Mar 7, 2013
Executives
Keith Johnson - VP, IR Ezra Uzi Yemin - Chairman, President and CEO Assi Ginzburg - EVP and CFO Frederec Green - President and COO, Delek Refining Danny Norris - VP, Finance
Analysts
Robert Kessler - Tudor, Pickering & Holt Evan Calio - Morgan Stanley Jeff Dietert - Simmons International Paul Cheng - Barclays Capital Blake Fernandez - Howard Weil Ben Brownlow - Raymond James Mark Hastings - Saugatuck Energy
Operator
Good morning. My name is my Brent and I will be your conference operator today.
At this time, I would like to welcome everyone to Delek US Holdings' Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).
I would now like to introduce Mr. Keith Johnson, Vice President of Investor Relations for Delek US Holdings.
Please go ahead.
Keith Johnson
Thank you, Brent. Good morning.
I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' fourth quarter and year end 2012 financial results. Joining me on today's call will be Uzi Yemin, our Chairman, President and CEO; Assi Ginzburg, our CFO; Fred Green, our Executive VP and President of our Refineries and Danny Norris, Vice President of Finance; as well as other members of our management team.
As a reminder, this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may deem to be forward-looking statements.
Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release.
As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Today's call is being recorded and will be available for replay beginning today and ending June 7, 2013 by dialing 855-859-2056 with a confirmation ID number 97891632. An online replay may also be accessed for the next 90 days at the company's website at delekus.com.
Last night, we distributed a press release that provides the summary of our fourth quarter and year end 2012 results. This press release is available on our corporate website and through various news outlets.
On today's call, Assi will begin with a few opening remarks on financial performance for the quarter. Danny will cover additional financial details for the quarter before turning it over to Fred to discuss initiatives in our refining segment.
Then Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Assi.
Assi Ginzburg
Thank you, Keith. We had a great year at Delek US during 2012 with our record performance for the fourth quarter and full year.
We ended the year with a record cash balance of $602 million and a net cash position of $240 million. This is an improvement of over $440 million from a net debt position on December 31, 2011.
In addition, our shareholder equity exceeded for the first time $1 billion. Delek Logistics successfully completed its IPO on November 7, 2012 unlocking the value of our logistics operation and providing approximately $176 million of net cash profit.
Finally, during 2012, we continued to return cash to our shareholder as we increased our regular quarterly dividend by over 160% to $0.10 per quarter. During 2012, we declared a total of $0.60 per share in regular and special dividend.
Also, we are pleased to announce that our Board of Directors declared our first special cash dividends for 2013 in the amount of $0.10 per share earlier this week. Now, I will turn the call to Danny to walk through the additional financial details.
Danny Norris
Thank you, Assi. Good morning, everyone.
For the fourth quarter 2012, Delek US reported net income of $64.3 million or $1.06 per diluted share. This compares to a net loss of $6 million or $0.10 per basic share in the fourth quarter last year.
For the full year 2012, Delek US reported net income of $272.8 million or $4.57 per share versus net income of $158.3 million or $2.78 per share in 2011. This represents a 64% increase in earnings per share from 2011.
Improved performance and full year results was primarily driven by our refining segment, which benefited from elevated Gulf Coast refined product margins, improved access to cost advantaged, WTI linked crude oil and the addition of a full year results from the El Dorado refinery which we acquired in April 2011. The improvement in company profitability in the fourth quarter was driven primarily by increased year-over-year margins in our refining segment.
This segment benefited from an improved Gulf Coast 5-3-2 crack spread of $26.71 per barrel in the fourth quarter this year compared to $20.34 per barrel in the fourth quarter of 2011. Also results benefited as WTI Midland crude was $3.55 per barrel lower than Cushing for the fourth quarter 2012, which is a wider differential as compared to $0.59 per barrel below Cushing in the prior-year period.
I want to discuss a few items on the income statement. Total operating expenses increased by $13.3 million to $96 million in the fourth quarter when compared to the prior-year period.
This increase was due to higher maintenance and contractor-related expense in our refining segment and year-end related insurance premium adjustments. Expenses in our Logistics segment increased due to pipeline and tank repair expenditures during the fourth quarter 2012.
General and administrative expenses increased to $28.8 million in the fourth quarter 2012 compared to $19.5 million in the prior-year period. This increase was primarily due to employee-related costs, outside services and taxes.
This includes approximately $700,000 of expenses related to our Delek Logistics IPO that occurred in the fourth quarter of 2012. Interest expense was $9.8 million in the fourth quarter 2012 compared to $12.5 million in the fourth quarter of 2011.
The decrease in interest expense was primarily attributable to the reduction in overall debt levels and reduced expenses associated with our interest rate swaps. As a reminder, at the end of third quarter 2012, we repaid the remaining $38.5 million of debt that was owed to an affiliate of Delek Group from our cash on-hand which reduced interest cost by approximately $1 million per quarter.
Our effective tax rate after taking into account an adjustment for $3.2 million of minority interest income was 37% in the fourth quarter 2012. This rate is higher than our normalized effective rate of 35.3%, primarily because we earned more income in Arkansas which has a higher income tax rate.
In the fourth quarter of 2011, our rate was 30.8%. For 2013, we are currently forecasting a tax rate of no more than 36.5% on an annual basis.
With the completion of Delek Logistics IPO on November 7, 2012, we now show a non-controlling interest line item on our income statement to account for the 37.6% of Delek Logistics that is owned by public unitholders. This amount was $3.2 million for the 55 days that Delek Logistics operated during the fourth quarter 2012.
Turning now to capital spending. Our capital expenditures for the year ended December 31, 2012 were $132 million of which approximately $65.9 million was spent in our refining segment, $10.5 million in our logistics segment, $29.1 million in our retail segment and $26.5 million at the corporate level.
Our 2013 capital expenditures are forecast to be approximately $158.2 million. This amount includes $94 million in our refining segment, $8.8 million in our logistics segment, $30.4 million in our retail segment and $25 million at the corporate level.
Now, I would like to discuss our segments. Our refining segment represented nearly 89% of the total contribution margin generated in the period and benefited from improved margins on a year-over-year basis.
Our refining segment contribution margin improved to $147.6 million during the fourth quarter of 2012 from $32.1 million in the fourth quarter of 2011. As discussed earlier, the market environment in the fourth quarter 2012 was much better compared to fourth quarter 2011 resulting in significant improvement in results.
El Dorado contribution margin increased to $54.8 million from a negative contribution margin of $13.1 million in the fourth quarter 2011. Our Tyler refinery contribution margin increased to $92.8 million in the fourth quarter 2012 from $44.8 million in the same prior year period.
On a combined basis, our refining system had a total throughput of over 141,000 barrels per day. At Tyler, we processed approximately 60,000 barrels per day of crude which is an improvement of approximately 57,000 barrels per day in the fourth quarter of 2011.
For the second half of 2012, this refinery averaged approximately 60,000 barrels per day of crude. As all of you know, our El Dorado refinery was impacted by the supply disruption from Exxon's North Line which was shutdown in late April.
Despite the loss of this supply, we had solid performance and were able to process approximately 63,200 barrels per day of crude oil during the fourth quarter of 2012. This was accomplished during the quarter by averaging more than 17,000 barrels per day of rail supply crude oil, shipping 2,750 barrels per day intermediate and 3,260 barrels per day of 84 sub-grade gasoline to El Dorado from Tyler.
Our supply flexibility allowed our fourth quarter 2012 crude supply of El Dorado to be weighted toward lower priced WTI linked sources and only contained approximately 6% of more expensive Gulf Coast sourced crude. Margins also benefited from a product slate that included approximately 89% light products compared to 79% in the fourth quarter of 2011.
This also allowed us to better control our asphalt inventory levels during the fourth quarter of 2012. Now I would like to review our logistics segment.
With the completion of Delek Logistics IPO on November 7, 2012, our marketing segment has been renamed logistics. Results prior to November 7, 2012 are recorded on a predecessor basis.
The predecessor period includes assets contributing to Delek Logistics at tariff rates that were in effect on November 7, 2012. For the fourth quarter 2012, results included 37 days of predecessor operations and 55 days of Delek Logistics operations.
On a year-over-year basis, results are not directly comparable. I want to point out that the segment will record 100% of Delek Logistics results with a minority adjustment made on a consolidated basis.
The contribution margin increased to $11.6 million from $7.8 million in the fourth quarter 2011. This increase can be attributed to the following.
First, a record margin in the West Texas wholesale business. Second, the contribution beginning November 7, 2012 from contracts associated with services provided to Delek US' refineries.
And third, higher fees generated by the Paline Pipeline which was acquired late in the fourth quarter of 2011. Moving on to the retail segment.
Retail's contribution margin was $8.7 million in the fourth quarter of 2012 compared to $10.7 million, excluding a $2.2 million goodwill impairment charge in the fourth quarter of last year. A higher merchandise margin this year partly offset lower fuel margins as compared to the fourth quarter of 2011.
Retail fuel margin was $13.8 per gallon, down from $14.06 per gallon in the year-ago period. Merchandise margin in the fourth quarter of 2012 was 29.6% compared to 29.2% a year earlier.
Same-store merchandise sales increased 0.8% in the fourth quarter this year when compared to a year-ago period. Same-store sales of private label products in areas other than cigarettes increased 33.1% in the fourth quarter 2012 versus the prior-year period.
Private label sales as a percent of total merchandise sales, excluding cigarettes, were 5.1%. As of December 31, 2012, the retail segment operated 373 stores versus 377 stores at prior year end.
Approximately half of the store base is either a [remix] location or a large format prototype. During 2012, we constructed six new stores and expect to have completed six additional new stores during the first half of 2013.
I will now turn it over to Fred to review initiatives in our refining segment.
Frederec Green
Thanks, Danny. Before I review capital expenditures and projects underway in refining, I did want to give you an update on the status of the Exxon North line.
This line resumed crude oil deliveries in early March. We will adjust our crude purchases from the North Line based on economics going forward.
Construction of a new rail offloading facility in the El Dorado refinery continues with one rack completed and already in service. The second rack is expected to be completed in the second quarter of 2013.
The combined capacity of these racks will give us the ability to offload 25,000 barrels per day of light crude oil or approximately 12,000 barrels per day of heavy crude oil or some combination of the two. We averaged approximately 1,900 barrels per day of heavy Canadian crude during January and February.
Further, we have access to 20,000 barrels per day through a third-party rail offloading operation adjacent to our refinery. In addition to our rail initiative, I wanted to update you on the progress to source additional cost advantaged crude to our refineries.
The strategic initiative to improve our pipeline access has been underway throughout 2012 and is nearing completion. During April of this year, our Tyler refinery should have the ability to receive Midland sourced crude oil directly.
Beginning in May, our El Dorado refinery should have the ability to receive additional Midland sourced WTI and WTS. This initiative should increase the amount of Midland sourced crude in our refinery system to approximately 87,000 barrels per day from the current level of 45,000 barrels per day.
Moving on to our quick-hit capital projects. We highlighted two projects for you on our last conference call that are underway at our El Dorado refinery.
These projects combined should increase contribution margin by $12 million annually with an expected capital cost of $6.5 million. The first was a $3 million project which has an expected total contribution margin of $8 million to increase ultralow-sulfur diesel production from 30,000 barrels per day to 34,000 barrels per day.
The first phase to increase production to 33,000 barrels per day is expected to be completed in the second quarter of 2013. Expected contribution margin from this first phase is $6 million per year based on current market conditions.
The second phase of the project will be completed in 2014 in conjunction with the refinery turnaround. Our second project at El Dorado involves the replacement of an alky compressor and is on schedule to be completed during the second quarter of 2013.
This project is expected to cost $3.5 million and it will allow us to further optimize operation of our SCC and increase gasoline production. Current estimates indicate approximately $4 million per year of margin improvement once completed.
In addition to the projects just discussed, our engineers have identified two additional projects at El Dorado. The first will debottleneck the crude preflash tower to increase our ability to process lighter crude oils.
The second will expand our isomerization unit to 9,500 barrels per day from 7,500 barrels per day currently. Preliminary estimates for capital cost are approximately $8 million with a payback of less than one year based on current market conditions.
We're still in the planning stages for these projects and are working to determine if they can be completed during the 2014 turnaround. Now, I'll turn the call over to Uzi for his closing remarks.
Ezra Uzi Yemin
Thank you, Fred. 2012 was another great year for our company.
We achieved a record net income for both the year and the fourth quarter of 2012. Our improved balance sheet would provide us with the ability and flexibility to grow our business, while continuing to return value to shareholders during 2013.
As Fred mentioned, we continued to make progress on improved crude supply flexibility through our rail initiative and in addition to that, we're increasing pipeline access to Midland sourced crude in the coming months. By increasing supply flexibility and finding ways to source cost advantaged crude, our refinery will be able to generate stronger margins and be very equipped to handle crude oil price fluctuations in the future.
Once pipeline access has been completed, we will have approximately 105,000 barrels per day of cost advantaged crude, including locally sourced crude, this out of our 140,000 barrels per day capacity in our refining system. Also, it is worth noting that the combination of improved pipeline access and increased certain rail supply crude will allow the El Dorado refinery as well as the Tyler refinery to operate on capacity without relying on Gulf Coast crude supply anymore.
We also continued to explore ways to improve our operations. During this year, we will be preparing for our 2014 turnaround at both refineries.
One option that exists at the El Dorado is the potential expansion to 100,000 barrels per day of crude from the current level of 80,000 barrels per day. Once the 2014 turnaround is completed, we estimate that it will cost approximately $100 million for this expansion.
We have not made that decision as to the time of this potential expansion but it may be done in conjunction with the next five turnaround at El Dorado, as extended downtime will be required for this project. Finally, we are optimistic about our future and began 2013 in a strong financial position.
The combination of additional access to cost advantaged crude, the creation of Delek Logistics, our financial situation and favorable market conditions allow us to be very optimistic about 2013. We will remain committed to creating additional value for our shareholders.
Going forward, as mentioned in the past and based on results and liquidity, we will continue to evaluate the payment of special dividends as well as increase in the regular dividends on a quarter-by-quarter basis. With that, Brent, would you please open the call for questions?
Operator
Yes, sir. (Operator Instructions).
Your first question comes from the line of Robert Kessler with Tudor, Pickering & Holt.
Robert Kessler - Tudor, Pickering & Holt
I want to see if you can provide a little bit more color on the $94 million of refining CapEx for 2013? What specific projects you have included in there?
Ezra Uzi Yemin
Absolutely. Fred, do you want to take that one?
Frederec Green
Sure. If you look kind of at our top 10 projects, we're building the 300,000 barrel crude tank at Tyler which is probably the largest single project looking at about $12 million there and that will go on the dropdown list for DKL going forward.
Beyond that, it's primarily regulatory flare gas recovery. We're starting that project.
Replacement of the electrostatic precipitator on the cat cracker and some flare modifications. Once you get passed those kind of larger projects, it's backed into the sustaining capital mode.
Robert Kessler - Tudor, Pickering & Holt
With big turnarounds coming for 2014, I know you're still working on the numbers, but is it fair to say total company CapEx will be higher in 2014?
Ezra Uzi Yemin
Absolutely. We are still working on the numbers but the ballpark for the turnaround, including some improvements to our refineries is $100 million.
That's our ballpark estimate. Obviously it can move here and there, but that's the ballpark number.
Robert Kessler - Tudor, Pickering & Holt
Okay. Thank you.
Ezra Uzi Yemin
Please note that in the CapEx, there are $25 million of corporate designated amount at this point just for general purposes.
Robert Kessler - Tudor, Pickering & Holt
Okay. Can I ask for a little bit of an update on the rail at El Dorado and in particular, are there heavy oil receiving capacity now with the first train, I guess, brought on line?
Can you give some indication as to expected volumes of Canadian heavy to be delivered, say, on average in the first quarter?
Frederec Green
I think I did mention that we offloaded about 1,900 barrels a day on average in January and February. We still have additional volumes that we're receiving in March as well.
The rail facility itself is two different rail spurs, if you will. One of those is already in service and we've been able to offload on a normalized basis when the cars show up, up to 20 railcars per day, which is roughly 10,000 barrels on the days we receive them.
Now, you don't receive cars every day. And on a manifest basis, you may not have 20 available.
But we're very excited about what we've seen so far, capability wise and the smooth operation of offloading.
Ezra Uzi Yemin
Let me give you some color on the trading side of this, if you will, not the operation. Obviously, as we look forward, we're talking about 105,000 barrels that will be at very, very good price compared to the market.
The remaining 35 will be a combination of different crudes, including the Canadian heavy, depends on pricing. So the fact that we're increasing our fleet, and just let me give you a color.
A year ago when we started, we had a fleet of 50 cars. Today we are with a fleet of 500 cars.
So we should expect bigger and higher volumes in the near future as well as 2014 and '16.
Robert Kessler - Tudor, Pickering & Holt
Do you have more cars on order and roughly what…?
Ezra Uzi Yemin
Our goal, and there's no reason to believe that we won't get there, is to increase our cars by 100 every quarter. And we started that a year ago and we are on track to have 100 every quarter.
Robert Kessler - Tudor, Pickering & Holt
Sorry, last couple from me on the Canadian heavy. One is, are you getting pure bitumen, are you getting enough access that is to the pre-diluted bitumen when you're picking it up in Canada?
And then the other side of that question is, is there a possibility for you to take diluent up with you on the return trip?
Frederec Green
The answer to the first question is yes, we're actually loading and receiving undiluted bitumen, so it's anywhere from 12 to 15 gravity and material. And we are looking at the possibility of returning diluent.
But for us, that material has higher value going into the gasoline pool with the $30 gas crack.
Robert Kessler - Tudor, Pickering & Holt
Okay. Thank you very much.
Ezra Uzi Yemin
Thank you.
Operator
Your next question comes from the line of Evan Calio with Morgan Stanley.
Evan Calio - Morgan Stanley
Hi, guys. How are you doing?
El Dorado, a few follow-up questions on rail, exciting topic. When you discuss your ability to take heavy -- remind me what's your maximum heavy refining appetite assuming it was available and your price incented?
Frederec Green
That will vary quite a bit. The El Dorado refinery has got a lot of flexibility.
It's designed to run in average crude slate of anywhere from 26 to 40 gravity. So if you're bringing in 12 gravity material and you offset it with WTI or WTS from West Texas, you can run quite a bit.
So it just becomes blending economics.
Evan Calio - Morgan Stanley
But I guess I'm saying is it would exceed if you went full -- you talked about a 12,000 barrel a day heavy I guess due to the slower time to unload versus 25 light. You could utilize 12,000 in heavy?
Frederec Green
Absolutely.
Evan Calio - Morgan Stanley
Great. And what's your landed cost for CS?
Ezra Uzi Yemin
Well, obviously, we don't want to discuss it too much because this is in negotiation on a monthly basis. I'm just going to mention to you that the fact that we're increasing our fleet gives -- as you know and I saw your grade note, that increases our advantage by $8 to $12 if we own the cars.
So that's the reason we are rushing into this buying mode of more cars.
Evan Calio - Morgan Stanley
Do you own cars or lease cars?
Ezra Uzi Yemin
A combination.
Evan Calio - Morgan Stanley
Do you…
Ezra Uzi Yemin
When I say lease, we still pay monthly lease but we control it. It's not delivered.
Evan Calio - Morgan Stanley
Right. I mean do you see greater ability to buy and I guess it relates to kind of all these assets, move that asset into your MLP?
Ezra Uzi Yemin
Absolutely.
Evan Calio - Morgan Stanley
Right. Can you remind me what are you spending in 2013 CapEx on rail associated assets?
Ezra Uzi Yemin
I don't remember that number off the top of my head. Do you remember it, Assi?
Assi Ginzburg
I don't remember.
Ezra Uzi Yemin
You can follow-up with Assi later.
Evan Calio - Morgan Stanley
Okay, that's fair. And then maybe one last, if I could.
On the light rail side kind of a similar to your $8 to $12 number, you mentioned transportation costs, you mentioned three areas like you go for Cushing and Bakken. Can you kind of give me a number so I can kind of understand what the improved profitability might be?
Ezra Uzi Yemin
It's actually improving quite a bit because of this simple reason that more and more we're moving unit trends. But please remember this is something that we will improve every quarter and we don't want to discuss it too much in detail.
Part of our great number quarter after quarter that we feel these are great numbers is we come each time and improve our situation with our vendors.
Evan Calio - Morgan Stanley
Well, that's good stuff. I'll leave it there for somebody else.
Thank you.
Ezra Uzi Yemin
Thank you, Evan.
Operator
Your next question comes from the line of Jeff Dietert with Simmons.
Jeff Dietert - Simmons International
Good morning.
Ezra Uzi Yemin
Good morning, Jeff.
Jeff Dietert - Simmons International
This is going to be a favorite topic this morning, but perhaps for Fred with the new Canadian heavy and bitumen which were not traditional feedstocks for El Dorado, can you help educate me on the yield differences for those crudes and your level of confidence that you're going to be able to run the level of WCS or bitumen that you talked about?
Frederec Green
The bitumen itself is a very high percentage of asphalt as you can imagine being 12 to 15 API. In the past we have run heavier crude oil grades at El Dorado, including some that were received into the Gulf Coast as imports but was also in the 12 to 15 API range.
So experience wise, I don't see an issue.
Jeff Dietert - Simmons International
There are no contaminants or no variables in the crude that are unique relative to things you've used previously?
Frederec Green
No. And in fact when we're purchasing the bitumens out of Canada, we do sampling and analysis to make sure we're not buying some of the higher acid grades of heavy bitumen.
So we have restrictions and quality requirements on what we buy.
Jeff Dietert - Simmons International
So is it going to make more sense to run bitumen in the summer months during asphalt season and maybe the Western Canadian select type crudes throughout the year?
Frederec Green
Certainly it makes more sense on the bitumen in the summer when we're in maximum asphalt mode and it's just going to depend on delivered price versus the alternatives. With the added pipeline flexibility, we're running our LP model on a daily basis almost looking for the best opportunities and there's a lot of cost advantaged crude out there to be added.
Jeff Dietert - Simmons International
Great. Secondly, with the North Line outage, you shifted and found lower cost feedstocks in other places and so there's advantages to lower cost feeds that you're bringing in.
I was curious if there were cost savings on reduced transportation costs on the North Line as well?
Ezra Uzi Yemin
Fred, why don't you take that as well, because you handle this thing.
Frederec Green
We did have a T&D agreement in place on North Line for utilization and in conjunction with the extended downtime, that T&D was terminated. So we don't have any lingering transportation costs associated with that line.
Jeff Dietert - Simmons International
Thanks for your comments.
Operator
Your next question comes from the line of Paul Cheng with Barclays.
Paul Cheng - Barclays Capital
Hi, gentlemen. Good morning.
Ezra Uzi Yemin
Good morning.
Paul Cheng - Barclays Capital
A number of -- hopefully a quick question, maybe -- can you give us that -- the extra profit that you make by the rail operation comparing to the other option in the fourth quarter and also if you can give us some kind of idea that -- let's assume that if we actually have all the infrastructure, all the rail capacity in place as it is assumed that by say that today actually, there's September 31, there's June 30 and you actually have all those facilities available and what is the incremental benefit in the first quarter that may look like?
Ezra Uzi Yemin
Great question, Paul. Thanks for the question.
There are different components. I have one number that we -- it was calculated and Fred mentioned [DHT] and people looking at it.
Had we had the Midland in place for the fourth quarter or the Midland that we're going to have in April-May in place during the fourth quarter, that number or the number you see in front of yourself pre-tax would have been higher by $51 million. So we took the agreement of April-May and put it just in Midland thing, and put it on top of the fourth quarter numbers, we are increasing our pre-tax income by $51 million for that quarter.
Second, with the rail activity, as you can imagine more and more cars coming our way and if we look at owning our cars, every barrel has an advantage of $8 to $12 versus delivered barrels. So we probably have, and as we've said, we want to increase it by 100 cars every quarter, so that's on top of the $51 million.
I hope it answered your question.
Paul Cheng - Barclays Capital
Do you have a number that how much is the benefit that you gain in the fourth quarter from the rail operation?
Ezra Uzi Yemin
I'm sure we can calculate that. I don't have it in front of me.
Assi, do you think we have it?
Assi Ginzburg
We know that we bought most of the crude oil and it fits down below (inaudible). So the alternative for (inaudible) was to run in the left because that's the only crude that was historically available for us in the winter coming from the Gulf having the rail facilities and we went close to 18,000 barrels a day for the quarter.
Then one can calculate what was the benefit, and it was significant as you can see.
Ezra Uzi Yemin
Now one thing, Paul, please remember, we had 300 cars that we used to own during that quarter. Now we're running 500.
And the difference is $8 to $12.
Paul Cheng - Barclays Capital
Okay. And I think you mentioned that WTI Cushing to Midland depends solely in the fourth quarter, your realization is $3.25.
Did I catch it correct?
Ezra Uzi Yemin
That is correct, $3.50.
Paul Cheng - Barclays Capital
$3.50. And what is the first quarter average, because by now that you already know the number.
Ezra Uzi Yemin
I think we have it. Hold on for a second, we'll give you that number.
Keith Johnson
Paul, it's Keith. In the first quarter when the spreads increased between WTI Midland, WTI Cushing, it looks like it averaged about $7.80.
Paul Cheng - Barclays Capital
$7.80. That is your -- this is based on the delivery, right?
Keith Johnson
No, just looking at the market kind of the August numbers for the period it's in.
Danny Norris
Before pipeline tariffs.
Keith Johnson
That's right.
Paul Cheng - Barclays Capital
So are we comparing apples-to-apples because the 3.50 I thought just your realized…?
Ezra Uzi Yemin
No. We are very close to the market $0.10 here and $0.10 there, because we usually buy it ratably from Midland.
So you can assume apples-to-apples 3.55 to 7.80.
Paul Cheng - Barclays Capital
Okay, good. And do you have the inventory market value in excess of both that you can share?
Ezra Uzi Yemin
I think we have it honestly in the K. While they are looking, why don't you complete your -- do you have it?
Keith Johnson
It's 41 million but I'll check it…
Ezra Uzi Yemin
We'll check but we think it's 41.
Paul Cheng - Barclays Capital
On hedging, going forward how should we look at hedging for you guys?
Ezra Uzi Yemin
As we said, it's not going to be too much. We had some hedging for the first quarter, fourth quarter.
It's very close to breakeven, $1 million here, $1 million there, nothing that we need to [move].
Paul Cheng - Barclays Capital
Right. So I think more importantly is why even bother to hedge going forward?
Ezra Uzi Yemin
It's really hard to explain that with the situation today because every time thinks, oh, I'm going to catch the market, the market keeps moving higher. You bring up a great point.
Paul Cheng - Barclays Capital
Okay. And maybe just for [Mark], do you guys have the (inaudible) with the current format by quarter go back to the last two years?
Danny Norris
Right now, as you can see, we have restated the annual number and we did not provide guidance for historical by quarter. We may decide to do so in a different way, but at this point we don't have that information.
Paul Cheng - Barclays Capital
Okay. And then a final one.
Fred, what's the turnaround activity for 2013?
Frederec Green
The only turnaround activity in 2013 is at Tyler. We're going to do the alky unit in October once we get out of this summer, vapor pressure season and get to a point we can blend that alky feed into the gasoline pool.
We just wanted to take that unit off the table for the larger refinery turnaround just to reduce the complexity.
Paul Cheng - Barclays Capital
How long is that going to be?
Frederec Green
It's three to four weeks.
Paul Cheng - Barclays Capital
Three to four. And you say it's August or October?
October, right?
Frederec Green
October.
Paul Cheng - Barclays Capital
October. And so is there any reason in the first quarter that we should assume your utilization may not going to be running pretty close to the current capacity in Tyler around 60 and the rate of about 80?
Ezra Uzi Yemin
Well, obviously first quarter as we come off January, we usually take advantage of two to three days a here, two to three days there (inaudible) because that's the time that we have inventory. But it doesn't need to be too material different than what happened in the past.
Paul Cheng - Barclays Capital
Right. So let me get this.
First half of the year that we should be able to run, I mean with some minor maintenance work, but you should be running pretty close to your maximum utilization rate is it?
Unidentified Corporate Participant
Paul, it's (inaudible). I'll give that.
The El Dorado refinery in January and February still didn't have access to almost any Gulf Coast crude and was still somehow restricted by the amount of crude we were able to get from added sources. So when you look at the El Dorado refinery crude, it probably should be similar to Q4.
Paul Cheng - Barclays Capital
I see. And in the second quarter, you should be -- with the increase in the well, you should be able to expect this in crude, you said?
Unidentified Corporate Participant
The combination of the increased rail facility, the fact that Exxon's North Line is up basically from last week and the increased connection to WTI Midland crude should allow us in the second quarter to run very close to capacity at both refineries.
Paul Cheng - Barclays Capital
Okay. Thank you.
Operator
Your next question comes from the line of Blake Fernandez with Howard Weil.
Blake Fernandez - Howard Weil
Good morning. A question for you on the Midland Cushing pricing.
Obviously, we've seen the gap relevant to WTI come in and I'm just curious, I mean obviously we had some refinery downtime. We had some pipelines coming on in the Permian, et cetera.
I just didn't know if you had any thoughts on maybe how we could think about movements going forward there?
Ezra Uzi Yemin
Great question, Blake. Thanks for the question.
Well always, all along, even when we went to $12, we're $0.50 under. We don't think that it should be more than $0.50 under.
One day 01 and another day 1 under, but certainly not 7 under, like we saw two weeks ago, three weeks ago.
Blake Fernandez - Howard Weil
Okay, fair enough. I guess I have a question that somewhat ties in the potential capacity expansion at El Dorado with maybe M&A.
If I'm doing my math correctly, it seems like the cost of adding that incremental distillation capacity is much more attractive than what you could probably get in the M&A market. So, I'm just curious if you could kind of confirm that?
And then maybe anything that would preclude you from moving forward? In other words, I'm assuming is there enough demand locally in order to absorb that product?
Would you have to ship it? And then also does that -- I would assume that's just simply light fleet capacity that would be brought on line?
Ezra Uzi Yemin
Well, it's a combination of many things. I'll give a few comments and then obviously Fred knows this topic much better than I do.
The one thing that we need to remember, we come and we tell the market about our quick-hit projects. Most of these quick-hit projects are projects that are part of this big project of extending El Dorado.
So if you take for example the DHT, the alky compressor, these are all projects that are basically part of the big project of 175 that we mentioned two, three years ago. Part of the turnaround next year will be or part of the turnaround and expansion in 2014 is another $13 million of that big project.
And then I think there are another $10 million of this year. So obviously we see great benefit taking it a piece at a time because we enjoy the returns not at one time, but DHT as Fred mentioned a few million dollars CapEx and then great, great return.
All these projects one thing is very common to them. They had payback of at least a year, some of them even quicker.
So to answer your question, it doesn't make sense right now to do an M&A or to find an asset and pay more than that one year or year and a half. With that being said, only two years ago, the entire El Dorado refinery, besides the local crudes, used to run Gulf Coast crude and foreign crudes.
So we do see other assets in the marketplace that don't take advantage of the differentials in the market as much as they should. So if that opportunity comes up, we will jump all over it and Assi mentioned the [$55] million at the end of the year that we had on our balance sheet.
Fred, do you want to add something to that?
Frederec Green
No.
Ezra Uzi Yemin
Okay. So apparently that's what we have to say about it.
I hope it answers your question, Blake.
Blake Fernandez - Howard Weil
Yeah, that's great. And then the last one for you, it's a little bit of a one-off, it's kind of on the retail side, but I'm just curious.
Within industry and some of the retailers, you're seeing some additional movements on potential CNG and LNG to begin to penetrate the trucking fleet and I'm just curious obviously with your retail presence, have you seen any opportunities? Do you think that's an emerging trend that we should be aware of?
Ezra Uzi Yemin
Well, obviously, we are familiar with the saying. However, we did a little experiment, nothing major to report to the market.
We need to watch this and if it grows, maybe take opportunity of that opportunity in the marketplace.
Blake Fernandez - Howard Weil
Okay. But this doesn't sound like you see that as a material threat on the distillate side of the equation at least at this point, right?
Ezra Uzi Yemin
When you have $10 differential if you own a railcar or not own a railcar, the entire focus of this management team is on the crude differentials and how to make money of this idea and we hope it reflect in the results.
Blake Fernandez - Howard Weil
Fair enough. Thanks.
Operator
Your next question comes from the line of Ben Brownlow with Raymond James.
Ben Brownlow - Raymond James
Congrats, a great quarter. On the retail segment, can you give some color on the demand trends that you're seeing through the -- that you saw through the fourth quarter and into 2013?
Ezra Uzi Yemin
Are you talking about gasoline or merchandise?
Ben Brownlow - Raymond James
Both?
Ezra Uzi Yemin
Gasoline, as we all know, with the extra blending of ethanol is flat. And obviously that's something that is here to stay in our mind.
We don't think that the demand will increase in the short term. In terms of the merchandise, we obviously see the marketplace continuing to improve with one caveat.
At the end of 2012 and early 2013, there was a pullback, as we all see with other retailers, with their behavior. And now it's -- with more confidence coming to the market, people are getting more confident spending but we did see a little dip by the end of the fourth quarter last year and early this year.
Ben Brownlow - Raymond James
That's helpful. And are you seeing any consumers trading up or down within merchandise categories?
And on the cigarette category, are you seeing -- few operators have been seeing an uptick in unit sales there. Are you seeing any improvement in that cigarette category and any data there you have?
Ezra Uzi Yemin
Cigarette is a declining category even if we see an uptick of one month. Long term, our assumption the five years plan we have is that cigarettes will be a minor category within the five to seven years from now.
So you may see an uptick next month or a month ago. But generally speaking, we don't expect this category to grow.
Ben Brownlow - Raymond James
All right. Thank you very much.
Ezra Uzi Yemin
Thank you, Ben.
Operator
Your next question comes from the line of Mark Hastings with Saugatuck.
Mark Hastings - Saugatuck Energy
You mentioned you're getting 100 new railcars a month. Are these railcars, are they coiled heated cars, how are you operating?
How are you moving the bitumen, et cetera?
Frederec Green
The 100 railcars was on a quarterly basis.
Mark Hastings - Saugatuck Energy
Got it.
Frederec Green
And what we're receiving is a combination typically of some coil cars, some general purpose cars. But obviously all of the bitumen that we bring in is in coil cars.
And we had a fair amount of those in our fleet already because before the crude by rail, initially we were using those railcars as part of our asphalt transportation.
Mark Hastings - Saugatuck Energy
Okay. Is there much of a process in converting the cars to halt asphalt versus hauling heavy viscous crudes?
Frederec Green
No. I mean the coiled cars are designed to handle the hot higher viscosity material and really all we had were maybe some fittings or welding on the cars themselves just to match up with the loading facilities.
Mark Hastings - Saugatuck Energy
Okay, great. Thank you very much.
Ezra Uzi Yemin
Thank you.
Operator
Sir, we have no further questions in the queue at this time. Are there any closing remarks.
Ezra Uzi Yemin
Absolutely. Thank you, Brent.
Obviously this was a wonderful year. 2012 ended with $4.57 for the year and 2013 is fixing to be another wonderful year.
Great start and obviously we are very excited with the crude placed between Midland and railcars on top of the new arm that we call it the new baby, our logistics or the MLP. I would like to thank investors, shareholders, employees, my colleagues here for a wonderful year.
We'll talk to you soon. Thank you.
Operator
Thank you. This concludes today's conference call.
You may now disconnect.