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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the Par Pacific Holdings Third Quarter Earnings Conference Call. [Operator Instructions]. As a reminder this conference is being recorded.
It is now my pleasure to introduce your host Suneel Mandava, Senior Vice President of Finance for Par Pacific Holdings. Thank you, Mr. Mandava. You may begin.
Thank you, operator. Welcome to Par Pacific’s third quarter earnings conference call. Joining me today are William Pate, President and Chief Executive Officer; Will Monteleone, Chief Financial Officer; and Joseph Israel, President and Chief Executive Officer of Par Petroleum.
Before we begin, note that our comments today may include forward-looking statements. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties and actual results may differ materially from these forward-looking statements.
Accordingly, investors should not place undue reliance on forward-looking statements and we disclaim any obligation to update or revise them. I refer you to our Investor Presentation on our website and to our filings with the SEC for non-GAAP reconciliation and additional information.
I’ll now turn the call over to our President and Chief Executive Officer Bill Pate.
Thanks, Suneel. I know we have a couple of calls in the industry today, so I want to thank our conference call participants for joining us this morning.
I’m pleased to report adjusted EBITDA of $49.7 million and adjusted earnings per share of $0.13 in the third quarter. We also generated $51.7 million of free cash flow in the quarter to further improve our financial profile. These results reflect record contributions from several of our businesses that helped to offset the previously announced operational downtime at our Hawaii refinery.
Our performance demonstrates the strength and balance in our system, brought by our mainland refining exposure, as well as the diversification of our earnings stream, with consistently strong retail and logistics profitability.
The $22 million increase in consolidated EBITDA from the third quarter of last year highlights the growth in all of our business segments. With record quarters in our retail segment, as well as our Wyoming and Washington refineries. Overall, the refining segment benefited from a strong mainland product market, combined with advantaged crude sourcing at both of our mainland refineries.
On the other hand, our Hawaii refineries continued to face the challenge of a tight waterborne crude market, driven by numerous macro issues during the quarter. We continued to have a positive outlook on our position in Hawaii, as the long term benefits of our acquisition and larger footprint only increase with time. Our growth projects also advanced during the quarter.
In Hawaii, our diesel hydrotreater is running in line with our expectation, increasing our clean distillate production. Our next gen renewable fuels logistics project in Washington also made substantial progress. The completion of this project early next year, along with our expanded marine capabilities, will allow us to further increase the synergistic commercial activities between Washington and Hawaii.
Our integration of recent acquisitions continues to move forward with the final systems integration for Tacoma, planned during the first quarter of next year. With that cutover, all of our businesses will be fully integrated and coordinated from a systems and process perspective.
Our team has done a great job in integrating the acquisitions for the past two years with a lean acquisition and integration budget. With these activities, we are now comfortable that our expected cost savings and commercial synergies will exceed the top end of the range that we provided at the announcement of the Tacoma acquisition.
Looking forward, we expect our businesses to continue performing well in the fourth quarter. Toward the end of the third quarter, we began to see the initial impact of IMO 2020 in widening distillate to high sulfur fuel oil spread.
Given our high distillate configuration in Hawaii, we continued to be well positioned for that event. We’re optimistic that we will generate strong cash flow for the remainder of 2019 which will enable us to repay debt, lower our cost to capital and increase our adjusted earnings per share.
Our goal continues to be to build sustainable free cash flows throughout the business cycle, and we remain confident in our business long term earnings and cash flow potential.
At this time, I’d like to turn the call over to Joseph to provide more details on our operations.
Thank you, Bill. The third quarter emphasizes the importance of a balanced refining system. The exceptional performance and record financial results in Wyoming and Tacoma helped to smooth out the third quarter maintenance and market conditions headwind in Hawaii.
Starting with our Wyoming refinery, our 3-2-1 Index was $27.32 per barrel, reflecting seasonal strong gasoline demand in the Rocky Mountains. Our refinery throughput averaged approximately 17,000 barrels per day. Our realized adjusted gross margin in the quarter was $25.65 per barrel, including approximately $1.90 per barrel positive RINs net impact.
Our production costs were $6.33 per barrel, reflecting reliable and efficient operations. So, far in the fourth quarter, lower refining utilization rates in the Rocky Mountains and Midwest have supported strong margins for our Wyoming system.
The 3-2-1 Index, has averaged approximately $30 per barrel in October, and our fourth quarter target throughput in Wyoming is approximately 17,000 barrels per day, as our improved commercial and logistics flexibility allows us to maintain high rates during off season.
In Washington, our Pacific Northwest 5-2-2-1 Index was $14.76 per barrel on ANS basis, reflecting stronger demand for gasoline and distillate. Our refinery throughput averaged approximately 38,000 barrels per day. Adjusted gross margin in the third quarter was $11.33 per barrel with a capture of strong seasonal [inaudible] contribution and favorable regional dynamics through IMO transition. Production costs were $4.40 per barrel.
In October our 5-2-2-1 Index has averaged approximately $25 per barrel, reflecting planned and unplanned maintenance in the West Coast. Western Canadian Select and Bakken crude differentials remain favorable, and our plan is to increase throughput in Washington up to approximately 40,000 per day in the fourth quarter.
In Hawaii, global waterborne crude differentials continued to be elevated, mostly due to an under supplied global oil market, in a backward dated market structure. As a result our realized crude differential in Hawaii averaged $3.26 per barrel over Brent in the third quarter.
Our realized adjusted gross margin in Hawaii was $0.98 per barrel in the quarter, including approximately $3 per barrel of negative impact related to the reformer planned and unplanned maintenance, and a positive $0.30 per barrel RINs net impact.
The elevated high sulfur fuel oil, HSFO pricing, provided the strong support to our $9.36 per barrel, Singapore 4-1-2-1 Index in the third quarter. However HSFO price drives only 20% of our fuel oil sales, while the 80% left is low-sulfur fuel oil based pricing. This is a significant advantage starting in the fourth quarter and going forward, and a cosmetic headwind in our third quarter capture.
Our refinery throughput averaged approximately 95,000 per day and production costs in the third quarter were $4.17 per barrel including approximately $0.70 per barrel of increased cost related to the maintenance work. Our refinery was back to full operation in mid-September and target throughput for the fourth quarter, is 110,000 to 114,000 barrels per day.
We are expecting crude differentials to remain elevated around $4.55 per barrel in the fourth quarter, with strong IMO support on the oil product side. As a reminder, the Par System is will position to benefit from IMO with approximately 70% distillate pricing driven production in Hawaii, and 50% distillate production in Wyoming.
Finally, we continue to make good progress with small profit improvements and optimization projects that we estimate will improve profitability capture in Hawaii by approximately $1 per barrel by the end of next year.
And now, I’ll turn the call over to Will to review consolidated results.
Thank you, Joseph. As Bill, stated third quarter adjusted EBITDA and adjusted earnings totaled $49.7 million and $6.7 million or $0.13 per diluted share. The benefits of our tax attributes continue to minimize tax obligations. Looking at the third quarter results by segment, demonstrates the balance of our business with retail and logistics making up 58% of segment contribution.
Separately G&A costs remained relatively flat versus last year, despite the growth in the overall business. Retail segment contribution increased approximately $5 million versus Q3, 2018 driven by strong fuel and merchandise margin. Retail same-store sales fuel volumes increased approximately 1.9% compared to Q3, 2018.
The logistics segment contribution increased approximately $8 million versus prior year due to the Washington acquisition and consistent throughputs across the Wyoming and Hawaii operations.
Refining segment contribution was $26 million, an increase of $10 million compared to Q3, ‘18. Underlying these results, were record quarterly contributions from the Wyoming and Washington facilities, partially offset by the impacts from the unplanned downtime in Hawaii.
Within the Wyoming location, we had record margin capture driven by strong diesel margins and sales mix, increased premium gasoline cracks and expanded commercial flexibility. The record Washington results under our ownership was primarily due to seasonal gasoline and Asphalt strength, tight West Coast distillate fundamentals, and improved discounts of inland feedstock versus waterborne alternatives.
Laramie’s third quarter adjusted EBITDAX and net loss totaled $19 million and $8 million excluding the impact of $4 million of unrealized loss on derivatives. Laramie’s last 12 months adjusted EBITDAX stands at $82 million. Laramie has ceased all joint activity and anticipates completing its remaining drilled, but uncompleted wells. Current leverage sits at 2.5 times, debt to EBITDA and the Laramie management team intends to dedicate cash flow towards deleveraging over the near-to-medium term. Given the sustained weakness in natural gas and natural gas liquids pricing, we recorded a non-cash impairment of our Laramie investment of approximately $82 million.
Shifting focus to additional accounting items. The largest item impacting both adjusted EBITDA and adjusted net income was the net RINs benefit recorded of approximately $5.7 million. I would remind all our stakeholders that in prior periods we have accrued expenses for RINs and all relevant periods and reduced our adjusted EBITDA and adjusted net income accordingly. So only impacting our GAAP net income was an approximate $2.8 million tax benefit, as well as the Laramie impairment referenced above.
On the capital structure front, net debt to capitalization was 46% excluding the impact of the Laramie impairment. Total liquidity was $175 million. Third quarter GAAP interest expense totaled $18 million of which $15 million was cash interest. DD&A totaled $22 million.
Cash from operations totaled approximately $74 million with working capital inflows totaling approximately $63 million, partially offset by $47 million in financing outflows. Capital expenditures and turnaround outlays totaled $27 million during the third quarter. Of the $27 million $15 million was associated with growth projects and $4 million was related to turnaround outlays. Planned 2019 total capital expenditures and turnaround outlays are expected at the lower end of the previously provided range of $100 million to $110 million.
This concludes our prepared remarks. Operator, I’ll turn it back to you for Q&A.
Thank you. [Operator Instructions] Our first question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.
Good morning team and thanks and congrats for the continued strong share performance. The first question I have is a little more near term. California crack spreads have been – or West Coast crack spreads I should say have been very robust. Back half of the third quarter, here to start off the fourth quarter and just any comments you can provide about how Washington has been running and whether you've been able to kind of capture the strength of the market.
Yes Neil, this is Joseph. We definitely see the impact of maintenance issues in PADD V since really October. Supply issues drive low inventories and a high pricing. Our refinery in Tacoma is well-positioned to benefit from it this quarter, so looking good there.
Yes, and this is Bill. Just to add to that in Joseph's prepared comments I'd note that we averaged 38,000 barrels a quarter in Q3 and the refinery is running really well and Joseph's signaled that we expect to take that up a couple thousand barrels a day in Q4 in the context of a stronger market.
I appreciate that. That's great to hear. The follow-up question, I guess the biggest risk in the near term as we think about the Par story is just the waterborne crude market. I just wanted to get your perspective on a couple of dynamics around that.
One is, how you think about higher freight costs and shipping costs and what that could mean for the imported barrel. Two, with the amount of mediums and heavy crudes off the market as a result of OPEC cuts and disruptions what does that mean, and it seems like ANS is well bid as well. So there's a lot of pieces to that question but wanted to give you guys an opportunity to respond to that as that's probably the primary near-term headwind for the business.
Okay. Global oil anchor rates are really higher in the fourth quarter, mainly driven by lower visibility of crude tankers and specifically VLCCs. The shortage is mainly driven by sanctions and geopolitical reasons, as well as IMO. We have scrubbers, installations, and LFSO floating storage, etcetera.
Our Hawaii refinery has approximately two to three months of crude oil purchase lead time, and as a result we should not expect any freight impact on our crude differential in the fourth quarter. Freight peaked around mid-October for a couple of weeks and has improved since. We just started recently to buy our first quarter crude oil for Hawaii and it is hard to say where is it going from here.
At the end of the day crude price will have to align with products, otherwise no global refineries run will force pricing adjustments through supply and demand balances. Again, we just turned the IMO corner and we are positioned very well Neil, especially in Hawaii and very optimistic that our optimization project, combined with the synergies and commercial contracts will support our profitability profile going forward, even in elevated crude diffs and higher freight scenarios.
To your IMO crude question Neil, I will comment that one of the most important things we have is the refineries of crude flexibility. We can purchase sweet and heavy sour in Hawaii, as well as in Tacoma and move intermediate and fuel oil around for optimization. So we'll keep monitoring market conditions and optimize our process accordingly.
Thank you, guys.
Our next question comes from the line of Matthew Blair with Tudor Pickering and Holt. Please proceed with your question.
Hey, good morning everyone.
Good morning Matt.
Good morning Matt.
Will, you know despite the write-down at Laramie, it looks like it bounced back a bit in Q3 compared to Q2. I was just hoping you could walk through the moving parts here and just talk about which areas got better quarter-over-quarter, which areas got worse and I guess that would include contribution from dry gas, contribution from liquids and then any sort of cost efficiencies.
Sure. Yeah, I think if you compare quarter-over-quarter I think slight improvements on gas realizations are relatively flat on NGL realizations and I think probably the biggest delta is really improvements in overall hedging gains during the quarter. Again, Laramie is relatively well-hedged for 2019. And then again I think no material changes really on the cost side, so that was the principle driver in the improvement.
Sounds good, thanks. And then Bill in the prepared remarks you talked about the merits of the integrated model and I'd agree that contributions from your logistics and retail segments have really balanced your results over the past few quarters here. I was curious though, as you look out over the next five years or so, would you anticipate that Par would always have an integrated model or would you be open to divesting higher-multiple businesses if that's where the market was indicating?
You know in our business model where we're operating in small niche markets, I think it's really important to be vertically integrated, because you want to be balanced in the market and Hawaii is a great example of that.
If you don't have vertical integration in the Hawaii market and you lose a contract or two, you suddenly go from selling into the local market at a profit to significant losses, because you have to move product out of that market or face the choice of run cuts and letting your costs go up, and I think you've seen the story – I mean with the increased throughput in Hawaii, we've taken our production costs from close to $5 a barrel down to $3 a barrel and a lot of that is just the economies of scale and the ability to sell into the local market and not bear the brunt of losses by exporting into larger markets. That same factor to a lesser extent plays out in the niche markets in the Rockies and the Pacific Northwest.
So I believe very strongly that an integrated model is important to our business model and to our long-term strategy.
Sounds good, and then any thoughts on 2020 CapEx that you talked about, 2019 coming in at the lower end of that. I think it was $100 million to $110 million range, and I know you have quite a few – or several turnarounds in 2020. Any thoughts on overall spending next year?
Yes, I'll let Will handle that. I would point out though that we originally thought we were going to have three turnarounds and we've now deferred the Washington turnaround to 2021 after getting our arms around the business and reviewing the asset base there, so Will, go ahead.
Yes sure. So I think Matt you probably – not a lot would change with respect to our maintenance and regulatory CapEx, and so again that's been running around kind of in that $35 million to $40 million range. And then again from a turnaround perspective we've got the Hawaii upper or East turnaround planned, and then that should run probably in 2020 somewhere between $30 million and $35 million.
We have spent some capital on that this year or anticipate spending it this year and then Wyoming should be about $15 million in the fourth quarter time frame. There's been minimal spend on that this year. So again I think that's the major kind of planned turnaround outlays that we've got for 2020. And then there's a handful of growth projects we're studying and we'll come back with firmer views on that probably during the fourth quarter conference call.
Very helpful. Thanks.
Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Good morning Mike.
Joseph, you mentioned that there are some projects that you're working on. It sounded like smaller projects that would help improve profitability in Hawaii. I believe you said to the tune of $1 per barrel in improved profitability. Can you give any additional color on what those projects might entail and what the cost associated with those projects would be?
Correct. We are talking about self-help, low-capital type of projects with the nature of a cost savings, as well as yields improvement type of projects, a lot of small fine-tunings in our hardware.
The other thing we are working on is our supply contracts really adjusting to market conditions and freight costs and things that happen in the market, they just catch up. And then the third one is synergies, mainly between Hawaii and Tacoma that should really improve our profitability profile.
Going forward, all together we think $1 per barrel is realistic, maybe even conservative times 40 million barrels per year. It's a significant $40 million type of EBITDA potential improvement coming to Hawaii, starting next year.
Alright, thank you. And then you provided the impact of the RINS benefit for both Hawaii and Wyoming. Was there any impact or benefit one way or the other on Washington, and I guess just I haven't done the math, but the split on that $5.7 million RINS benefit, is it about 50/50 between Hawaii and Wyoming?
Mike, its Will. It's pretty close. It's about $3 million to Wyoming and about $2.7 million to Hawaii, and there was no impact to the Washington results in the third quarter.
Remember, we didn't own the Washington refinery in 2018. So the exemption was for the year 2018.
Okay, got it. And then the last question I had for you is just about the strength that you were seeing in retail. You know we've had a couple quarters this year that were quite strong. Is this $17 million of EBITDA type number a sustainable number going forward or was there something unusual that suggests that we should put this into our tussles going forward?
Well, there was nothing unusual, although it's been a very strong market and I'd hesitate to guide anybody to think that we can sustain this type of a run rate. We've simply had strong market conditions and positive fuel sales volumes, as well as merchandise sales volume, particularly in Hawaii.
Alright, thank you very much.
Our next question comes from the line of Brad Heffern with RBC. Please proceed with your question.
Hey, good morning everyone. Just one clarification item; I think during the prepared remarks there was like a $4.55 number for Hawaii. I just want to make sure, was that the guided crude diff number or was that something else?
Yes, this is our guidance for crude differentials in Hawaii. We started with this last quarter and we're just giving you better tools to model our results. At this time we purchased all of our fourth quarter crude oil and we are able to give you a pretty close guidance for this expected diff.
Okay great, thanks for that. And then I guess just thinking about what happened in the third quarter with the sort of simultaneous downtime in Hawaii. It sort of put you in an uncomfortable situation of having to export lower-value product and then replace it with higher value imported product. Was that just a situation where it was bad luck and you just don't think it's likely to recur again, or is there something you can do during turnarounds going forward to try and prevent that situation from happening again?
Well, let me say that operational reliability – as I mentioned earlier, vertical integration is really important to our business model and operational reliability is as important. And any time we have an unplanned outage, we spend a lot of time assessing that, understanding what went wrong and learning from our mistake. We've certainly taken that to heart with respect to this outage and I'd also point out that we haven't had significant unplanned outages in Hawaii in quite some time. This was a fairly lengthy event and it is costly when you're in a niche market like this.
And as we mentioned in our September 16 press release, downtime is an opportunity to inspect the hardware, and when we found corrosion, we decided to address that without taking any start-up risk and this caused the longer maintenance and the additional work. We are a really responsible operator and we take safety very, very seriously with no compromise.
And Brad, this is Will. I think the unplanned nature of this did drive some incremental cost that if it was planned, i.e., if we're going into a planned turnaround, I think you would have ability to minimize some of the costs that we incurred here, basically having to export unfinished product and import finished product.
Okay, fair enough. And then I guess finally just on the integration front can you talk about how things are going with Tacoma, how integrated it is and maybe any thoughts on the amount of synergy capture you've had to-date?
Yes, well as I mentioned in my remarks, we're above the top end of the range. Integration’s gone well. We still have a major event with the cutover of the Tacoma team to SAP and we'll do that after the end of the year, but so far it's gone well. We've got a great team there.
They're operating really well and I think the big surprise for us, the big positive surprise is the commercial synergies just from the balance of the system and the ability to move intermediate back and forth between Hawaii and Tacoma, having access to the West Coast improves our profile quite a bit and I think helps the profitability, and some of that has shown up already in the Washington results in particular, which largely reflect the synergies from the deal.
Okay, thank you.
Our next question comes from the line of Jason Gabelman with Cowan. Please proceed with your question.
Yeah, hey guys, thanks for taking the question. There's a few refining assets that seem like they're coming to market that are in the regions that you operate in. I wonder if your mindset is still kind of in the acquisition mindset or if you're more focused on your underlying operations at this point. Thanks.
Well, we've built this company through acquisitions and I think a series of successful acquisitions and we will continue to grow this company and be opportunistic if opportunities present themselves and if they're attractive, and I think we've been pretty clear about our focus. Certainly it's on operations, but we are big believers in our businesses in the Rockies, in the Pacific Northwest and in Hawaii and we look at these acquisitions in the market opportunities in the context of what kind of value they might bring to our assets aside from just a financial investment.
We're fortunate to have I think a pretty good footprint right now, which positions us well for acquisitions and presumably with significant synergies and cost savings associated with events like that. But as you know, acquisitions are – they are hard to forecast and predict. So I would not want anybody to think that something's in the hopper or anything. I mean it's just there's a lot of activity, a lot going on and you never know what's going to happen, and we're fortunate to have a really good footprint right now that we can grow our business with the assets we have today.
Yes no, it seems like the acquisitions have worked out well for you thus far for sure. And then just on the kind of $1 a barrel of overall improvements that you expect to capture, how much of that dollar is dependent on market prices and how much of that is kind of more underlying operational improvements? Thanks.
You know we're not going to get into those details, but certainly there are number of factors associated with what we think will be the improvement in the capture in Hawaii over time.
Alright, thanks a lot for the time.
Thanks Jason.
Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Please proceed with your question.
Hi, good morning. I'm not sure if it was asked and answered in your script, I was a little late here. But could you discuss if there's any impact on crude by rail and your mix and spreads by the Washington vapor and regulatory changes that have been discussed or have been put into place?
Andrew, we don't expect any impact from this recently passed legislation period. The state law provides new restrictions on [inaudible] crude oil starting 2021, based on a 2018 reported volume. We understand a number of legal challenges for the bill are being prepared and will be forthcoming.
In the event we become subject to the proposed RVP limitations, we have sufficient crude alternatives to supply Tacoma with minimum impact on our operation flexibility or financial result.
Excellent! And then a question for Will here. This Laramie impairment, is it of the nature that it passes through to the taxes on Par and thus would be additive to the company's huge NOL?
No. Again, our threshold is oriented toward fair value with respect to Laramie. The Laramie tax basis is separate and independent from our conclusions of fair value on Laramie.
Okay, and the first round of expirations on those NOLs, that's not for several years is it?
That's correct, not until 2027 and later.
Okay, long down the road. And lastly, did you guys mention or could you provide upcoming non-deal road show and investor presentation foresight here in case we wanted to travel and attend rather than to hear about it at the last week or two before?
Andrew, we actually put out a press release for the fourth quarter I think in the last couple weeks, I'll just refer you to that.
Okay. Excellent! I'll catch it. Thank you.
Our next question comes from the line of Tim Rezven with Oppenheimer. Please proceed with your question.
Hi, good morning folks. Thanks for taking my question. I wanted to follow up on I believe it was Jason's M&A question and I probably won't get a good answer, but I'll at least give it a shot here. You know very active with Tacoma closing and in the expansion in Hawaii. From an organizational perspective, can you accommodate sizable growth right now given that it's been about 10 months since your last acquisition closed?
You know I'd say the answer is yes. I mean as I mentioned with respect to our integration we still have a couple more events with respect to the acquisition of Tacoma. But in the first quarter we expect to cutover that organization to SAP and at that point all of our business units will be fully integrated. There will probably be a little pain as there always is when you're bringing an organization onto SAP, but we've done that before and I'm sure the organization in Tacoma will do quite well if we move them onto all of our systems.
Okay, and then just as a follow-up, you know leverage has come down and you've generated free cash flow. So I know there are some sort of levers you can pull, but you would feel comfortable at least looking right now given kind of where the balance sheet is? You don't see that as an impediment on a deal?
Well, certainly we're going to be focused on reducing our debt and that is probably a factor that's important in our consideration. We're fortunate to have a lot of free cash flow that we've been generating over the last year and we think our earnings profile is set up nicely going forward. So we continue to focus on reducing our debt.
Okay, thank you.
Our next question comes from the line of Patrick Sheffield with Beach Point. Please proceed with your question
Hey guys, thanks for the question and congrats on another strong quarter.
Hey Patrick, thanks a lot.
I just had a quick balance sheet question. You guys generated a lot of free cash flow in the quarter, but the cash balance went up by $4 million and the debt balance went I think down by only $4 million. So is there something going on in cash from financing or where did the free cash flow go?
Yes, I called this out in my script, but there was roughly $47 million in financing outflows and so again this is tied principally to paying down the working capital lines that we have in place with J. Aron and Bank of America, and so that's the principal pay-down of the working capital inflow that we received during the quarter.
And how large are those facilities today?
Again, they are embedded and they flex with the size of our working capital in aggregate. It's part of our $175 million in total liquidity. But again, as you saw the working capital inflow occur, again that we turned around and really took that inflow and paid down the deferred payment arrangements that we had with those two providers.
And when we look at that on a go-forward basis, should that be kind of neutral cash flow?
It should be neutral. If you recall back in Q1, right, we had the inverse of this occur where you saw a …
Yes, I saw that on the balance sheet. That’s what I figured was going to happen, but I was just confirming.
Yes, so again you've had – again, we've on-boarded both the Par West facility and increased our inventory and sales profile in the state of Hawaii pretty substantially this year. This does require additional working capital. We've principally funded that through our intermediation arrangements and then simultaneously brought on board the Washington inventory and receivables positions.
So, I think over time you can expect to see that neutral. It's going to flex quarter-to-quarter based on our inventory and sales profile, but again that's one of the benefits of those facilities, is it helps smooth that out in aggregate.
Yes, and you guys mentioned de-levering going forward. How are you thinking about the convert versus I guess you have a couple, you know the retail property term loan or the term loan B or how do you prioritize your debt pay-down?
Again, I think we'd like to see kind of our net debt to cap, let's say excluding the Laramie impairment under that 30% to 35% level. Again, without getting into the tactics of what we'd focus on, I think our liquidity position we're projecting that to increase and again I think should have the opportunity to again elect to reduce debt on one of our instruments that we had out there. And again, I think there are a number of considerations when we think about sort of the tactics of that.
Great, thanks guys. Congrats again.
Thanks Patrick.
Since there are no further questions left in the queue, I would like to turn the floor back over to management for any closing remarks.
Thank you. Thanks for joining us this morning. We look forward to a strong end of year as distillate cracks have continued to improve and the West Coast markets have exhibited uncharacteristic strength today. Have a good day!
This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day!