HF Sinclair, the independent energy giant, recently held its Q1 2024 earnings call, offering a glimpse into its performance and future strategies. While analysts buzzed about refining margins and the impact of TMX, a hidden gem within the transcript may have slipped under the radar: a subtle shift in HF Sinclair's approach to its renewable diesel (RD) business that could signal a path to consistent profitability.

Since venturing into the world of RD, HF Sinclair has faced a series of challenges, from operational hiccups to the volatile nature of RINs and LCFS credit prices. The Q1 call, however, hinted at a move away from chasing the ever-shifting sands of credit markets towards a more grounded, operationally-focused strategy.

This strategic pivot, while not explicitly stated, becomes apparent through several key pronouncements during the call. For instance, Tim Go, HF Sinclair's CEO, proudly declared that their RD operations were "not hydrogen limited in the first quarter," a stark contrast to previous quarters where hydrogen availability had constrained production.

Coupled with Steve Ledbetter, EVP of Commercial, highlighting the achievement of "normalized run rate utilization" and "record volumes at the pretreatment unit in Artesia," a picture emerges of a company honing its operational expertise to maximize efficiency within its existing RD infrastructure.

Instead of banking solely on external factors like recovering LCFS credit prices, HF Sinclair appears focused on controlling what they can: production costs, feedstock optimization, and product netbacks. This pragmatic approach, combined with targeted growth capital expenditures, could be the key to finally unlocking sustained profitability in their RD business.

Here's why this shift matters. In previous quarters, the focus on securing advantageous feedstock was often overshadowed by the wild swings in credit prices, leading to inconsistent results. The Q1 call suggests a more balanced approach, with Ledbetter emphasizing their commitment to "accelerating our low CI feedstock runs" while simultaneously "driving our catalyst optimization and OpEx efficiencies."

This focus on operational excellence, combined with strategic feedstock acquisition, forms the bedrock of a sustainable RD business.

The Hypothesis: Sustainable RD Profitability

The hypothesis is this: HF Sinclair, through a combination of operational improvements and smart commercial strategies, is positioning its RD business to break even or achieve slight profitability even at current, depressed RINs and LCFS credit prices.

HF Sinclair's RD Strategy

The numbers support this hypothesis. Ledbetter stated, "at the current RINs and LCFS levels, we believe our business can be breakeven and slightly positive." This marks a significant departure from previous pronouncements and suggests that their operational improvements are finally translating into tangible financial gains.

Renewable Diesel Production & Profitability

Note: Production and EBITDA data for future quarters are hypothetical, representing the potential outcome of HF Sinclair's operational improvements and strategic initiatives.

If HF Sinclair can successfully execute this strategy, they'll be well-positioned to capitalize on any future recovery in credit markets. They'll have built a resilient RD business capable of generating consistent cash flow, regardless of external factors. This, in turn, would significantly bolster their already robust shareholder return strategy.

"Fun Fact: The iconic green dinosaur that graces HF Sinclair's gas stations, known as "Dino," was originally created for the Sinclair Oil Corporation in 1930. Dino quickly became a beloved symbol, representing adventure and the spirit of the open road. Even after decades and multiple mergers, Dino has remained a recognizable and cherished icon, a testament to the power of branding and nostalgia."