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Executives

Kristine Boyd - Manager, IR

James R. Gibbs - President and CEO

Doug Aron - VP, Corporate Finance

Paul Eisman - EVP, Refining & Marketing Operations

Michael C. Jennings - EVP and CFO

Nancy J. Zupan - VP, Controller

Analysts

Paul Cheng - Barclays Capital

Paul Sankey - Deutsche Bank

Chi Chow - Tristone Capital

Daniel Burke - Johnson Rice

Erik Mielke - Merrill Lynch

Mark Flannery - Credit Suisse First Boston

Kenneth Pounds - Nutmeg Securities

Jacques Rousseau - Back Bay Research

Frontier Oil Corporation (FTO) Q3 FY08 Earnings Call November 6, 2008 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Q3 Earnings Call hosted by Frontier Oil Corporation. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. [Operator Instructions]. As a reminder, today's call is being recorded. I would now like to introduce your host for today's conference call, Manager of Investor Relations, Ms. Kristine Boyd. Please go ahead.

Kristine Boyd - Manager, Investor Relations

Thank you, Anthony. Good morning and thanks to all of you who are joining us this morning for our third quarter earnings call.

Before we get started, I would like to read our Safe Harbor statement. The primary purpose of this conference call is to describe the assets, operations and certain current and historical financial conditions associated with Frontier Oil Corporation. This information and associated comments made during the course of this conference call may include forward-looking statements concerning the company. These may include statements of plans and objectives for future operations, statements of future economic performance or assumptions or estimates. The accuracy of these forward-looking statements is subject to a wide range of business risks and changes in circumstances that are described in the company's reports that are filed from time to time with the Securities and Exchange Commission. Actual results and outcomes often differ from expectations.

I would now like to turn our call over to our Chairman, President and CEO, Jim Gibbs.

James R. Gibbs - President and Chief Executive Officer

Good morning. Welcome to our call. We did have a good quarter and I am here to tell you all about it. We did have earnings this quarter, about $72 million. That's equivalent to about $0.70 a share, which is... sequentially, that's higher than both our first and second quarters.

Embedded in that is a FIFO loss of about $0.75 a share and a hedging gain of about $0.62 a share. So when you net all those up, it comes in roughly as an approximation of about $0.83, which is about in line with I think your expectations.

For the nine months, we had net income of 178 million; that's 1.71 a share. We had a FIFO loss of $0.85 on that and... pardon me, a FIFO gain of $0.85 and a hedging loss of 24. So when you net those all out, that's about $1.10 per share.

Probably more important in this environment, the current environment is what happened on cash flow. I am pleased to announce that our net cash flow from operations was in excess of $100 million for the quarter. And we invested about $45 million, so our free cash was $55 million. It's nice to have free cash.

We also have a bond offering in September which was successful at a good rate. That netted us about $197 million. So as a result of all that activity, we ended the quarter with $464 million worth of cash on our books. Doug Aron tells me he is taking real good care of it as well.

For the nine months, we had net cash from operations of about $222 million. Our investing activities was about $168 million. So we had free cash for the six months of... pardon me, the nine months of $53 million.

Our operations were generally very good. Our operating costs are coming down at both plants and continue to come down in the fourth quarter as well. I think we had some interesting highlights. Our combined crude charge for the quarter was about 174,000 barrels, which is about 2800 barrels... 2700 barrels more than this time the third quarter of 2007. And our... but our yields have improved dramatically. Of that 174,000 barrels a day, our gasoline increased by about 450 barrels a day. But more importantly, our distillate yield was up more than 11,000 barrels per day.

We could have improved on these... this throughput. But we encountered some fairly mediocre crack spreads on gasoline in July and then as well as August. First part of July, all of July, a little bit of August, we reduced crude rates.

In September, we had much better margins as a result largely of the hurricane. So we ran hard at both plans. And we also had a 10 day coker shutdown in El Dorado in August, and that was to tie in our revamp there. I think we have some... of note, just to show you how good the quarter went production wise, we had 15 production records at both of those two plants. I think probably the most important certainly [ph] would be the crude rate in El Dorado where we established 127,000 barrel a day monthly crude rate. Along with that, a new record of 143,600 barrels of total input to the plant. And we were ran the plant in September on a daily basis of in excess of 130,000 barrels per day of crude charge.

So that plant is really coming on. The staff at both plants have done an excellent job as well as our operators.

Also at El Dorado, we had distillate production that set a record of about 57,400 barrels a day on a monthly basis and about 52,300 barrels a day on a quarterly basis. Those numbers should come up. We're currently getting about 60,000 barrels a day of diesel plus out of production at that plant.

At Cheyenne, our coker has been fairly well debugged now. We established a record there at running the coker at about 11,600 barrels a day, or a quarterly record. And on a daily basis record, about 13,800. But we've run since then the coker at a rate of about 15... 14,500 barrels per day on several occasions. So the operators there have really got the bugs worked out of that really operating well, have done a great job.

CapEx. I guess everyone is talking about CapEx during their conference calls; we'll do the same thing as well. Our third quarter spending was about $45 million cash wise. We expect our 2008 CapEx to come in in the neighborhood of $240 million. That's about 20 to $30 million than our second quarter call, and what we've done is just trimmed out a lot of things that we can differ. We are not exiting out anything; we are just spreading it out over the next two or three years. Our 2009 CapEx estimate is about $165 million. Again, we've delayed a lot of expenditures... pardon me, a lot of capital expenditures that are non-strategic. But we have not taken out anything important in our strategic capital expenditures or our safety environmental projects.

Along those lines, we finished up the coke drum replacement in August and they came in right on budget, maybe just a little bit less. As far as the ones that are in progress, we have a gas oil hydrotreater and cat revamp and a flue gas scrubber going in in El Dorado. The gas oil hydrotreater revamp is about a $82 million project. We have spent $24 million to date, expecting to spend $8 million in the fourth quarter and $50 million in 2009. That project is on time and on budget.

We also have the cat revamp. We have actually trimmed a little more of the costs out of that. We are looking now at a $27 million project that. That will be spent almost entirely in 2009.

We did have a larger project. We just delayed the biggest part of that, which is a vapor recovery revamp. We'll do that at the next turnaround. That... again, that project is on time and on budget and then we have a flue gas scrubber, which is going to be done about the same time, fall 2009. $34 million project, we have $13 million to date and will spend $6 million in the fourth quarter and $15 million in 2009. The project again on schedule and on budget.

And lastly, I would like to talk about the balance sheet. We are proud of it. It's really a strong balance sheet which will give us a lot of flexibility. We have about again $464 million worth of cash on our books. We have a $500 million revolver. We have none drawn on it. We have long-term debt of $347 million and our net debt to cap of minus 11.3%.

One thing you might focus on is we have net working capital of $724 million. And that's approximately $7 per share. So I guess gives us a lot of flexibility, but more guarantee that we're going to be around a long time. We have a lot of staying power with that type of balance sheet, particularly in light of the fact that we fairly consistently generate free cash and we are very cautious about what we do it.

Business wise, the business is mediocre as far as gasoline is concerned. There is no crack spread on gasoline. It varies from barely positive to barely negative, That's on WTI. We are making all of our money on diesel, and that market has held up quite well, and on the differentials. It's got a little thin in the third quarter, but now they've recovered areas where more customers are seeing them. So we are doing pretty much what we did in July and the first of August. We are filling up our coker and we are filling up our diesel treaters and we are filling up our sulfur tray and we are trying to find any incremental barrels that make sense, but not many of those around.

So that's what we are up to. I think we are... operationally, we'll have a good quarter. As far as we are concerned, you need to keep the eye on the price of crude, because the falling crude prices will typically get us some fairly significant FIFO losses. But operationally, on the other basis, we are doing quite well.

So Anthony, with that, we'll just open it up for questions and see what is on everybody's mind.

Question And Answer

Operator

Absolutely. [Operator Instructions]. We'll take our first question from Paul Cheng at Barclays Capital.

James R. Gibbs - President and Chief Executive Officer

Paul, before you start --

Paul Cheng - Barclays Capital

Hey, how are you doing?

James R. Gibbs - President and Chief Executive Officer

Fine. Before you start, you can ask as many questions as you want.

Paul Cheng - Barclays Capital

Oh, thank you.

James R. Gibbs - President and Chief Executive Officer

You're welcome.

Paul Cheng - Barclays Capital

You are so kind. I think that generally in the past, you guys have been very generous to share with us what is the margin look by facility between gasoline, diesel and light heavy discount. So can you do that?

James R. Gibbs - President and Chief Executive Officer

Yes, I think, yes.

Paul Cheng - Barclays Capital

What is the October month and maybe then what is currently that they are doing?

James R. Gibbs - President and Chief Executive Officer

Well Mr. Aron is loaded for bear on that question.

Doug Aron - Vice President, Corporate Finance

Okay, Paul. October, we saw the month start out very strongly. As Jim mentioned, September sort of ended after we saw strength from the hurricanes on Gulf Coast and sort of started with a bang, ended with the whimper. Our gasoline cracks for the month of October were $8.31 at Cheyenne and just under $1 in El Dorado. On diesel, we saw those at $31.61 in the Rockies or for the Cheyenne refinery and at about $23.25 in El Dorado.

As I said, that month of October ended pretty weakly and we started to see that carry over into the month of October, particularly on gasoline where the month to date average on gasoline in the Rockies is about a negative $2.75 and month to date average in the mid continent about a negative $6 currently. In terms of diesel, as Jim mentioned, still very strong. We are seeing about a $25 diesel crack in the Rockies and about a $21 diesel crack in the mid continent.

Paul Cheng - Barclays Capital

How about, Doug, the light heavy discount, the way how you guys define in Cheyenne and El Dorado?

Doug Aron - Vice President, Corporate Finance

We are seeing, Paul, right now about $22 off in terms of the light heavy discount. That's generally more described for our Cheyenne refinery, which is significant if you consider that as a percentage of WTI, compared to where we saw that through the summer when TI was double where it is now and West Texas sour has started to trade in the 5 to $6 off is the most recent quote.

Paul Cheng - Barclays Capital

Sorry, I just wanted to make sure that we are talking about apples to apples, the third quarter, the Cheyenne light heavy discount you are reporting is about $13.90. Is the $23 in the same definition as that 13.90 or there is a different definition?

Doug Aron - Vice President, Corporate Finance

Paul, I think what we reported is an actual late in crude oil price. I would actually defer to Nancy on exactly what that number is. But I think what we're seeing is more of a quoted price out of Canada than actually our late in crude oil cost.

Paul Cheng - Barclays Capital

Okay.

Unidentified Company Representative

The important difference being transportation, Paul, of --

Paul Cheng - Barclays Capital

Sure. So I mean --

Unidentified Company Representative

$2.5 in Cheyenne and $3 or so at El Dorado.

Paul Cheng - Barclays Capital

Right. So if Nancy that can... maybe opting with that [ph] remind me what may be on a same definition that the number may look like? And also Doug, can you give us some idea that how the operating run rate may look like in the fourth quarter?

Doug Aron - Vice President, Corporate Finance

I think Paul is probably better equipped for that.

Paul Eisman - Executive Vice President, Refining & Marketing Operations

Yes, I have got that. And I'll tell you the numbers that we're currently planning to. I will also tell that we're continually reevaluating these numbers as crack spreads change. But our correct plan has us at El Dorado at about 124,000 in crude, 139,000 of total feedstock and at Cheyenne of nearly 45 of crude and 48 of total feedstock.

Paul Cheng - Barclays Capital

Okay, perfect. And Jim, is there any... I guess that you talked about the CapEx for 2009, $165 million. If we really want to look at say what is the sustainable or minimum requirement for CapEx for next year, what kind of number that you may project that? What is the project you already commit yet? The project you already commit, you really cannot back out, what is the minimum you have to spend for next year?

James R. Gibbs - President and Chief Executive Officer

It's about 95 million, I think.

Paul Cheng - Barclays Capital

95 million.

Doug Aron - Vice President, Corporate Finance

We are signed up for about 100 million already, Paul, and we have another 10 or so that we would consider to be one-time process safety management operator shelters and such, leaving sort of 50 to 55 of maintenance level of capital expenditure. And I think if you ask us, where we can run these plants, it would be a number like that. And that is the case for 2009.

Paul Cheng - Barclays Capital

Okay. A final one, Jim, since you guys are one of the few company actually using FIFO and with the oil price start out the year at say 96 or 100 and now that dropped down to 60 any plan to convert yourself into LIFO?

James R. Gibbs - President and Chief Executive Officer

We are looking at, quite often... I'll just be honest with you. We did it again in the summer, because of the tax benefit. But that's reversed itself. We don't have the tax, Paul, now that we had then because of the LIFO loss. And since everyone is probably going to have to shift to FIFO anyway when we'll all have to go to International Financial Standards as opposed to GAAP, U.S. GAAP, we'd just be switching on and switching back. So we try to examine the benefit of it and be objective as we can. But we haven't quite gotten to the point where we want to switch and does give us indigestion, I'm telling you. But we are probably... everyone's going to have the same indigestion there is about two years anyway.

Paul Cheng - Barclays Capital

I see. Just a final question then. If your inventory level now is as low as you think that you sustain or that there is more room for you to bring down your inventory?

James R. Gibbs - President and Chief Executive Officer

No, we have a little bit less, but we are growing out inventory as fast as we can. But we don't have any... we don't have much excess inventory on what we consider to be our standards now... I mean our standard operating level. We probably have I'm going to guess maybe 100,000 barrels in excess of that in the entire system and will have that down to less than minimum here within three weeks.

Paul Cheng - Barclays Capital

Very good, thank you.

James R. Gibbs - President and Chief Executive Officer

Okay. You're welcome. Paul, I want to tell you one more thing. The benefit of this... of our cokers, the revamp and El Dorado and the revamp at Cheyenne I don't think can be minimalized here because what it's allowed us to do essentially is sell no asphalt unless somebody wants to buy it in Cheyenne, and the same situation in El Dorado. We are producing no asphalt now. We are converting that into light products. And that market has collapsed. I have heard some numbers about $600 a ton thrown around and the market is not $600 a ton in the mid con or the Rockies; it's more like 150 to 250 a ton. So if we were having to sell asphalt now, we probably couldn't at any type of a breakeven value going forward the summer, there is simply no winter fill because the biggest buyers, they have all gone bankrupt and because there is just no place to put it and no place to move it. So it's been real benefit us and really a profit maker for us as well. We're glad we've got those projects there.

Paul Cheng - Barclays Capital

Thank you.

James R. Gibbs - President and Chief Executive Officer

You're welcome.

Operator

We'll take our next question from Paul Sankey at Deutsche Bank.

Paul Sankey - Deutsche Bank

Hi guys.

James R. Gibbs - President and Chief Executive Officer

Good morning, Paul.

Paul Sankey - Deutsche Bank

Jim, just... how are you? Just following up on the asphalt thing, what you're saying basically is there really isn't any potential for asphalt to sustain high margins just because if ever the margins were high enough, you would just make more of it, right?

James R. Gibbs - President and Chief Executive Officer

That's right. But the market has just collapsed and... for the winter fill.

Paul Sankey - Deutsche Bank

Okay.

Unidentified Company Representative

50% of the winter fill storage, Paul.

Paul Sankey - Deutsche Bank

Got you. In general, gentlemen, the way you're setting up the balance sheet and everything seems like you're really bunkering down here. How do you think this is going to play out over the next year or two? I mean we still have high levels of imports relatively I guess given gasoline cracks for example. Distillate is holding up. Do you expect that to get the full --

James R. Gibbs - President and Chief Executive Officer

Just go back to your economic forecast: when the economy improves, our markets will improve. It won't improve until the economy... worldwide economy, and particularly the U.S. economy improves. This business, whatever you say, is all very, very sensitive to the U.S. economy. And you are right. We are very, very cautious. 64 years old and I have worked through about four of these cycles. And they can get really, really mean. And there is not much margin of error. So you just have to be very cautious of what you do and assume the worst. And you get something better, you prepare to take advantage of it, but not to anticipate.

Paul Sankey - Deutsche Bank

Can you just make it quite clear why you raised debt? I think there are some technical reasons for that as well as the obvious ones.

James R. Gibbs - President and Chief Executive Officer

That's right. We had the expectation that crude was going to stay somewhere around $120, $125 a barrel. And we had... that had caused us to increase our expectations of working capital by about $250 million. So rather than just fight the ups and downs and be in and out of our revolver, we decided to go ahead and seek permit financing for that $200 million increment. There is or about $225 million or $255 million worth of permit increase and working capital requirements. That's inventory and receivables at about $125 oil price. So we went ahead and financed that out, took care of that, got very, very liquid, so we have flexibility to do what we want and continue our capital program through 2009 and be ready to do something else. So if we are wrong, we can go back and buy those notes back out in the open market. If we are right, we have established a great big insurance policy there, which we don't intend to liquidate.

Paul Sankey - Deutsche Bank

Yes, it's a pain to raise the revolver's ceiling, right?

James R. Gibbs - President and Chief Executive Officer

Yes, and you know the banks... you have to be careful who is in the revolver right now because the financial system including the banks is going through its own state of problems [ph]. I think all our banks are good and solid banks, but you have to... you don't want to rely on that sucker right now to the entire limit because maybe some of the banks can't perform. I think we were very selective and very lucky. We've got real good solid banks on that.

Paul Sankey - Deutsche Bank

You seem to be saying that you stuffed the cash in Doug's mattress.

James R. Gibbs - President and Chief Executive Officer

My mattress.

Paul Sankey - Deutsche Bank

Okay. And then finally on demand, the old question is some people have said lower prices; you've seen a bounce back. I guess distillate is still strong. Just anything you could add on that and I'll leave it there. Thanks.

James R. Gibbs - President and Chief Executive Officer

Still strong. We're not going to count on it. We're going to take advantage of it when we can. But our budget doesn't call for $20 distillate cracks next year.

Paul Sankey - Deutsche Bank

Okay. Thanks.

James R. Gibbs - President and Chief Executive Officer

You're welcome, Paul.

Operator

And we'll take our next question from Chi Chow at Tristone Capital.

Chi Chow - Tristone Capital

Good morning everyone.

James R. Gibbs - President and Chief Executive Officer

Good morning Chi.

Chi Chow - Tristone Capital

Could you give some comments on your '09 CapEx on the timing of the spending during the course of the year?

James R. Gibbs - President and Chief Executive Officer

I don't know if it's... Paul, do you have any idea what it looks like?

Unidentified Company Representative

The bulk of that spending is geared to our two projects that complete in September and October timeframe of next year. So it should be weighted towards the first three quarters of the year. But otherwise, fairly ratable.

Chi Chow - Tristone Capital

Okay. Great.

James R. Gibbs - President and Chief Executive Officer

A lot of it's going to be done at the turnaround and there is also turnaround capital and capitalized expenses on that. So almost all of the equipment fabrication is going to be done prior to that. But you would always have a lot of cost [ph] when you did the turnaround and do the revamp and tie ins.

Chi Chow - Tristone Capital

The turnaround is included in the 165?

James R. Gibbs - President and Chief Executive Officer

Just the expense portion... no, no.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

The capital expenditure is the actual turnaround spending which we capitalize and amortize through the next three or four years is not included in the 165.

Chi Chow - Tristone Capital

And how much is that, Mike?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Nancy, do you have the turnaround spending for El Dorado for next year?

Nancy J. Zupan - Vice President, Controller

I am sorry, I don't have that number with me. I can get it for you, but I don't have it with me today.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

She will have to follow up on that.

Chi Chow - Tristone Capital

That's fine. I have one other just kind of broader industry question. We are starting to see a lot of cancellations of cokers and other expansion projects throughout the industry. What are your thoughts on how that's going to impact the Inland and Canadian crude markets going forward?

James R. Gibbs - President and Chief Executive Officer

Well we would like to see all of them cancelled Chi. And those competitors and they compete for crude oil to the extent that they don't have upgrading capacity on crude, there is going to be more barrels for us. We would have been running more barrels right now if we could get some more crude into El Dorado. And I think we've got the capability of picking up another 8000 barrels for that arrangement. So that would help the supply run more... if we had the capability of running more Canadian stuff next year. But that's just sort of a side bar. But to the extent these things get cancelled, there is going to be less upgrading capacity and that helps us just keeps one or two more competitors out of business.

Chi Chow - Tristone Capital

And it seems like we've got some of the I think pipeline expansions coming now from Canada starting next year I think.

James R. Gibbs - President and Chief Executive Officer

That's right.

Chi Chow - Tristone Capital

Do you see the producers cutting back on production or how do you think this balances out?

James R. Gibbs - President and Chief Executive Officer

We have seen nobody cut back on production yet. We've seen some projects spread out a little bit. I think Shell was the most notable on that. But we haven't seen any reduction in production that's affecting the market any. The light heavy in Canada has been spreading back out to the $20 plus range. So that tells me that there is a lot of production out there looking for a home.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Chi, at these gas prices, our understanding of the DSAG D type [ph] operating costs would be incremental operating cost in the 20, $30 range. And if you take sort of 40, $45 WCS number, they are still making money and presumably have incentive to produce.

Chi Chow - Tristone Capital

Okay, thanks a lot.

James R. Gibbs - President and Chief Executive Officer

Thanks Chi.

Nancy J. Zupan - Vice President, Controller

I think I have the answer to the question on the turnaround expense for next year. $22 million is what we're expecting for expense. And then as Mike mentioned, that will be amortized over a three to four year period, depending on which units are... mostly a four year period.

James R. Gibbs - President and Chief Executive Officer

Okay. Thank you very much Nancy.

Nancy J. Zupan - Vice President, Controller

Sure.

Operator

We'll take our next question from Daniel Burke at Johnson Rice.

Daniel Burke - Johnson Rice

Good morning all.

James R. Gibbs - President and Chief Executive Officer

Good morning Danny.

Daniel Burke - Johnson Rice

Jim, I think I've got one just one question left and it actually skates on top of a couple you've already addressed, and maybe lead us back to asphalt and the Canadian situation. But, if we continue to see crude prices under pressure here, that is WTI. Do you think you can continue to see your differentials widen or is that going to be more difficult?

James R. Gibbs - President and Chief Executive Officer

No, I don't think it's going to be more difficult at all. We found out that whenever they reached sort of a peak level, and typically they're related to the flat price of WTI. When they got up to about $100, it just flattened out. And it was... the differential crude price went to 140 at WTI flat price and then the differential stayed about 20 bucks, 22 bucks, 23 bucks. So I don't think that that relationship is very solid now. But it will when it gets much lower than 60 or $70, again, to reduce the differential somewhat.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

I think on top of that, WTI has a Cushing storage facility where there is currently almost 20 million barrels available, meaning that people can look at the contango and the curve which has about 410 million of 12 months and effectively store a barrel at their cost of capita, that's not the case with the regional barrels being produced in North Dakota, Montana, Wyoming. So we see in the near term additional pressure on those barrels relative to WTI and then the same fundamental is probably true of Canada, though, there is clearly more storage on that Enbridge system and a few more outlets by way of Chicago and the Spearhead line to Cushing. But we don't see falling WTI and compressing differentials as likely; it's probably the other way around.

James R. Gibbs - President and Chief Executive Officer

He's talking about WTS sweet spread in the Rockies, not the light heavy; that number is about 10 to $15.

Daniel Burke - Johnson Rice

Okay. So what you mean is it's as much a physical issue, particularly when you get over to the Rockies as it is a crude quality issue?

Unidentified Company Representative

Probably predominantly a physical issue.

Daniel Burke - Johnson Rice

Great, that's it for me. Thank you all.

James R. Gibbs - President and Chief Executive Officer

Good Danny.

Operator

And we will take our next question from Erik Mielke at Merrill Lynch.

Erik Mielke - Merrill Lynch

Yes, good morning. I have another question, so I'll try to keep it brief. Just on the cash balance, just want to make sure that I am... this is 100% clear. We should view that entirely as a safety cushion at this point and not part of your strategic ammunition?

James R. Gibbs - President and Chief Executive Officer

Well, you can consider it as a caution, but you can't fully eliminate it from any type of strategic opportunity, no. So you've got ammunition plus a cushion; it's a good combination.

Erik Mielke - Merrill Lynch

Okay.

James R. Gibbs - President and Chief Executive Officer

Where in South Texas are you from Erik?

Erik Mielke - Merrill Lynch

And on the issue of strategic ammunition and opportunities, given your low valuation currently and the delays in cancellations that we are seeing on various projects, should we expect you to be approached by other people given that you can buy you for a fraction of what it would cost to gain access to these sort of assets and the industry clearly needs them?

James R. Gibbs - President and Chief Executive Officer

Well we are not approaching everyday to be a seller, but we are approaching everyday to be a buyer because there is not many independents left that can do anything exception of one or two of us. I mean they are tapped out. I think there is no way they can raise capital. And the liquidity an issue to us as well. So there is only one or two buyers, potential buyers in the entire universe of independent refiners. Yes, we are approached weekly, but not to be a seller, but to be a buyer. But that doesn't mean that's not going to happen and we're only here to do one thing, and that's make you money.

Erik Mielke - Merrill Lynch

I was thinking more on the lines of upstream participants buying rather than downstream.

James R. Gibbs - President and Chief Executive Officer

Well if that were to happen, it would be more likely to be Canadian upstream and a heavy oil producer, right?

Erik Mielke - Merrill Lynch

Indeed.

James R. Gibbs - President and Chief Executive Officer

I mean heavy oil refiner, right; that's the combination, the heavy oil producer, heavy oil refiner. But no, we're not... we haven't... our telephone lights aren't --

Erik Mielke - Merrill Lynch

Okay.

James R. Gibbs - President and Chief Executive Officer

Burning red today.

Erik Mielke - Merrill Lynch

Good. Thanks for the detailed disclosure as well.

James R. Gibbs - President and Chief Executive Officer

Okay, thank you Erik.

Operator

We'll take our next question from Mark Flannery at Credit Suisse.

Mark Flannery - Credit Suisse First Boston

Hi, yes. I guess the follow on really from that, you're being approached everyday to be a buyer. Is anything catching your eye, or assuming we got to a position in 2009 where asset prices were at a at/or below distressed levels, in theory, what kind of thing would you look to buy should you make that decision?

James R. Gibbs - President and Chief Executive Officer

Mark, good to talk to you, but no, we hadn't. We haven't fallen in love yet. Hadn't any steady dates yet. As a matter of fact, there is a bunch of ugly stuff out there we wouldn't want to take out. So no, we're being very cautious. You know what we like and the opportunity... the likelihood of us being able to do something I think is very small because we only want the kind of assets that nobody wants to sell. We want upgrading capacity, we want good markets and we want a price where we can consistently give you a higher return on your invested capital. So we are very picky. We aren't willing to buy something that we have put a billion dollars into it. We just something this fits right into the system; looks like what we've got and we don't mind taking it to a party.

Mark Flannery - Credit Suisse First Boston

Right. Okay, thank you very much.

James R. Gibbs - President and Chief Executive Officer

Okay.

Operator

We will take our next question from Kenneth Pounds at Nutmeg Securities.

Kenneth Pounds - Nutmeg Securities

Hi, good morning gentlemen. There's been a lot of talk about supply and production. I am little curious about where you see the demand coming back in your market, and people turn around numbers down 6% down 9% and several etcetera down 1 or 2%. How are you seeing those dynamics changing and hopefully improving in your markets?

Unidentified Company Representative

Kenneth, we see this as sort of the front-end of a recession and gasoline and diesel sales volumes tends to go up in the midst of a recession. So how long does this last, I mean your economic crystal ball is probably as good as ours. But history would tell you maybe 6 to 9 months and those figures you quoted in terms of down 6 to 9% I think are real in the geography that we occupy. So we expect that it will be tough sledding for a period of time. But come third quarter, fourth quarter of 2009, we would expect things to be better.

Kenneth Pounds - Nutmeg Securities

Right. I've heard that actually the Wyoming sweet discount is up to $11. You guys buy a lot of that right?

James R. Gibbs - President and Chief Executive Officer

Yes, $15 sometimes. Yes, we buy 8 or 10,000 barrels a day.

Kenneth Pounds - Nutmeg Securities

Alright. Okay.

James R. Gibbs - President and Chief Executive Officer

That's one reason you won't see us running 90 or 100% heavy crude anytime soon is because we actually made more money on the Montana sweet than we can on the last barrel of heavy crude from Canada. That differential is just too good to turn down.

Kenneth Pounds - Nutmeg Securities

Right. Finally, okay, also the drop in the Canadian dollar, is that helped the light heavy with Canada also?

James R. Gibbs - President and Chief Executive Officer

No, not too much. It's all U.S. dollar-based franchise. We still buy all the gas up there on U.S. dollars rather than Canadian dollars.

Kenneth Pounds - Nutmeg Securities

Okay, great.

James R. Gibbs - President and Chief Executive Officer

Maybe a lot less feisty than they used to be, though.

Kenneth Pounds - Nutmeg Securities

Great. All right, I'll let someone else get on. Thank you.

James R. Gibbs - President and Chief Executive Officer

Okay, Ken. Thanks for calling.

Operator

[Operator Instructions]. We'll take our next question from Jacques Rousseau at Back Bay Research.

Jacques Rousseau - Back Bay Research

Good morning guys.

James R. Gibbs - President and Chief Executive Officer

Good morning.

Unidentified Company Representative

Hey Jacques.

Jacques Rousseau - Back Bay Research

Hey, most of my questions have been answered, just a couple of minor things. I noticed the tax rate was a little low this quarter, about 29%. What's kind of a good run rate or I guess why was it lower and what's kind of a good run rate we should be using?

James R. Gibbs - President and Chief Executive Officer

Can we let Nancy Zupan to answer that question? Nancy is really a wonderful Controller, but she is also a very scheming, conniving and she got a few tax credits out of Kansas that are again very beneficial to us. Nancy, you want to take the stage on this one since you're responsible for all this stuff?

Nancy J. Zupan - Vice President, Controller

Sure. Basically, the biggest contributor to our decreased tax rate as what Jim just referred is income expansion credits that we were able to achieve in Kansas and basically what where we run a may be average of 4 to 4.2% state tax rate, what these credits that were going through this year we're seeing actually a negative state tax about 6.7%... excuse me, with all the other states, it's a negative 2.5% for the year. In addition to that, we also on the federal tax basis had some deductions for the Section 199, which reduced our statutory rate by about 1.4%. And then we had some tax contingencies in the third quarter that contributed another reduction of 1% so going forward base of I think through the rest of 2008 will see state tax rate of about reduced level, and then as far as 2009 there will be some additional pay tax credit we get take there will a little bit less then this year, but they will probably in the neighborhood of may be $5 million to $6 million deduction of taxes in as 2009 time period. Does that answer the question?

Jacques Rousseau - Back Bay Research

I guess it does. There is a lot of numbers to add up here. Would you have expectations of what your overall tax rate would be?

Unidentified Company Representative

For which years, Jacques?

Jacques Rousseau - Back Bay Research

I guess 4Q and then next year.

Unidentified Company Representative

Okay. Recognize that what Nancy just gave were tax credits.

Jacques Rousseau - Back Bay Research

Sure.

Unidentified Company Representative

So the actual tax rate is pretty heavily dependent on a level of income. The Section 199 results in about 2% reduction and that traditionally brought us down to about 35% rate. We're going to see another approximately $5 million of Kansas tax credit in the fourth quarter. So, just offset that against taxes payable in your model.

Jacques Rousseau - Back Bay Research

Okay.

Unidentified Company Representative

And then same thing 2009 ratably $5 million or $6 million. And sort of one more plug, I mean you... we've gotten the state of Kansas to significantly help us with these capital projects at the El Dorado refinery and mostly attributable to the work of Nancy and her staff in Denver.

Jacques Rousseau - Back Bay Research

Okay. So take 5 million or 6 million off a rate of about 35%?

Nancy J. Zupan - Vice President, Controller

Yes.

Unidentified Company Representative

Correct.

Jacques Rousseau - Back Bay Research

Okay, great. One other thing, in your other revenue line, it was about $104 million. What else is in that besides the hedging and I guess what's the hedging pre-tax?

Unidentified Company Representative

Almost nothing besides the hedging. The hedging pre-tax is 103,500,000. So the rest is... we tend to sell some rans [ph] and sulfur credits and these types of things. We had a little bit in that line this quarter. But again, the hedging is 99% of it.

Jacques Rousseau - Back Bay Research

Great. Thank you.

James R. Gibbs - President and Chief Executive Officer

Let's go back to tax only a second, Jacques. I think we are going to qualify for the accelerated depreciation on our capital project up in Cheyenne, which is about 112 - 15 million. That should generate about $20 million worth of cash from deferred tax in 2009. So it will be enough to pay bonuses with anyway.

Jacques Rousseau - Back Bay Research

All right. Thank you.

James R. Gibbs - President and Chief Executive Officer

Since we are not going to get any due out of them later [ph].

Operator

[Operator Instructions].

James R. Gibbs - President and Chief Executive Officer

Anthony, I think we are toast.

Operator

I would like to turn the conference back over to you Mr. Gibbs for any additional or closing remarks sir.

James R. Gibbs - President and Chief Executive Officer

Well thanks for calling in. Times aren't real good; they aren't that bad as well. We are working hard for you. If you have any questions, just give us a call, if you're ever in Houston, come on by. Thank you.

Operator

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time and have a wonderful day. .

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Source: Frontier Oil Corp. Q3 2008 Earnings Call Transcript
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