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Alon USA Energy (NYSE:ALJ)

Q4 2012 Earnings Call

March 07, 2013 11:30 am ET

Executives

Amir Barash - Vice President of Investors Relations

Paul Eisman - Chief Executive Officer

Shai Even - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Chi Chow - Macquarie Research

Evan Calio - Morgan Stanley, Research Division

Clay Rynd - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Alon USA Energy Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, March 7, 2013.

I would now like to turn the conference over to Amir Barash, Vice President of Investor Relations. Please go ahead.

Amir Barash

Thank you, Alicia. Good morning, everyone, and welcome everyone to Alon USA's Fourth Quarter and Year End 2012 Earnings Conference Call. With me are Paul Eisman, President and CEO; Shai Even, Chief Financial Officer; along with other members of our senior management team.

You should have received yesterday our earnings release, but in case you didn't, you can obtain a copy from our website, alonusa.com, under the Investor Relations section.

Before I turn the call over to Paul, please be aware that information reported on this call speaks only as of today, March 7, 2013, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Also let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual results or performance to materially differ from any future results or performance expressed or implied by those statements. These risk and uncertainties include the risk factors disclosed by the company from time to time in its filing with the SEC.

Furthermore, as we start this call, please also refer to the statements regarding forward-looking statements incorporated in our news release issued yesterday. And please note that the contents of this conference call, today, are covered by these statements.

With that, I will turn the call over to Paul.

Paul Eisman

Thank you, Amir, and good morning, everyone. 2012 was a truly important year for our company. Our adjusted EBITDA of $434 million for the year was the best in our history, and the second consecutive year that we achieved record results. In November, we successfully completed the initial public offering of Alon USA Partners, which includes the Big Spring refinery and associated wholesale marketing business. The profitability of our Krotz Springs refinery improved materially as we began delivering and processing price-advantaged West Texas crude oil to the facility. Most importantly, utilizing proceeds from the IPO and cash generated from operations, we were able to reduce net debt in 2012 by $422 million and increase equity by $225 million.

When we exclude special items, we recorded net income of $0.58 per share in the fourth quarter, as compared to a loss of $0.78 per share in the same quarter last year. Adjusted EBITDA in the fourth quarter was in excess of $120 million, and we generated over $172 million of cash from operations during the quarter. For the year, we're reporting income of $2.30 per share, excluding special items.

Our West Texas refining and marketing system continues to benefit from crude oil differentials that expanded during the quarter. In addition to the WTI Cushing discount to Brent, we also benefited from expanding location differentials between Midland and Cushing. With very good margins available to it, the refinery operated very well. The total throughput at our Big Spring refinery in the fourth quarter was an excess of 72,000 barrels per day. Our average throughput for the year of almost 69,000 barrels per day is the highest in the history of the refinery.

Direct operating expenses during the quarter were good at $4.17 per barrel. For the year, our direct operating expenses averaged right at $4 per barrel, an improvement over the $4.23 per barrel we reported in 2011.

Oil production in the Permian Basin continues to increase at a rapid pace. A particular interest to us is the development of the Cline Shale in and around the Big Spring area. Estimates of recoverable oil reserves in this formation are increasing nearly daily, and the potential for recoverable oil is estimated to be as much as 30 billion barrels. The Big Spring refinery truly is in the perfect place to take advantage of these dramatic increases in domestic production.

In our wholesale marketing business, branded fuel sales during the quarter reached almost 103 million gallons, an increase of nearly 7% over the same period last year. We continue to be pleased with the acceptance of the new Alon brand that we introduced in 2012. Among other benefits, this brand gives us a platform that allows us to grow without the geographical restrictions that we've had in the past.

In our retail marketing business, fuel sales were up 8% over the same period last year. Fuel margins increased during the quarter to $0.2006 per gallon, from $0.1908 per gallon the prior quarter. Merchandise sales were up 6% versus the same quarter last year, with merchandise margins of 32.7%. This business continues to deliver strong result with impressive topline growth.

The Krotz Springs refinery operated well during the quarter. Throughput at the refinery was the highest of the year at over 72,000 barrels per day. For the entire year of 2012, we averaged almost 68,000 barrels per day of feed stock, which was an increase of 14% over 2011 levels. Krotz Springs benefited from increasing volumes of Midland Pride [ph] West Texas crude oil, averaging over 30,000 barrels per day during the quarter, up from 23,000 barrels per day in the third quarter. For the year, we averaged 20,000 barrels per day of West Texas of crude oil in Krotz Springs and expect this to increase to 30,000 barrels per day in 2013. Direct operating expenses were $3.84 per barrel in the quarter, very close to our average of $3.85 per barrel for the year.

We are continuing work to develop and implement a plan for our California operation. As indicated previously, we've submitted the permit application that is required to develop the rail terminal and modify the refinery to run lighter crudes to Bakersfield. We remain optimistic that we can get these permits in the fourth quarter, which would allow us to restart the refinery and terminal beginning in 2014. In the interim, we are taking steps to maximize the value of these assets. We've greatly reduced our operating and logistical costs on the West Coast. Also, we have significant rail receipt capacity on the West Coast that we are looking to take advantage of. This was already occurring at our Long Beach and Willbridge terminals, as we are using these assets to receive in terminal oils for third-parties. These actions will allow us to offset expenses in the West Coast as we work to reconfigure the assets.

Our asphalt marketing business was impacted by weak demand during the quarter and the year. Versus last year, blended asphalt tonnage was off nearly 8%. Despite reduced sales, the financial performance of our asphalt marketing unit improved from our results in 2011. This improved performance was driven by higher margins and lower operating costs. Our gross margin increased to $43 per ton in the year, as compared to $27 per ton in 2011. We also reduced our direct operating expense in this business by $8 million versus last year. In 2013, we expect to see asphalt market directionally improve but remain challenging. With refining operation shutdown in California, we are supplying our asphalt business primarily with third-party purchases. We are encouraged that we are able to purchase this asphalt at very favorable prices, and expect this to result in improved profitability in this business in 2013.

Of course, we are also pleased with the successful initial public offering of approximately 18% of Alon USA Partners, again, which includes the Big Spring refinery and wholesale marketing assets. Since the initial offering, the market price of the units has appreciated significantly. We believe this is a reflection of the market realizing the strength of this business, along with sustainable nature of these strengths.

Looking forward to the first quarter, refining margins are very good. In addition to continuing wide differentials between Cushing WTI and LLS, we also have wide differentials between Midland and Cushing for much of the quarter.

Lastly, we've seen strength in the gasoline market as planned and unplanned refinery shutdowns have kept gasoline inventory under control.

We will complete some required maintenance at both our Big Spring and Krotz Springs refineries in the first quarter. The Big Spring work is already completed and the refinery is running well.

Throughput guidance for Big Spring is 60,000 barrels per day for the first quarter, and 68,000 barrels per day for the year. At Krotz Springs, our maintenance work is nearly complete. Throughput guidance at Krotz Springs for the quarter is 57,000 barrels per day and 69,000 barrels per day for the year. Of this, we expect 30,000 barrels per day to be WTI-price group.

As I started this call by saying, 2012 was a remarkable and important year for the company. We ran relatively well to take advantage of good markets available to us. We completed several financial transactions to strengthen the company, and we were able to reduce net debt by $422 million. Despite all of this, we have additional opportunities to improve our business, and I'm convinced that our best days are in front of us. We will continue to focus on our operational performance, debt reduction and execution of our plans.

With that, we're glad to take any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Chi Chow with Macquarie Capital.

Chi Chow - Macquarie Research

Paul, so in California, can you give us some guidance here in 2013 on what the operating cost structure might look like? I knew you kind of wound things down there, but are we still going to see operating costs falling through?

Paul Eisman

Yes, I think in the last earnings call, we estimate that it's somewhere between $25 million and $30 million, and that's pretty much unchanged.

Chi Chow - Macquarie Research

Okay, that's for the year, right?

Paul Eisman

That's correct.

Chi Chow - Macquarie Research

And you talked about the terminal operations that you have running still in Long Beach. How is that going to flow through the financials? Is that coming through the refining segment? Or is that going to show up elsewhere?

Shai Even

Well, right now, the plan is that it will come through the refining segment.

Chi Chow - Macquarie Research

Okay. Okay, great. And then secondly, can you talk a bit about possible impact from the ethanol RINs? The pricing really skyrocketing right now. Can you speak a little bit to how that's impacting you guys?

Paul Eisman

Well, I mean, we're aware that RINs pricing is increasing and it's having impact on us and others in the industry. They tend to be somewhat volatile depending on performance. I don't know where all this is going to ended up -- end up. Obviously, we're planning to deal with this -- but in terms of the number and impact, I don't really have that right now.

Chi Chow - Macquarie Research

Okay. What percentage of gasoline that's being produced at the refineries do you blend yourself with ethanol?

Unknown Executive

Virtually -- probably about 80% of the gasoline that comes out of Big Spring refinery gets blended with ethanol.

Chi Chow - Macquarie Research

Okay. What about Krotz Springs?

Unknown Executive

Krotz Springs, none of it, sorry.

Chi Chow - Macquarie Research

Okay. And I guess, finally, can you make any comment on any sort of RINse you might be able to carry forward from last year and apply them for this year?

Unknown Executive

Obviously, we can and we have some rinse in inventory to do that, but I don't have the exact numbers here.

Operator

The next question is from the line of Evan Calio with Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

You mentioned in your comments intention to move crude in West Coast via rail, and it terminalling for third parties. What -- I mean, what is -- I mean, what's the transloading capacity today in your Bakersfield? I mean, what are -- what's coming in now that --?

Paul Eisman

Yes, we didn't -- we're not really doing anything at Bakersfield today. We have some capacity at Bakersfield that we're looking at options to utilize. We are currently doing transloading for people in Long Beach and the Willbridge. In Willbridge, it's approximately 6,000 barrels per day. In the Long Beach, it's 3,000 barrels a day.

Evan Calio - Morgan Stanley, Research Division

Right. And then so how does that -- as you look at crude coming in by rail, what -- can you update us on your analysis of securing capacity and securing volumes, kind of in connection with investing in those refiners and making them profitable with the advantage crudes?

Paul Eisman

Well, we believe that that's possible. I mean, we're in a process of working through the details of those logistics. We've got the permits submitted. As we mentioned in the comments, we're optimistic that we'll get that permit in the fourth quarter, and then we can proceed with the completion of the project. But today, we see no reason that we can't make that work.

Evan Calio - Morgan Stanley, Research Division

And are you also in discussions forum and a number of proposed pipeline projects, Questar, Kinder Morgan, et cetera? I mean, do you see potential options there as well?

Paul Eisman

We're staying in touch with those people and in contact with those companies in terms of their plans. And certainly, that's an option for us. Many of those projects actually come in to the Bakersfield area and could be very handy for what we might do with that refinery.

Evan Calio - Morgan Stanley, Research Division

And then lastly, can you update me on the advantage crude ramp at Krotz Spring, kind of where we are?

Paul Eisman

Yes, we're -- in the fourth quarter, we were at 30,000 barrels per day, that's pretty much our capacity with the current assets that we've got in place. We are looking at other alternatives to raise the rates of advantage crude in the Krotz Springs. I don't really have anything to report right now, but I can tell you we're actively working on it.

Operator

[Operator Instructions] The next question is from the line of Clay Rynd of Tudor, Pickering, Holt.

Clay Rynd - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Quick question on permitting in California. Are you all seeing kind of a timing difference for permits in different areas of the California or is it pretty much the same across the state? I mean, for example, is it easier to get a permit, say, in Bakersfield than it would be in Los Angeles or something along those lines?

Paul Eisman

I mean, we believe it's significantly easier to get a permit in Kern County than it is in others, in the Metropolitan areas around Los Angeles or the Bay Area is simply -- the Kern County is -- I mean, they're still requiring significant effort to get the permits, all these the disclosures they require. But around the Bakersfield area, there's just historically been a significant amount of industrial development. They're more aware of that and in tune with that. It's important part of the economy in the Bakersfield area. So we see that as significantly easier than achieving one in those other areas that you mentioned.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

All right. Okay. And then another -- kind of changing topics here. Looking at what you did on operating margin in California on $1 per barrel in 4Q, is that kind of what we should expect until going forward? Or what should we think about there?

Paul Eisman

Yes, there's a lot of noise in those numbers. We ran -- for part of October, involves a shut down, de-inventorying and those kinds of things. So we'll -- as we get closer to the restart, we'll kind of provide some information related to that. I wouldn't necessarily take the information that we did -- that we had in the fourth quarter and extrapolate that going forward. It might be better than that, I don't know really -- it might be worse, it might be better, but I wouldn't use that number.

Operator

Thank you. There are no further questions at this time. I will turn it back over to management for any closing comments.

Paul Eisman

Okay. Thank you very much. 2012 was a great year for the company and we're looking forward to a better 2013. We appreciate your interest and investment in the company. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.

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