Western Refining Q4 2008 Earnings Call Transcript

Mar. 5.09 | About: Western Refining, (WNR)

Western Refining, Inc. (NYSE:WNR)

Q4 2008 Earnings Call

March 05, 2009 10:00 AM ET

Executives

Mark B. Cox - Senior Vice President, Treasurer and Director of Investor Relations

Gary R. Dalke - Chief Financial Officer

Paul L. Foster - President and Chief Executive Officer

Jeff A. Stevens - President

Mark J. Smith - President, Refining and Marketing

Analysts

Vance Shaw - Credit Suisse

Chi Chow - Tristone Capital Inc.

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2008 Western Refining Inc. Earnings Conference Call. My name is Josh, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answering session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to our host for today's call, Treasurer and Director of Investor Relations, Mark Cox. You may proceed, sir.

Mark B. Cox

Thank you, Josh. Good morning, everyone. Thank you for taking the time to listen-in this morning. As always, we appreciate your continued interest in Western Refining. Again, my name is Mark Cox, and I'm the company's Treasurer and Director of Investor Relations.

Joining me today for our call are Paul Foster, our CEO; Gary Dalke, our CFO; Jeff Stevens, our President and COO; Mark Smith, our President of Refining and Marketing and other members of our senior management team. If you need a copy of the earnings release, you may obtain one from our Investor Relations section of our website at wnr.com.

Today on our call, Gary will give a brief overview of our fourth quarter financial results. Paul and Jeff will continue -- will comment related to operations and market conditions and then we'll open the call for your questions.

However, before we proceed, I need to make the following Safe Harbor statement. Today's presentation will contain forward-looking statements, and I incorporate and refer you to forward-looking statement section of our earnings release and most recent filing with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect the ever changing events or circumstances.

In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results which can be found in the press release and on the Investor Relations section of our website.

I'll now turn the call over to Gary.

Gary R. Dalke

Thank you, Mark. As stated in our press release, we reported net earnings of $33.6 million or $0.49 per diluted share for the quarter ended December 31, 2008, which excluded a $46.4 million after-tax non-cash inventory write-down.

For the same period in 2007, the company had a net loss of $25.5 million, or $0.38 per diluted share. Including the inventory adjustment, we had a net loss of $12.8 million or $0.19 per diluted share for the fourth quarter of 2008. The inventory adjustment was necessary because the year-end value of crude oil and finished products at Yorktown declined to a level below the recorded cost of inventories on May 31, 2007, the acquisition date of Giant.

Simply put, on approximately 3.3 million barrels of crude oil and finished product, our average inventory value declined approximately $18.60 per barrel from the date of the acquisition of Giant to year-end 2008. I want to, again, remind you this was a non-cash charge.

Excluding the lower cost for market inventory write-down, the company reported net earnings of $110.6 million or $1.63 per diluted share for the full year of 2008. This compares to net earnings of about $238.6 million or $3.53 per diluted share for 2007, Including the non-cash inventory adjustment, 2008 earnings were $64.2 million or $0.95 per diluted share.

The usual details are included in our press release, but I would like to highlight a few items relating to our fourth quarter 2008 operations.

At El Paso, our throughput and per barrel operating costs were negatively impacted by the planned major maintenance turnaround that lasted approximately 30 days from mid-November to mid-December.

Also, the gross margin at our Yorktown refinery was $1.73 per barrel for the quarter. Excluding the non-cash write-down of inventory included in Yorktown's cost of goods sold, refinery gross margin would have been $11.51 per barrel.

Gross margins improved at our refineries in comparison to the fourth quarter of last year as a result of improved market conditions and lower crude oil costs as we processed a higher percentage of heavy and sour crude in the 2008 quarter than in the prior year period.

Our adjusted EBITDA for the fourth quarter of 2008 was $129 million, a significant increase compared to the prior year level of $12.6 million. The definition of adjusted EBITDA is contained in our earnings release, but essentially it represents earnings before interest, taxes, depreciation, amortization, non-cash lower costs for market adjustments and maintenance turnaround expense.

Total capital expenditures for the 12 months ended December 31, 2008 were $222.3 million, including capitalized interest of $9.9 million. Capital expenditures in 2008 primarily consist of spending at El Paso and Yorktown on low sulfur gasoline projects, as well as other improvement and regulatory projects at our refineries.

Thank you. I'll now turn the call over to Paul.

Paul L. Foster

All right. Thank you, Gary. Let me begin by saying how very proud I am of the improvements we've made in our operations in 2008.

We completed a number of projects at our refineries throughout the year that contributed to our fourth quarter earnings. These improvements are sustainable, and we look forward to our first full year of the resulting financial benefits from these improvements in 2009.

At the Yorktown refinery, we completed construction of our low sulfur gasoline project and subsequently increased the amount of heavy crude oil that we're processing from approximately 61% in the fourth quarter of '07 to 100% of our crude oil throughput currently.

Also, at Yorktown, we reduced our purchased alkylate usage and lowered our transportation costs which should result in a savings of approximately $54 million per year.

At the Four Corners refineries, we renegotiated several crude oil supply agreements, and we've reduced our crude oil costs by approximately $5 per barrel. And at the El Paso refinery, DuPont sulfuric acid regeneration project was completed, which allowed us to raise sour crude runs from approximately 10% to 20% of crude throughput.

After we complete the low sulfur gasoline project in the second quarter of '09, we will have the capability to increase sour crude runs up to approximately 50% of crude oil throughput at El Paso. And even though current market conditions would not support running this level of sour crude, we believe that longer term this flexibility will be very beneficial to us.

In terms of safety and reliability at our refineries, we reduced the injury rate by 65%, reduced environmental incidents by 20%, and experienced minimal unplanned outages in 2008.

Given the number of projects underway at our refineries throughout the year, these accomplishments are outstanding, and I applaud our team for their focus and hard work.

As you know, last year we announced that we were pursuing strategic alternatives, including a potential sale of the Yorktown refinery. While the process remains open, the credit and M&A environment has changed dramatically, and we do not expect the sale to occur in the near term. However, we have continually and significantly improved the performance of Yorktown since we began this process.

As a result of the improvements we've made, it is a more valuable asset to us today and we intend to continue investing capital and making continued improvements at Yorktown.

As you know, we made progress last year with a renegotiation of our credit facilities. We don't have any debt maturity until 2012, and given our results and outlook, we feel very comfortable with our credit facilities covenants for the foreseeable future.

However, this does not change our goal of further enhancing Western's financial flexibility and reducing our debt.

In summary, we have made significant and sustainable improvements to our asset base. This solid asset base, together with our improving financial flexibility, provides the foundation we need to move successfully through this challenging industry period and drive even stronger results as markets recover.

I'd now like to ask Jeff to give us an update on what we're seeing in the markets and in the first quarter of 2009.

Jeff A. Stevens

Thanks Paul. So far in the first quarter of 2009, we've experienced unseasonably strong refinery margins. These strong margins have primarily been the result of tightening product supply in our markets and our lower relative crude oil costs.

In the Southwest, a major turnaround at a competitor's refinery and the bankruptcy of Longhorn Pipeline impacted the supply of finished products into El Paso, Tucson and Phoenix so far in the quarter.

Additionally, West Coast gasoline inventories are tight, and this has also contributed to our refinery margins in the Southwest. In the past several months we have been extremely well positioned in terms of crude oil costs. Storage constraints at Cushing and weak demand for crude oil have reduced the front-month WTI price, while prices in the future months have moved higher resulting in record contango levels.

At the El Paso refinery, we have benefited significantly from contango in the pricing of our crude oil.

In January, our benefit was approximately $3.30 per barrel. In February, it was approximately $5.25 per barrel. And in the month of March, it was approximately $4.75 per barrel.

We have also benefited from the near-term weakness in the WTI crude oil prices at Yorktown and the Four Corners refineries. We don't know how long the market will provide these types of crude oil opportunities, but we remain focused on capturing the benefits while they are available to us.

Before I turn the call back to Paul, I'd like to make a couple of comments about our 2008 financial performance. As we discussed on our last call, we made a decision to move the planned major turnaround at our El Paso refinery from January of 2009 to the middle of the fourth quarter 2008.

Given what I've just highlighted about the first quarter conditions, this was a very good decision. It did, however, impact El Paso's profitability in the fourth quarter. The extension of the turnaround reduced El Paso's contributions to earnings in the quarter. Additionally, due to the acceleration of this turnaround, we were unable to produce and build inventory which is our normal practice prior to a turnaround.

Instead, we had to purchase finished projects to supply our customer base. Throughout the months of November and December, product prices dropped rather dramatically and we booked a loss on the resale of these purchased products. These two items combined reduced earnings on an after-tax basis by approximately $35 million or $0.52 per diluted share in the fourth quarter. However, we feel we have more than made up for that in the first quarter by having the turnaround behind us and running El Paso full.

Throughout 2008, our retail and wholesale groups did an exceptional job in a challenging environment. While many of our largest customers, such as homebuilders, contractors and copper mines have been hit hard by a slowing economy, we managed to profitably grow our business.

In our retail group, we experienced a 3% decline in fuel volumes. The fuel margins increased from $0.14 to $0.22 in the fourth quarter of 2008 compared to the fourth quarter of 2007.

Merchandise sales increased approximately 4% and our merchandise margin remained constant at approximately 27% in the fourth quarter of 2008 compared to the fourth quarter of 2007. The combination of these factors contributed to an increase in operating income from $1.4 million in the fourth quarter of 2007 to $5.3 million in the fourth quarter of 2008.

Our wholesale group also performed well in the fourth quarter of 2008 compared to the same period in 2007. We increased our fuel and lubricant sales and managed to improve our margins on both product lines. These improvements contributed to an increased operating income from $4.1 million in the fourth quarter of 2007 to $7.4 million in the fourth quarter of 2008.

We are pleased with these financial results and our solid operating performance, especially in the current economic climate.

Paul, I'll turn it back over to you.

Paul L. Foster

All right. Thank you, Jeff. As you can tell from Jeff's comments, we are very pleased with what we are seeing in the first quarter, and we currently believe it could be one of our most profitable quarters. Our guidance for the first quarter is as follows.

We expect crude oil throughput at our four refineries to be approximately 206,000 barrels per day during the quarter. We expect total refinery throughput at our four refineries to be approximately 241,000 barrels per day.

In the first quarter, we expect operating costs to be approximately 363 per barrel, at the El Paso refinery; approximately 1023 per barrel at the Four Corners refineries, and approximately 477 per barrel at the Yorktown refinery.

We expect total SG&A in the first quarter to be approximately $29.5 million. Interest expense will be about $30 million, and depreciation and amortization will be $32 million for the quarter.

We expect our tax rate to be 35% for the quarter. We recently completed our capital budgeting process. So we're now in a position to provide CapEx guidance for 2009. We believe that capital expenditures in 2009 will be approximately $155 million. A significant portion of this spending will be for the completion of the low sulfur gasoline unit in El Paso and other regulatory projects.

In summary, we made significant improvements at our facilities in 2008, and we've carried this momentum into 2009.

At Yorktown, our crude slate is composed entirely of lower cost heavy crude oil. This changed to a 100% heavy crude has enabled us to lower our crude costs. It has given us the ability to process third-party blend stocks and intermediates and has significantly increased our flexibility as well as reducing our transportation costs.

We have a capital project plan at Yorktown in the second half of 2009 that will further enhance our crude oil flexibility, and increase our crude processing capacity. At El Paso, after we complete the low-sulfur gasoline project in the second quarter of 2009, we will have the capability to increase our sour crude runs up to approximately 50% of crude oil throughput.

We're proud of what we achieved in 2008 despite the challenging economy. We're optimistic about what we will achieve in 2009.

In closing, I would like to thank our employees throughout the company for their hard work and their dedication to safety. We have a number of projects underway in all of our refineries and safe reliable operations along with environmental stewardship continue to be our top priorities.

I thank you again for listening, and we'd now like to open the call up for questions. Josh, we're ready for questions.

Question-and-Answer Session

Operator

Thank you very much Paul. (Operator Instructions). And our first question will come from the line of Vance Shaw from Credit Suisse. Vance, you may proceed.

Vance Shaw - Credit Suisse

Yes, good morning. First of all, congratulations guys on a very good quarter.

Paul Foster

Thank you.

Vance Shaw - Credit Suisse

I apologize. But I am on the loan side, buy side here at Credit Suisse as well. So I just have couple of sort of fixed income-related questions. Do you guys believe there's going to be excess cash flow under the credit agreements, and so a pay-down in excess of regular scheduled amortization?

Paul Foster

We've gone through that calculation, and we're watching it. We actually don't believe that we're going to have an excess cash flow payment.

Vance Shaw - Credit Suisse

Okay.

Paul Foster

But that calculation is actually made at March 31. And so we really can't be sure of until that date.

Vance Shaw - Credit Suisse

Oh, I got you. Okay, so it was made at the end of the year. Okay thanks. And also you guys mentioned 9.9 million in capitalized interest. I missed whether that was for the full year or for the quarter.

Paul Foster

That was for the full year.

Vance Shaw - Credit Suisse

Okay. And can you guys give us any additional information on what the LC draw was in your revolver? You mentioned that I guess at the end of the year you had 60 million in cash borrowings. I would imagine the LC would have gone down quite a bit from September to December just due to lower oil prices but...

Paul Foster

Vance, now I'll ask, Mark Cox has those numbers in front of him, so.

Mark Cox

Yes Vance. We've seen our LC usage come down really for two reasons. One is you just mentioned lower cost. But we've also been able to talk to some of our crude suppliers and get credit extended back to us. So we've seen some significant improvement in that area as well. As you'll see in the K when it's filed at the end of the year, we had LCs outstanding of $245 million, and we had as you just said borrowings of 60 million.

Vance Shaw - Credit Suisse

And your total availability, Mark, was what, 880, is that right?

Mark Cox

Well the total availability under the two facilities is 880, but we also have the limitation related to what our borrowing base levels is. And again, you'll see at the end of the year that was about $560 million. So it's come down as well because of the lower crude costs, lower finished product costs, and also lower receivable levels.

Vance Shaw - Credit Suisse

I got you. And just one final question, looks like you had obviously fabulous quarter at Four Corners, and pretty darn good quarter, considering El Paso. And your accounts crack was pretty light. And did you guys mention, I sort of jumped into the call little bit late, did you guys mention anything about that?

Mark Cox

Yeah. If you look at the table, the financial tables in the press release, it showed $1.73 crack for the quarter at Yorktown. But that included a pre-tax $61 million LCM inventory write-down.

Vance Shaw - Credit Suisse

I see.

Mark Cox

Well if you excluded that, it would have been $11.51 per barrel.

Vance Shaw - Credit Suisse

Well that's pretty good. Okay, thanks guys and again, congratulations, wonderful.

Paul Foster

Thanks Vance.

Mark Cox

Thanks Vance.

Vance Shaw - Credit Suisse

All right. Bye, bye.

Operator

And our next question comes from the line of Chi Chow from Tristone and Capital. Chi, you may proceed.

Chi Chow - Tristone Capital Inc.

Thanks, good morning.

Paul Foster

Good morning.

Chi Chow - Tristone Capital Inc.

Yeah, Four Corners, a great result there. Can you give us an idea on the volumes of crude, your processing at the refinery in the fourth quarter from the Bakken or other regions outside of the local area, and if that is continuing here in the first quarter?

Jeff Stevens

Yeah, Chi, this is Jeff. In the fourth quarter, I believe we processed about 3000 barrels a day from other sources than the local crude oil market. That has dropped off some in the first quarter. It's probably closer to 1500 to 2000 barrels a day of other sources of crude. We continue to monitor that. When the opportunities are there, we're going to take advantage of them.

Paul Foster

And we're also looking at some different sources as well in the next few months.

Chi Chow - Tristone Capital Inc.

From outside the region?

Paul Foster

Yes.

Chi Chow - Tristone Capital Inc.

Can you comment at all about the pricing you may be getting on these crudes?

Jeff Stevens

Well obviously our goal is to land them in as cheap as we can Chi. It really just depends upon the different qualities of the crude, but right now most of them are laying in at WTI or WTI minus number.

Chi Chow - Tristone Capital Inc.

Okay, great. Paul, you mentioned in your comments on the CapEx that you are planning on a Yorktown project in the second half. Could you elaborate on that little bit?

Paul Foster

I will. It's a project in the second half of the year that will further improve our crude and vacuum operation there. I'll ask Mark Smith to comment on the project itself.

Mark Smith

Chi, we have a turnaround scheduled in all of this year, and the project complex is on making the crude and coker units, and total cost of that project is about 25 million.

Chi Chow - Tristone Capital Inc.

Okay. And is that going to allow you to run different grades of crude or what exactly is going to be the outcome?

Mark Smith

Ultimately it will allow us to run higher rate on the coker and run heavier crudes through the crude unit. So it will allow us to improve our fuel flexibility there at Yorktown.

Chi Chow - Tristone Capital Inc.

Okay, got it. And then one final question on your CapEx for '09. Do you have a sense on timings or is it the front end weighted or back end weighted?

Mark Smith

It's pretty much flat across period.

Chi Chow - Tristone Capital Inc.

Okay, great. Thanks a lot.

Paul Foster

Thank you.

Operator

(Operator Instructions) And at this time, we are showing no more questions available. Paul Foster, you may proceed.

Paul Foster

All right. Thank you again Josh and I just want to thank everybody for listening in. We look forward to wrap it up the first quarter and moving forward. I'm told that we may have one more question in the queue. Is that right Josh, or not?

Operator

They've disconnected, sir.

Paul Foster

They disconnected. Okay. Well thank you again for listening and look forward to talking to you next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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