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Western Refining Inc. (NYSE:WNR)

Q1 2009 Earnings Call

May 06, 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 - Chairman and Chief Executive Officer

Jeff A. Stevens - Director, President and Chief Operating Officer

Analysts

Jeff Dietert - Simmons & Company International

Jacques Rousseau - Soleil - Back Bay Research

Ann Kolher - Caris & Company

Chi Chow - Tristone Capital Inc.

Vance Shaw - Credit Suisse

Adrel Askew - Hartford Investment Management

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2009 Western Refining Earnings Conference Call. My name is Fab and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Mr. Mark Cox, Treasurer and Director of Investor Relations. Please proceed.

Mark B. Cox

Thank you, Fab. Good morning everyone and thank you for taking the time to listen in today. As always, we appreciate your continued interest in Western. My name is Mark Cox, again and I'm the company's Treasurer and Director of Investor Relations.

Joining me today for today's 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 provide an overview of our first quarter financial results. Paul and Jeff will comment really for operations and market conditions and then we'll open up the call for your questions.

However, before we proceed, I need to make the following Safe Harbor statement. Today's presentations will contain forward-looking statements and I incorporate and refer you to the forward-looking statements section of our earnings release and most recent filings with the SEC.

We assume no obligation to update or revise any forward-looking statements to reflect new changed 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 earnings release in our 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 $58.9 million or $0.86 per diluted share for the quarter ended March 31, 2009. For the same period in 2008, the company had a net loss of $40.4 million or $0.60 per diluted share.

The increase in earnings for the three months ended March 31, 2009 compared to the same period in 2008 was primarily due to stronger refining margins. Margins improved at our refineries as a result of improved market conditions and lower crude oil costs as we processed a higher percentage of heavy and sour crude oils in the first quarter of 2009 than we did in the same period last year.

A change in our lower costs for market inventory reserve also increased net income by $7.2 million for the first quarter of 2009.

Our adjusted EBITDA for the first quarter of 2009 was $141.9 million, a significant increase compared to the prior year, although which was a negative $15.2 million. The definition of adjusted EBITDA is contained in our earnings release, but essentially it represents earnings before interest, taxes, depreciation, amortization, lower costs for market inventory reserve adjustments and maintenance turnaround expense.

For the three months ended March 31, 2009, we generated cash flow from operations of $96.8 million. As of March 31, 2009 we have no cash borrowings outstanding under the company's revolving credit facility and since early January when we paid down $60 million we have not made any subsequent cash borrowings.

Total capital expenditures for the three months ended March 31, 2009 were $38.7 million which included capitalized interest of $3.8 million. Capital expenditures in the quarter primarily consisted of spending at El Paso on the low sulfur gasoline hydrotreater as well as other improvement and regulatory projects at our refineries.

Thank you, I will turn the call over to Paul.

Paul L. Foster

Thank you, Gary. We are pleased to report one of the most profitable first quarters in our history. These results largely reflect the significant improvements we made to our refineries throughout 2008. These improvements are sustainable and we look forward to our first full year of resulting financial benefits in 2009.

As we've previously discussed, we have increased the amount of heavy crude oil being processed at Yorktown from approximately 63% in the first quarter of '08 to 100% of crude oil throughput currently.

This changed of 100% heavy crude has enabled us to lower accrued costs and it significantly increased our flexibility in terms of the crude slate that we can process.

We've also taken advantage of the opportunity to purchase lower cost blendstocks and intermediates. In addition, we recently completed the construction startup of our low sulfur gasoline unit in El Paso.

As a result, we now have the capability to increase our sour crude runs up to approximately 50% of crude throughput. This unit also gives us the capability to increase our production of Phoenix grade gasoline from approximately 12,000 barrels per day to an excess of 20,000 barrels per day.

Historically, Phoenix has been one of our best markets in terms of both product demand and gross margin. Financially with EBITDA of approximately 142 million in the first quarter of '09, we had a ratio of debt to four quarters' EBITDA of 2.42 times. This is significantly below our first quarter 2009 covenant requirement of 5 times.

We don't have any debt maturity until 2012 and given our results and outlook, we feel comfortable with our covenants for the foreseeable future. However, this comfort does change our goal to further enhancing Western's financial flexibility and reducing debt.

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

I'd now like to ask Jeff to give us an update on what we're seeing in our markets.

Jeff A. Stevens

Thanks Paul. Crude oil throughput at our four refineries was approximately 202,000 barrel per day during the first quarter of 2009. Total refinery throughput at our four refineries was approximately 229,000 barrels per day.

Unlike others that have reported slower demand for finished products, we are seeing positive demand trends in our markets and have chosen to run our refineries near capacity. So far in the quarter, we've begun to see some improvement margins compare to what we experienced in the month of March, as a result of gasoline inventory gross, increased gasoline demand and continue low refinery utilization rates as we've begin the spring and summer driving season.

Throughout the first quarter, we experienced a decline in diesel demand as railroad traffic and copper mining operations slowed down as a result of the sluggish economy. In the second quarter, it appears that diesel demand has stabilized and we believe that it'll begin to increase once the economy begins to improve.

In our Southwest market, several refineries will be undergoing major maintenance turnarounds in the second quarter. Additionally, as we approach the summer paving season, asphalt margins are -- asphalt refinery are significantly better this year than last year.

The improved margins coupled with anticipated increase in demand for asphalt, as a result of the government stimulus plan, should contribute to our earnings throughout this summer.

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

Paul L. Foster

Thank you, Jeff. As you can tell from Jeff's comments we are cautiously optimistic with what we're seeing in the second quarter. Our guidance for the second quarter is as follows.

We expect crude throughput at out four refineries to be approximately 186,000 barrels per day during the quarter. We expect total refinery throughput at the four refineries to be approximately 211,000 barrels per day.

Our throughput projects in second quarter in comparison to the first quarter's actual throughput reflect a planned 10 day out in mid-June in El Paso to perform some work on the South side bathing (ph) tower.

Yorktown's throughput has also been reduced slightly because of the narrowing of the light heavy differential. In the second quarter, we expect operating cost to be approximately $4.20 per barrel at El Paso, approximately 925 per barrel at the Four Corners refineries and approximately 490 per barrel at Yorktown.

We expect total SG&A in the second quarter to be approximately $30 million, interest expense will be around 28 million and depreciation and amortization will be 33.5 million.

We expect our tax rate to be about 35%. We continue to believe that capital expenditures in 2009 will be approximately 155 million of which 38.7 million were spent in the first quarter.

In summary, we made significant improvements to our facilities in 2008 and we have carried this momentum into '09. We're proud of what we have achieved and despite the challenging economy, we're optimistic about what we'll achieve in 2009.

In closing, I would like to thank our employees throughout the company for their hard work and 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 up the call for questions. Fab, we're ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And the first question will come from the line of Jeff Dietert from Simmons, please proceed.

Jeff Dietert - Simmons & Company International

Good morning,

Paul Foster

Good morning

Jeff Stevens

Good morning Jeff.

Jeff Dietert - Simmons & Company International

You guys have been quite successful really across all three refineries at improving margin capture rate relative to the crack spreads that are available on those markets and stock has performed well this year. I was wondering if you can comment on the possibility of issuing some additional equity just to stabilize your balance sheet and really put the debt covenant concerns behind you.

Paul Foster

Yeah, thank you Jeff. As you know and as we talked about a number of times, we are absolutely committed to improving our balance sheet and I can tell you that we're studying this issue very, very closely. And we're always looking at the various options available to us. I can't get into any specifics, but I can tell you that we're studying that very closely.

Operator

Your next question will come from the line of Jacques Rousseau from Back Bay Research.

Jacques Rousseau - Soleil - Back Bay Research

Good morning gentlemen.

Paul Foster

Good morning, Jacques.

Jacques Rousseau - Soleil - Back Bay Research

Two questions for you. One, I just wanted to get a little more color on the inventory gain that you had in the quarter. And two, just wanted to see what you could say about the Phoenix market now? I noticed that the prices seem to be under some pressure there relative to El Paso which is not usually a typical thing, especially for this time of year?

Paul Foster

All right. I'll ask Gary to address the inventory gain question.

Gary Dalke

Yes, we're on -- LIFO inventory and as a result some of the inventory that we've put on related to the Legacy Giant assets are at a higher level than what we historically put on with El Paso.

So at March 31, we have a deal -- an assessment of what our LIFO cost was relative to realized more market values. We had a non-cash LCM write-down of our inventories of 50 million at March 31. We have went through the same exercise; at the end of December we had about $61 million.

LCM reserve theirs, so the -- we had a net change to the LCM reserve of $11 million and tax effective that's 7.2.

Jacques Rousseau - Soleil - Back Bay Research

So that shows up as lower costs in.

Gary Dalke

It shows up as lower costs of product sold and increased refinery gross margin.

Jacques Rousseau - Soleil - Back Bay Research

Okay, so that's an extra 7.2 million in the quarter, you're saying?

Gary Dalke

Correct.

Jacques Rousseau - Soleil - Back Bay Research

Thank you,

Gary Dalke

After tax.

Jacques Rousseau - Soleil - Back Bay Research

Right.

Gary Dalke

And it relates to Yorktown.

Jacques Rousseau - Soleil - Back Bay Research

Okay, Okay

Paul Foster

And I'll ask Jeff to answer your question about the Phoenix market.

Jeff Stevens

Jacques, there is some pressure in Phoenix right now. There seems to be somewhat of a pricing pressure on the street in Phoenix. The last few months has been below its normal LA spot per LA spot plus transportation. Part of our production of Phoenix grade gas is sold based on those rack prices that you see in Phoenix but we also sell a percentage about 25 to 30% of our CBG is sold on an LA spot. That will be El Paso pricing. So, we are been impacted some by it but not completely by it.

Jacques Rousseau - Soleil - Back Bay Research

How long do you see that going on for?

Jeff Stevens

Well, obviously we don't have influence on the Phoenix street price there. I think that eventually people will stop shipping product if they're not making money there in the market. So, it should strengthen. But right now it's not a good situation.

Jacques Rousseau - Soleil - Back Bay Research

Sure.

Paul Foster

Jacques, the Phoenix market is one that there are lot of refineries that delivery product into there and Jeff and I -- well all of us have been involved in that market for decades and we've seen this over and over and over and its just a matter of letting it sort itself out. But it'll come back. Phoenix will I think we have a lot of confidence that being for market and it'll continue to be one of our better markets.

Jacques Rousseau - Soleil - Back Bay Research

One last question if I could. I noticed the production volumes in Four Corners were off in the quarter. Was there any particular reason for that?

Paul Foster

Get that Mark.

Mark Cox

No, we pretty much ran the crude that was available in the market place. No, there was nothing significant.

Jacques Rousseau - Soleil - Back Bay Research

So should that be a kind of continuing level we should look for?

Paul Foster

Yeah I think so.

Jacques Rousseau - Soleil - Back Bay Research

Gram 26, I think it was.

Paul Foster

It wasn't like that.

Jacques Rousseau - Soleil - Back Bay Research

Okay, thank you.

Operator

Your next question will come from the line of Ann Kolher from Caris. Please proceed.

Ann Kolher - Caris & Company

Great. Good morning gentlemen.

Paul Foster

Hi, Ann.

Ann Kolher - Caris & Company

Just a question -- regarding your the volumes in basically the retail sales volume, your volumes as well as in the wholesale division the loop sales were down quite considerably year-over-year? I need to as well as the margin was also down, also sequentially. What are kind of the trends that we -- should we look for both of those?

Paul Foster

I think in what we're seeing from the retail side I would tell you that April we actually saw an increase -- a small increase year-over-year. So we are seeing strength at the retail side of things. So we're expecting retail to have a pretty good year.

On the wholesale side, largely most of their business is in Arizona and that lubricants business a lot of is tied to the mining industry and that business it has come off.

I think what we seeing now is kind of a flattening in that market and I think we're actually starting to see more work put out by the state and I think we'll start to see that stabilize and slowly increase as the year goes on but there is no question that Phoenix slowed down on the construction side and mining side which impacted both the wholesale margin and volume.

Ann Kolher - Caris & Company

Okay. Great, thank you. I appreciate that.

Paul Foster

Thanks Ann.

Operator

Your next question will come from the line of Chi Chow from Tristone Capital.

Chi Chow - Tristone Capital Inc.

Good morning.

Paul Foster

Good morning.

Chi Chow - Tristone Capital Inc.

Hey Gary, what was the gross availability on your revolver at the end of the first quarter?

Gary Dalke

Mark has that number right in front of him. So, I'll ask Mark to respond to that.

Mark Cox

Yeah, Chi, the gross availability at the end of the first quarter was 361 million and our net availability -- I'll just give you all the numbers because I think if you're going to ask that next. Our net availability would have been about 112 million.

We had cash in the quarter I think of about 75 million. To give you an idea of where we are today, today we have gross availability of 390 million. We have net availability of about 150 million and then on top of that we've about 108 cash. So, looking at total liquidity today we're about 250 million, Chi.

Chi Chow - Tristone Capital Inc.

Okay, so did your borrowing base come down from year end '08 a little billion?

Gary Dalke

We're seeing the borrowing base levels come down just a little bit with inventories coming down and when prices came down a little bit in the first quarter. We started to see that ratchet back up over the last few weeks.

Chi Chow - Tristone Capital Inc.

Okay. During the quarter did you get any benefit from any sort of Contango trade?

Jeff Stevens

Yeah, Chi, this is Jeff. In the first quarter I'd say it was probably about primarily was in El Paso, so it's approximately 120,000 barrels and probably throughout the month it was probably in the $3 -- $3and 25 range.

Chi Chow - Tristone Capital Inc.

Okay, how that looking here in the second quarter?

Jeff Stevens

In the second quarter, its obviously come down I would say April was about $1 and May is closer to $2 and I think we'll see that trend into June.

Chi Chow - Tristone Capital Inc.

Okay, great. One final question do you have any sort of outlook for 2010 CapEx at this point?

Paul Foster

No we haven't published anything about that obviously we're looking at it internally but nothings out yet.

Chi Chow - Tristone Capital Inc.

Okay, thanks a lot. I appreciate it.

Paul Foster

Thank you, Chi

Operator

The next question will comes in the line of Vance Shaw from Credit Suisse.

Vance Shaw - Credit Suisse

Hi guys can you hear me.

Paul Foster

Yes, Sir. Good morning.

Vance Shaw - Credit Suisse

Hi, congratulations, very decent quarter guys, that's super.

Paul Foster

Thank you.

Vance Shaw - Credit Suisse

Question for you, sort of follow up on the first question. Are you guys are still pursuing any sort of assets sales or other things that might help you reconfigure the balance sheet. And yeah, I'm clearly very worried guys, you're paying a high rate on your loans. Seems towards the kind of numbers you guys are putting up, you should be able to do something.

Paul Foster

Yeah, I mean we're -- we're continuing to focus on our balance sheet. As you know, last year when we started looking at the at a potential transaction at Yorktown, that really won the right tower.

It turned out that the market just didn't go the right direction for a transaction there at that time. But we continue to believe -- Yorktown's one of our favorite assets and is performing very well for us. And so, it's not as if we're anxious to get rid of it. But we do continue to focus on it. There are a number of alternatives we're looking at to reduce our debt and asset sales is only one of them but I think I'm confident that we're focused and going in the right direction.

Vance Shaw - Credit Suisse

All right. Thank you very much.

Paul Foster

Thank you.

Operator

Your next question will come the line of Adrel Askew (ph) from Hartford Investment, please proceed.

Adrel Askew - Hartford Investment Management

Yeah actually my question was answered and so certainly -- but I was going to ask just regarding your interest expense, how -- what solutions you guys are looking so far as getting that down, obviously with the amendment last year, it was, you guys are the right bearers (ph) is probably above market which you should be paying given the improvement in the business. Just let me know what you guys are thinking there?

Paul Foster

Yeah I mean we agree. We obviously would prefer to be paying lower interest rate but -- and that's one of thing, that's one of the big motivations for us to get our debt down because as you know there are staged rates -- that stair stepped rates where when we pay the debt down we also have a lower interest rate. So we are focused on in it and we're going to get there.

Adrel Askew - Hartford Investment Management

Thanks.

Operator

And that's conclude today's question and answer session. I would now like to turn the call back over to Mr. Paul Foster for closing comments.

All right, thank you Fab. I just wanted to thank all of you for listening in. And we're -- as we stated earlier, we are optimistic, I guess cautiously optimistic about the remainder of 2009 and look forward to talking to you next quarter. Thank you.

Operator

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

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