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CVR Refining, LP (NYSE:CVRR)

Q2 2013 Earnings Conference Call

August 1, 2013 12:00 ET

Executives

Jay Finks - Director of Finance

Jack Lipinski - Chief Executive Officer

Susan Ball - Chief Financial Officer

Stan Riemann - Chief Operating Officer

Analysts

Mohit Bhardwaj - Citigroup

Jeff Dietert - Simmons

Operator

Greetings and thank you for joining the CVR Refining, LP’s Second Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jay Finks, CVR Refining Director of Finance. Thank you, Mr. Finks. You may now begin.

Jay Finks - Director of Finance

Thank you, Shay. Good morning everyone. We very much appreciate you joining us this morning for our CVR Refining second quarter 2013 earnings call. With me are John Lipinski, our Chief Executive Officer; Susan Ball, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.

Prior to discussing our 2013 second quarter results, let me remind you this conference call may contain forward-looking statements, as that term is defined under Federal Securities Laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements, without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2013 second quarter earnings release that we filed with the SEC this morning before the open of the market.

With that said, I will turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

Jack Lipinski - Chief Executive Officer

Thank you, Jay. Good morning everyone, and thank you for joining our earnings call. This morning I am pleased to report another solid quarter. Last Friday, as you know, we pre-released our second quarter earnings and declared our second quarter’s distribution of $1.35 per common unit. The second quarter’s distribution will be paid on August 14 to unitholders on record as of August 7.

In the 2013 second quarter, we reported a consolidated net income of $339.2 million as compared to $259.5 million a year ago. Our 2013 second quarter’s consolidated adjusted EBITDA was $250.6 million as compared to $379 million a year ago. Our realized refining margin adjusted for FIFO, first-in first-out, accounting was $19.18 per barrel as compared to $27.07 a barrel in the same quarter last year. The decrease year-over-year was partially driven by the decrease in the Group 3 2-1-1 crack spread as well as significant increases in RINs expenses associated with our obligations under the Renewable Fuel Standard.

In the second quarter 2013, the NYMEX 2-1-1 crack spread averaged $25.95 per barrel as compared to $29.27 per barrel in the second quarter of 2012. The NYMEX 2-1-1 has been impacted by the narrowing of the Brent-WTI spread which averaged $9.37 over the second quarter of this year and that compares to $15.44 for the same period a year ago. In the second quarter 2013, our RINs expense was $65.5 million as compared to $6 million in the second quarter of 2012. The pad 2 Group 3 product basis was a positive $1.83 per barrel on a 2-1-1 basis as compared to a negative $0.53 barrel in the same quarter last year.

Operationally, in the second quarter, we ran approximately 193,000 barrels a day of crude that was roughly 117,000 barrels a day at Coffeyville and 76,000 barrels a day at Wynnewood. Our crude throughputs were at the high end of our guidance provided during our last quarter’s call. Like most Mid-Continent refiners, we continued to benefit from attractively priced crudes in the second quarter. Our purchased crude oil discount of WTI for the second quarter was $2.43 a barrel as compared to $4.31 a barrel in the second quarters of 2012. The decrease year-over-year was due to lower heavy sour crude discounts primarily Cold lake and Western Canadian Select.

For example, in the second quarter 2013, the WTS discounts to WTI averaged $16.62 a barrel as compared to $20.45 a barrel a year. Also impacting our purchased crude discounts were lower discounts for lights sour crudes. The West Texas sours discount to WTI averaged $0.17 per barrel this year as compared to $5.28 a barrel in the second quarter last year. Our gathering system continues to grow and surpassed prior records. We gathered over 53,700 barrels a day for the second quarter which is a new quarterly record. In May we set a new single month’s gathering record of just over 54,300 barrels a day.

At this point I will turn the call over to Susan to talk more about financials. Susan?

Susan Ball - Chief Financial Officer

Thank you, Jack and good morning everyone. Net income was $339.2 million in the second quarter of 2013 as compared to net income of $259.5 million in the second quarter of last year. Adjusted EBITDA for the quarter was $250.6 million versus $379.6 million in the second quarter of 2012.

In the second quarter of 2013 the most significant adjustments to income in calculating adjusted EBITDA were a FIFO inventory gain of $24.2 million in the second quarter of 2013 and gains on derivatives net of $120.5 million. Current period settlements on derivative contracts were $14.7 million during the second quarter. As of June 30, we had 10.7 million barrels hedged for the remainder of the year at an average fixed price of $26.40. We’ve continued to layer on 2014 hedges and have 9.3 million barrels hedged at an average fixed price of $31.59. The majority of the 2014 hedges are ULSD diesel positions.

Adjusted EBITDA is reduced by certain annual reserves that are pro-rated on a quarterly basis to drive available cash for distribution. These annual reserves are set aside for cash needed for debt service of approximately $40 million, $125 million are set aside for maintenance and environmental capital expenditures and $35 million is set aside for future major scheduled turnaround expenses again these are the annual reserves set aside pro-rata on a quarterly basis.

Available cash for distribution for the second quarter was approximately $200 million. In the second quarter of 2013 our Wynnewood refinery reported of refining margin adjusted for FIFO impact of $119.8 million as compared to $158.5 million in the second quarter 2012. Our Coffeyville refinery reported a refining margin adjusted for FIFO impact of $216.6 million in the second quarter of 2013 as compared to $309.4 million in the prior quarter last year.

Our Coffeyville and Wynnewood refineries on a consolidated per barrel basis reported a refining margin of $19.18 per crude oil throughput barrel, which is adjusted for the favorable FIFO impact in the second quarter of 2013 as compared to $27.07 per barrel in the second quarter of 2012 which was adjusted for an unfavorable FIFO impact. At the plant level, Coffeyville’s refining margin adjusted for FIFO impact was $20.30 per barrel in the second quarter 2013 as compared to $28.02 per barrel in same period a year ago. Wynnewood’s refining margin adjusted for FIFO impact was $17.34 per barrel in the second quarter 2013 as compared to $25.23 per barrel for the same period a year ago.

Direct operating expenses excluding turnaround expenses per barrel of crude oil throughput was $4.77 in the second quarter of 2013 as compared to $3.99 in the prior year’s quarter. The increase year-over-year was mainly driven by higher repairs and maintenance personnel costs and utilities expenses. On a refinery by refinery basis Coffeyville’s direct operating expenses excluding turnaround expenses per barrel of crude throughput was $4.69 in the second quarter of 2013 is compared to $3.95 in the same period a year ago. Wynnewood’s direct operating expenses excluding turnaround expenses per barrel per barrel of crude oil throughput was $4.88 for the second quarter 2013 is compared to $4.06 in the second quarter a year ago. We ended the quarter with cash and cash equivalents of $483.3 million under our $400 million ADL we had $27 million issued standby letters of credit and no short-term borrowings with availability of $373 million. Our total long-term debt outstanding was $552 million which is comprised of $500 million of the 6.5% unsecured notes and $52 million of capital leases.

As of June 30, 2013, we had not borrowed against an Inner Company Credit Facility with CVR Energy, our parent which the $150 million credit facility is available to fund future profit and growth capital expenditures. During the quarter, we completed an underwritten operating of common units in and utilized all the proceeds to redeem common units from our parent CVR Energy. Subsequent to the closing of the offering, there were no increases to the common units outstanding.

CVR Refining has $147.6 million outstanding, which consist of $42.8 million or approximately 29% which is owned by the public which includes $6 million common units held by affiliates of Icahn Enterprises and $104.8 million common units or 71%, which is held by CVR Energy. Second quarter 2013 capital expenditures totaled $35.5 million, of the total capital expenditures in the second quarter $28.3 million related to maintenance and environmental and $7.2 million related to growth capital.

With our liquidity and debt levels, we continue to be in a position to support our current business in future growth. With that, Jack, I’ll turn it back to you.

Jack Lipinski - Chief Executive Officer

Okay, thank you, Susan. Let me spend a few minutes talking about the third quarter in the future a little bit. As we announced in our press release, I just discussed earlier we had to take down our track record to Coffeyville refinery due to a failure of its flue gas cooler, it’s a very large piece of equipment that we are working on right now and repairing but the anticipated down time for that outage is approximately 30 days and we’re currently expecting unit to be back at full rates in the third week of August.

In connection with taking the cat cracker outage, we’ve opportunistically taken down our number one crude unit to improve efficiency and to correct some nagging issues and we’re going to use this time to just do some cleanup so while we comeback will be able to operate the plant at high rates. We estimate that our total crude throughputs for both plants for Q3 to be in the range of 170,000 to 180,000 barrels a day in the quarter last Friday, we pre-released our second quarter’s earnings as well as provided an update to our full year distribution outlook, which we estimate to be between $4.10 to $4.80 to common unit and that include some pre-IPO period.

The updated outlook as a result of looking at the forward stretch primarily the group, the NYMEX 2-1-1, the shutdown I just discussed and increased RINs cost. Looking forward, we believe we are seeing a trough in the Brent-WTI spread as WTI has traded up in anticipation of additional pipelines coming into operation. Our view is that this Brent-WTI spread will once again wind as additional shale based crude is produced. The current Brent-WTI spread is just under $2 and the forward strip shows an increasing to about $4 in December.

Based upon recent RIN costs and we’ve disclosed this in other documents. Our full year estimated obligation is between $200 million and $240 million. If you permit me, I will get on soap box and talk about what is broken with RINs. These – we are not anti-bio-fuels. We believe that’s a company that bio-fuels have a place in the fuel chain. We simply believe that the way the RINs programs is being configured and it operates it is broken. Every shareholder of this company ought to be lighting up the phone lines to their to their congressmen, their senators and even the White House and just take a look at what your distribution was reduced by this faulty program. Back in 2005 and 2007 when these rules were enacted, the United States was producing about 5 million barrels a day of crude and Canada about 2 million barrels. This year we expect domestic production to exceed $7.5 million from Canada, sorry, dollars, barrels 7.5 million barrels and Canada is up another 1 million.

If you look at combined North American crude production, it’s up almost 14% over the period when this law was enacted to provide us some energy independence. I do agree with the ethanol industry that they provide a benefit in a way, that ethanol prices are lower than the finished gasoline price. And if that’s the case this is the classic American dream. They’ve had support since 1982 in the form of blenders, credits or excise tax credits and now even a mandate. And if they are capable of producing product that is less expensive than the gasoline that is ultimately sold, that’s a perfect business model.

So, my view is its time to take off the training wheels, but the ethanol will be blended into gasoline based on economics and in the mandate needs to be reformed. I’m not necessarily calling for repeal. I think there is a place for ethanol and place for biofuels in our fuel structure, but certainly this program is broken, it was never intended to pick winners and losers and the obligated parties under this scenario are simply the refiners and the importers and being a merchant refiner, we’re significantly impacted as you can see. So, I urge every one of our shareholders to get on the phone and tell your congressman what you think.

So, with that I’ll turn it over for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Jeff Dietert of Simmons.

Jeff Dietert - Simmons

Good morning, Jeff Dietert with Simmons.

Jack Lipinski

Hi, good morning Jeff.

Susan Ball

Hi, Jeff.

Jeff Dietert - Simmons

I’m well. Jack, Susan how are you guys? On your $4.10 to $4.80 distribution guidance, did I hear correctly that you’ve got the $200 million to $240 million of RINs baked into that forecast as well as the forward curve for differentials, crude differentials and gasoline and diesel cracks? Is that the right way to think about that?

Jack Lipinski

Yes it is.

Jeff Dietert - Simmons

And that what kind of RINs price is baked into that $200 million to $240 million?

Jack Lipinski

At the time, it was roughly $1 that when we did the numbers, we did them at the current market. So, they were roughly $1, earlier in the year they were at lower levels, they spiked up to $1.40, $1.50. They came down to the mid 90s, so we’re going to have to go to when all the hearings were going on in Washington and those that generate RINs saw maybe its time to get out. And there is some indication now that price is moving back up a little bit, because we aren’t sure if congress or if the EPA will act. Unfortunately, the RINs market is a liquid, it’s a bid-ask type of market and it’s absolutely the kind of market you hate to see because it could be manipulated.

Jeff Dietert - Simmons

Thanks. And you’ve done a fair amount of cat cracker work this year, Coffeyville and Wynnewood both earlier in the year and then you mention the third quarter FCC work is - are these efforts really to maintain the units or do you expect some incremental yield out of units with all the work you’ve done this year?

Jack Lipinski

On some of the other units we always do whatever we can to improve efficiency and improve yield. This one was a simple or not a simple failure. Unfortunately this piece of equipment sits ten stories in the air and it’s rather large, but we had two failures in the flu gas cooler and we’re in the process of re-tubing a good portion of it in place. That’s why it’s taking so long. The number one crude unit we would expect to comeback up with increased distillate yield and any time we do any work on units, it’s always with an eye toward improving our distillate yield over gasoline. So, the short answer is that any time we do come down, we do cleanups, we do with the unit down, we’ve inspected other parts of it found some other issues and repair, and so we get better on this as we go forward. Yes, we’ve been running the plant fairly hard and one of the things and it’s attribute to our operating people, offsetting a lower tax rate in higher RINs cost and lower crude differentials, those have been offset due to a large degree, as you could see by our numbers, by the simple fact that the plants have run well, notwithstanding some unanticipated mechanical failures. And that our yields are constantly improving. Wynnewood has been a remarkable, I’m not going to use the word surprise, but it’s been remarkable what they’ve been able to do at Wynnewood in getting this plant up and running and improving its yield and lowering its cost structure.

Jeff Dietert - Simmons

And the forward curve, cracks for 2014 are elevated relative to '13 and Susan mentioned that you had been putting more hedges on. Is there a schedule that summarizes that? I apologize if I missed it.

Jack Lipinski

No, no, we continue to hedge and what we have right now as we have somewhere just under $11 million distillate cracks for the year and these are quarterly, but for the year out which they averaged $31.40 million, they are about and giving a round number so, whatever we published, we have the exact number and then we’ve also moved ahead and started putting out some gasoline cracks where we see the numbers that we find to attract us and right now we have little over $3 million gasoline cracks done at a little over $21.60 million and the way we are looking at this is anytime we should lock and effectively 2-1-1 at a $25 or better level of those are good times.

Jeff Dietert - Simmons

Is there maximum level, maximum percentage of your expected production you’re willing to hedge or how do you think about that?

Jack Lipinski

Well, right now we are somewhat over – little over 20% hedge so for next year we will – these had a numbers hold, we will likely double this number and maybe a little more. We never like to be more than half hedged and if drops being hedged these levels gives us the question that you also don’t want to miss the opportunities that the market gives you several times a year by being fully hedged.

Jeff Dietert - Simmons

Great, thanks for your comment.

Jack Lipinski

Thank you.

Operator

Thank you. Our next question comes from Faisel Khan from Citigroup.

Mohit Bhardwaj - Citigroup

Yes, hi. This is actually Mohit Bhardwaj for Faisel. I’ve just got two quick questions. First one is on RINs. Jack or Susan if you guys could just clarify that $200 million to $240 million number. I was just doing a quick math based upon 96,000 barrels per day of gasoline production and if you take a $0.75 average RIN price for ethanol that just gets you to $110 million. I was just wondering how do you guys get to that $200 million to $240 million?

Jack Lipinski

Okay. I had to tell you this being need to read regulation because the regulation doesn’t only apply to gasoline. It applies to transportation fuels. So for example you’ve actually when you come up, I think the numbers about 8% or 9% of the total is transportation fuel half to have a RIN associated with it be it D6, actually the numbers more than 9.6% of your combined gasoline and diesel require as RINs and then the EPA gives you your volumetric obligation which says how much of that in D6 or ethanol rents, how much of the D4 rents or these other rents so good. If you are calculating RINs just simply based on gasoline, you really do need to go back and read the rules because transportation fuels including diesel. What are excluded, just for everybody else’s benefit -- jet fuel is not a transportation fuel, asphalt is not, heavy fuel oil is not, heating oil is not, even though certain locations may have bio-fuel obligations for certain heating oil. So, it’s the combination of gasoline and diesel out of our 9.6%.

Mohit Bhardwaj - Citigroup

Thank you. I definitely understand that. But I thought if you just compare versus where we were last year say, just for the quarter, $6 billion to $65 billion. A large part of that six was based on money in the advanced bio-fuels. So, I was just a little confused on how this 9.62 was actually translating to your total production of gasoline, so thanks for the clarification on that. And one more question just on midstream. So, obviously you guys had a good record for your gathering business and you previously mentioned that the run rate on EBITDA as far as the midstream assets are concerned is close to $35 million. So, how are you guys thinking about putting those assets into a midstream kind of an MLP or is it still the $50 million watermark over there?

Jack Lipinski

Well, we still think it needs to be close to 50, it doesn’t necessarily have to be 50, as I’ll be honest with you we are looking at organic opportunities. We are also looking at acquisitions, its kind of tough to acquire in this space, but we are constantly looking and if we can acquire we will if we can’t we’ll organically grow.

Mohit Bhardwaj - Citigroup

Okay. Thank you for your clarification.

Operator

Thank you. (Operator Instructions) I will now turn the floor back over to Jay Finks for closing comments.

Jay Finks - Director of Finance

Thank you, Shay. I’d like to thank everyone for listening to our conference call today. Please visit our website, cvrrefining.com or contact Investor Relations for additional information. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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