HollyFrontier Corporation announced that its Board of Directors has approved a plan to convert the Cheyenne Refinery to renewable diesel production and to construct a pre-treatment unit (“PTU”) located at the Artesia Refinery. Including the previously announced renewable diesel unit at the Artesia Refinery, HollyFrontier is expected to have a combined capacity to produce over 200 million gallons per year of renewable diesel and pre-treat over 80% of its feedstock. HollyFrontier expects to invest between $650-$750 million in its renewables business, with an expected aggregate internal rate of return of 20-30%.
Mike Jennings, HollyFrontier’s President and Chief Executive Officer, commented, “Demand for renewable diesel, as well as other lower carbon fuels, is growing and taking market share based on both consumer preferences and support from substantial federal and state government incentive programs. This represents an exciting opportunity to enhance both the profitability and environmental footprint of HollyFrontier through organic investment.
“Today’s announcements lay the groundwork for an integrated renewables business at HollyFrontier, including multiple renewable diesel plants with feedstock flexibility. After 86 years as a petroleum refinery, Cheyenne will take on a new challenge. We realize that this decision affects many employees, their families and the community. We are thankful to all of our colleagues in Cheyenne and will work closely with those impacted by this decision.”
Conversion of the Cheyenne Refinery to Renewable Diesel Production
With expected capital spending of $125-$175 million, HollyFrontier intends to repurpose Cheyenne’s current footprint and a portion of its existing assets to produce approximately 90 million gallons per year of renewable diesel. HollyFrontier expects the project will be completed in the first quarter of 2022 and generate an internal rate of return of 20-30%.
Construction of Pre-Treatment Unit at the Artesia Refinery
HollyFrontier also plans to construct a PTU that will process over 80% of the feedstock for both of HollyFrontier’s renewable diesel plants. The PTU is expected to provide feedstock flexibility, mitigating single feedstock risk and generating value through the use of lower carbon intensity feed.
HollyFrontier estimates the capital cost of the PTU to be $175-$225 million and the in-service date to be in the first half of 2022. The PTU has an expected internal rate of return of 10-15% but is intended to protect the returns of HollyFrontier’s renewables business against potential volatility in the feedstock markets.
Petroleum Refining in Cheyenne
The conversion to renewable diesel production will result in HollyFrontier ceasing petroleum refining and reducing the workforce at the Cheyenne Refinery. This decision was primarily based on the expectation that future free cash flow generation in Cheyenne would be challenged due to lower gross margins resulting from the economic impact of the COVID-19 pandemic and compressed crude differentials resulting from dislocations in the crude oil market, coupled with forecasted uncompetitive operating and maintenance costs and the anticipated loss of the Environmental Protection Agency’s small refinery exemption.
Based on the initial review of its long-lived assets, over the second and third quarters of 2020, HollyFrontier expects to record non-cash charges of $225-$275 million for impairment and depreciation charges and $3-$12 million for asset retirement obligations. Additionally, over the next twelve months, HollyFrontier anticipates pre-tax costs of $25-$45 million for decommissioning assets and $5-$7 million for severance obligations and proceeds of $50-$70 million from the liquidation of working capital.
Capital Expenditures Update
In 2020, HollyFrontier expects to maintain its total capital spending guidance of $525-$625 million. For Refining, the company expects to spend between $202-$221 million. This lower range reflects further optimization of refinery capital budgets and lower spending at the Cheyenne Refinery. For Renewables, HollyFrontier expects capital expenditures in 2020 of $150-$180 million, which includes capital costs for the Artesia renewable diesel unit, the Cheyenne conversion and the PTU. There is no change to the $30-$45 million capital spend for Lubricants & Specialty Products or the $85-$110 million for turnarounds & catalysts. Capital expenditures for Holly Energy Partners also remains unchanged at $58-$69 million.