what we're talking about earlier, but ask slightly differently. What does the right balance sheet look like for you guys when you're done with your -- hopefully, your repositioning of the company?

Yes. Maybe I'll take that one. Doug, when we think about the balance sheet from a leverage perspective, right? And when we, where we are coming out of the fourth quarter on the midstream side of the business, so anything we do around midstream, we're going to want to make sure that we see that vehicle as a consolidator going forward. We had a very positive experience with the 3Bear acquisition, integration is going well. And so coming out of the fourth quarter, that's -- on an LTM basis, that's sort of in the high 4s, total debt to EBITDA. But if you think about the go forward as we move our way through 2023, we think that's naturally going to decline back into the high 3s as we had a full year of 3Bear into the LTM numbers. We spend growth capital. Last year, we're -- a majority of our growth capital that we put forward in the $350 million number earlier this year is targeting growth at the midstream level. We see a lot of rigs, a lot of activity with our customers in the Midland crude gathering business as well as in the Delaware Basin and our gathering business there. And so we think that sort of in the 3.5% to 4% range is an appropriate for a midstream company. It is increasingly a third-party business and not just a sponsor business from the refined parent. And so we think that's appropriate. And at the refining level, look, over the years, as I think about this business, we need to be flexible, not only to weather, cyclical storm, but we never know what's going to happen. We didn't -- obviously, nobody foresaw something like COVID happening. And I don't -- hopefully, we never go through something like that again. But look we need to be, from a liquidity standpoint, net debt to kind of EBITDA, in my opinion, frankly, no more than 1x and hopefully somewhat inside of that from a leverage perspective because I want to be able to be very opportunistic around growth opportunities that we see, that we truly believe are going to present themselves for us. So we don't want to have to be approaching that from a position of being overburdened from a leverage perspective of being someone constrained. And look, we do believe that the margin environment is going to be very supportive for us. So we need to focus on not only returning cash to shareholders, but where appropriate, deleveraging our Refining business side of things so that we [ can't take ] advantage of opportunities.

Okay. Well, Kalei, do you want to take the last one?

Yes. Maybe just to pick it up there, and the buybacks are obviously positioned as your flywheel. In the fourth quarter, you guys opted to do the buyback and not the debt repayment. Can you talk about the logic behind that? And does it speak to your strategy going forward? For example, will you continue to buy back shares rather than put the balance sheet back to where it was prior to the fourth quarter?

I think from a going-forward perspective, the way we're thinking about it with everything that Mark has effectively trying to do, the thought process is buybacks are still definitely important. Getting the balance sheet in order is important, but we want to have the flexibility for anything and everything that Mark is going to be undergoing. And so hence, the $75 million to $100 million of guidance that Avigal stated, with current market conditions, we see a pathway to be able to do that sometime this year, but that would be balanced with debt reduction. But again, that's knowing that we have this pathway with the sum of the parts, and so we want to have that flexibility.

Okay. Guys, I think we are out of time, and that's a good place to leave it. So when I...

I want to say thank you very much indeed for you guys joining us. We owe you a visit up in Nashville, and we're delighted to have the opportunity to hear what you guys are thinking. So thanks very much, indeed, for being here. Rosy, thanks for setting it up. Todd, great to see you again.

Yes. Doug, thanks very much. Kalei, thanks very much. We appreciate you guys putting on this conference. It was a great day to day, and we look forward to continue telling our story. And more importantly, we look forward to hosting you guys here in Nashville.

Look forward to. Thanks, fellows.

All right. Cheers. Thanks.