Alon USA Energy Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Alon USA (ALJ)

Alon USA Energy (NYSE:ALJ)

Q2 2013 Earnings Call

August 07, 2013 11:30 am ET

Executives

Claire A. Hart - Senior Vice President

Paul Eisman - Chief Executive Officer and President

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

Alan P. Moret - Senior Vice President of Supply

Analysts

Jeffrey A. Dietert - Simmons & Company International, Research Division

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

Chi Chow - Macquarie Research

Paul Y. Cheng - Barclays Capital, Research Division

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Rakesh Advani - Crédit Suisse AG, Research Division

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Alon USA Energy Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 7, 2013. I now like to turn the conference over to Mr. Claire Hart, Senior Vice President. Please go ahead, sir.

Claire A. Hart

Thank you, George. Good morning, everyone, and welcome to Alon USA Energy Second Quarter 2013 Earnings Conference Call. With me are Paul Eisman, President and Chief Executive Officer; 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, August 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 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations, include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control and 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 risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC.

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

With that, I'll turn the call over to Paul.

Paul Eisman

Thank you, Claire, and good morning, everyone. The market environment in the second quarter was extremely volatile. In the second quarter, we recorded net income of $19.9 million, of which $8.4 million was attributable to noncontrolling interest, resulting in net income available to stockholders of $11.5 million or $0.17 per share as compared to $0.77 per share in the same quarter last year. Excluding special items, net income available to stockholders was $0.27 per share as compared to $0.63 per share for the same quarter last year. For the first 6 months, we reported net income available to stockholders of $1.03 per share as compared to $0.24 per share for the same period last year. Adjusted EBITDA for the second quarter was $66 million.

Our results in the quarter were significantly impacted primarily by contraction in crude oil differentials and repairs to the Krotz Springs reformer that resulted in downtime and higher costs in the quarter. We're optimistic about longer-term trends in our industry, our strategy and our ability to identify and deliver self-help initiatives to continue to improve the profitability of our company.

Operationally, our West Texas refining and marketing system had an excellent quarter, setting an all-time quarterly crude charge record during the period. Crude oil differentials contracted significantly during the quarter with the WTI Cushing to LLS differential dropping from $20.22 per barrel in the first quarter to $15.07 per barrel in the second. More significantly, the discount for West Texas Sour price in Midland versus WTI dropped to $0.36 per barrel from $11.41 per barrel in the first quarter. Given transportation cost to Cushing and the product value difference between sweet and sour crude, the current Midland sour differential's unsustainable.

In the interim, we are maximizing the amount of sweet crude we are processing at Big Spring. The total throughput at our Big Spring refinery in the second quarter was just over 72,000 barrels per day. Direct operating expenses during the quarter were $4.16 per barrel, resulting from higher throughput rates and good cost control. This compares to $4.27 per barrel in the same quarter last year.

We continue to look at a number of projects and actions to further improve the profitability of Big Spring. Last quarter, we mentioned increasing the production of toluene and aromatic solvents. Our total petrochemical production out of Big Spring increased by almost 400 barrels per day versus the first quarter, contributing another $700,000 in gross margin. When this initiative is fully implemented, we expect that it will increase profitability of Big Spring by an estimated $14 million per year.

We are looking at modifying our vacuum tower during the 2014 turnaround to increase distillate recovery and de-bottleneck the refinery. Early estimates are that this project could increase our distillate yield by 2% on crude and increase crude throughput by as much as 3,000 barrels per day at a relatively low cost. We are also working on projects to improve LPG recovery, to run lighter crudes and on a more significant increase of the refinery capacity.

Finally, we are working to continue to expand our truck receipts of locally produced crude where we benefit from delivered cost and quality and anticipate having an additional new receipt system in place by year end. We believe that Big Spring is strategically located and that we will have a continuing feedstock price advantage over much of the industry.

In our Wholesale Marketing business, we are enjoying significant increases in both branded and unbranded sales. Versus the same quarter last year, branded and unbranded sales are both up by an identical 16%. In addition to increasing the profitability of our business and integration of our marketing back to Big Spring, this increased volume is contributing to our ability to generate RINs internally.

Our Retail Marketing business had a very good second quarter with record fuel sales are up nearly 15% over the same period last year. Fuel margins were very good at $0.202 per gallon. Merchandise sales were up 1% versus the same quarter last year with a merchandise margin of 31.6%. These improved results come despite 2 fewer stores operating this year as compared to last. We feel that much of this improvement is coming from our remodel program, and we completed remodels on 34 stores thus far in 2013.

The Krotz Springs refinery results were impacted by a fire in the reformer that occurred in late April. While there were no injuries resulting from the fire, the entire refinery was shut down for approximately 12 days, and the reformer was shut down for 37 days in the quarter while repairs were made. As a result of the fire, throughput at the refinery for the quarter averaged 58,800 barrels per day, of which just over 31,000 barrels per day was WTI. The pretax economic impact of the fire on our second quarter results was approximately $17 million. The reformer was returned to service on June 1, and the refinery has been operating well since. Direct operating expenses were higher this quarter at $4.63 per barrel as a result of lower crude runs and higher expense resulting from the fire.

Obviously, we are disappointed with the fire and the impact it had on our earnings for the quarter. This is not consistent with our expectations for our plans, and we are redoubling our efforts to ensure that we operate safely and reliably at all of our facilities.

On the positive side, we completed work to put our Krotz Springs crude oil rail rack into service and received our first rail cars of crude in late June. The current capacity of the rack is 9,000 barrels per day, expandable to 14,000 barrels per day. Crude oil receipts are ramping up, and we received approximately 2,500 barrels per day by rail in July. The economics of rail receipts have changed with the contraction in differentials, but we believe there are opportunities to take advantage of the flexibility provided by the rail-unloading facility.

Additionally, we are benefiting from operational efforts to improve distillate recovery and reduce FCC catalyst cost at the plant. In conjunction with our compliance with MSAT regulations, we began selling a benzene-rich like product stream as a feedstock for BTX units. This contained benzene is paid -- is priced at $50 per barrel over its value in gasoline, contributing to $400,000 per month to gross margin.

In California, we are still working on getting our permit to install a rail-unloading facility and make modification to Bakersfield to run light crude. We expect to get these permits by the end of the year. Last quarter, I mentioned our initiative to take advantage of our West Coast logistical assets, and we recently completed an agreement with the West Coast refiners to provide them rail-unloading services out of our Willbridge, Oregon terminal. We expect operations to start in mid-September. We are also close to developing a similar agreement at another West Coast facility and have expanded the capacity of our rail -- of our crude oil rail terminal at Long Beach. Currently, this logistics business is contributing about $10 million to the bottom line, and we expect this to grow over time. Finally, we are moving forward to restart the product rack at Paramount and reenter the wholesale market there, which will enable us to generate RINs from these sales.

In addition to these logistics initiatives, we are also pleased to be a partner in the California AltAir Fuels project. This facility is designed to produce 30 million gallons per year of renewable jet fuel and diesel fuel. In addition to being one of the equity owners of the project, we will also be the operator of the plant.

In our Asphalt Marketing business, sales in the quarter were negatively impacted by unusual weather in our marketing area that shut down a number of paving projects. Versus the second quarter last year, blended asphalt tonnage was off nearly 25%. Most of this reduction in sales is from committed business that we expect to recover in the third and fourth quarters. We are encouraged that margins on a cash basis in this business improved to almost $90 per ton as compared to $43 per ton in the second quarter of 2012, as we've been able to maintain the sale of our specialty asphalt while purchasing blend stocks at attractive values.

Looking forward, crude oil differentials have obviously been narrowed. The startup of pipelines from West Texas to the Gulf and the expansion of Seaway have for now resolved the logistical constraints to get West Texas crude to alternative markets. However, we feel that some of this is overdone and that the longer-term differentials will be fundamentally based on the relative values of crude oils and the costs associated with getting these crudes to suitable markets.

For example, in the second quarter, West Texas Sour actually sold at a higher price than WTI. From a yield perspective, WTI is a more better valuable crude than sour crude, and we feel that pricing will adjust to reflect this. Alternatively, if this differential remains tight, it means that sweet crude is being discounted, and we can take advantage of that by increasing sweet crude runs at Big Spring.

We also believe the transportation differentials will be set by the highest cost of transportation to clear the market. Current crude oil pricing supports the continued high level of exploration and production activity and crude production growth in West Texas, the Eagle Ford and other areas of Mid-Continent and Canada. And we expect these barrels to make it to the Gulf Coast where they will very soon push out all light crude oil imports.

At this point, we expect LLS to start selling at a discount to Brent, and the discounts for WTI from Brent will widen, improving the economics of both the Big Spring and Krotz Springs refineries. Fundamentally, it is good to operate in a feedstock-rich environment.

Throughput guidance for the third quarter is 69,000 barrels per day at both Big Spring and Krotz Springs. Our initiatives to increase RIN production internally are bearing fruit. I mentioned that both branded and unbranded sales out of our Big Spring system are up 16% versus the second quarter last year, contributing to RIN generation. In addition, we expect to begin blending biodiesel within our Big Spring system next month. We expensed $8 million of RINs costs for the quarter at Big Spring and expect our RINs cost for the year to total $20 million.

At Krotz Springs, we did not incur RINs expense for the first half of the year. I can't comment today on RINs obligations and costs for the remainder of the year, but we will provide guidance about this at a later time. We see it as a positive that the EPA in their announcement yesterday acknowledged the issues with the ethanol blend wall in the indicated flexibility in setting the 2014 renewable blending requirement.

In summary, we remain optimistic about our markets, our operations and our ability to deliver improvements in our business. With that, we are glad to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Jeff Dietert with Simmons.

Jeffrey A. Dietert - Simmons & Company International, Research Division

Did I understand your logistics, $10 million? Is that $10 million EBITDA per annum?

Paul Eisman

Yes.

Jeffrey A. Dietert - Simmons & Company International, Research Division

Okay. And how do you expect that to grow with the investments that you're making on the logistics side?

Paul Eisman

Well, it's all about getting customers and people that want to use the assets. So we've got several West Coast assets. We've already -- the deals we already have consummated, generate that $10 million of EBITDA. As I mentioned, we're very close, we think, on one of our other facilities and a big part of what we had planned to do in Bakersfield and the permits that we've submitted allow for a fairly significant rail facility at Bakersfield. So we've got to develop that from a business perspective, but we think there is a significant opportunity to grow that business.

Jeffrey A. Dietert - Simmons & Company International, Research Division

And you talked about Bakersfield expecting permits in the fourth quarter this year. Any update on what that capacity might look like, either initially or eventually?

Paul Eisman

The logistics capacity?

Jeffrey A. Dietert - Simmons & Company International, Research Division

Yes. In the Bakersfield rail project.

Paul Eisman

What we've designed and what we've permitted is 2 unit train unloading facilities. And if those are fully utilized, it could be up to about 140,000 barrels per day. I mean, we don't actually know where we'll end up, but that's the permitting -- that's what we've permitted.

Jeffrey A. Dietert - Simmons & Company International, Research Division

Got you. And secondly, it looks like you had the cost of the unplanned downtime as a special item, the $11.6 million. I believe that's $0.17 a share. I think it's an industry standard to include those as unplanned downtime as part of the refining operations. Any reason why that was a special item rather than incorporated into the operating numbers?

Shai Even

Yes. We felt that this is a one-off item in order for some people reporting on this kind of event in a different way. We feel that necessary to that highlight that is a nonrecurring item this quarter.

Operator

Our next question is from the line of Clay Rynd with Tudor, Pickering, Holt.

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

Okay. I know you said you weren't going to talk much about the RINs at Krotz Springs. But I'm a little confused on the 1Q commentary you had talked about how you had -- you saw under the colonial system that you were a little short RINs there. So has something changed fundamentally there? Or are you just not buying ratably? Or kind of could you walk me through what you can there?

Paul Eisman

Well, in the first half, I mentioned that we did not buy any RINs, not incur any RINs expense. That was consistent with our obligation in the first half. And then the second half, we said that we weren't really going to comment today. I'm going to have to stick to that. I really can't comment.

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

Fair enough. I guess my other question would be you have this MLP structure with Big Springs now, and as you build out kind of these logistics assets, are those an option to be dropped down even though they're more traditional MLP type assets? Or do you want to keep kind of the variable rate MLP, which just kind of refining assets in it or...

Paul Eisman

Yes, I think one of the things that the Alon partners provide us is a vehicle to do drop-downs. The question will become, I think, that if we get sufficient EBITDA generation to generate another separate MLP that's more of a logistics. Obviously, it trades at a different type of multiple with a different type of yield. So we have to evaluate that. But it's fundamentally a different type of MLP.

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

Okay. So it'd be 2 separate entities, you wouldn't kind of roll it all into one?

Paul Eisman

Potentially, I don't think we're there yet, so we haven't -- but yes.

Operator

And our next question is from the line of Chi Chow with Macquarie.

Chi Chow - Macquarie Research

The Krotz Springs rail terminal, do you have the ability to bring in other crudes other than WTI? And are you looking to do that [indiscernible]...

Paul Eisman

We do. I mean -- and frankly, that's one of the advantages of rail, is that you go get it from wherever it makes the most sense. So the Krotz Springs refinery is a light sweet crude refinery, which, at the end of the day, given the increase of production at light sweet crudes in U.S., we think is an advantage. But, we can go get those from anywhere. We can send those railcars -- we did the first in July. We sent them out to West Texas. But with the contraction in differentials, we're likely to send them other places. We can go to the Bakken. We can go to Niobrara. We can go anywhere that the crude is available and is priced attractively.

Chi Chow - Macquarie Research

Have you tested the Bakken barrels and these other crudes at the plant? Or do they work okay just operationally?

Paul Eisman

Yes, we've run some Bakken that -- it's been delivered down into St. James, and we have run those barrels. And they run effectively. Some of the Bakken that we've seen -- there is variability in the quality of Bakken, and as with any field, not all the crudes are the same. And in some cases, we've seen the Bakken be lighter than we'd like, and we're obviously -- we'd obviously try to deal with that. But Bakken generally is a crude that is -- that can run very well at Krotz Springs.

Chi Chow - Macquarie Research

Okay. Great. Then at Big Spring, how much volume are you trucking in at this point? And with running a lighter slate, does that cause any issues with yields at the plant?

Shai Even

Yes. We truck in a little over 30,000 barrels a day of crude, locally gathered crude. That -- all that crude is not being run at Big Springs. Some of it is moved on to our -- to Krotz Springs. But we are running more WTI at the plant too, as Paul said.

Chi Chow - Macquarie Research

Right. And again, has that caused any yield issues on not running as much the TS barrels.

Paul Eisman

We -- so we were on -- we are maximizing the amount of WTI with this current crude differential situation. We're maximizing the WTI that we're running at Big Spring. We're up to about 25,000 barrels per day right now, and we're looking at that testing it. And the issue is not so much yields. The yields out of WTI are better than what we see of WTS. We produce less asphalt, we -- it generally, the crude slate is more valuable. And so the issue for us is not the crude slate, but how light the crude is and limits that we have in crude tower related to running to lighter of a crude for the kind of equipment we got. One of the things I mentioned in my remarks, is that we're looking at a project to possibly de-bottleneck the refinery to run more WTI. Because if you believe these differentials are going to be -- continue to be this narrow, I mean, as I said also, that really means that we're dealing with a discounted crude in this market. And so we want to take advantage of that. And we don't think that's a big capital expense. We think we can do that very effectively. In the interim, we're trying to understand where the limits are by -- we'll continue to push the amount of WTI we're running in the refinery, looking at the economics of that and seeing how we want to optimize the refinery.

Chi Chow - Macquarie Research

Okay. Great. Are the trucking assets yours? Or are they third party?

Paul Eisman

They're third party.

Chi Chow - Macquarie Research

Okay, okay. I guess final question, Paul, you mentioned in your remarks, I guess, the restarting of the facility in Oregon and looking at something in Long Beach, could you go through that list again on the logistics assets on what's going on the West Coast?

Paul Eisman

Yes, it's not restarting -- well, that Willbridge terminal has been an asphalt terminal, and -- but we've got good rail facilities there, and so we're going to utilize those to bring crudes into that facility for third parties and handle the logistics for them. We continue -- we can continue to run asphalt sales out of that facility if we want to continue to do that. Also in Southern California, in our Long Beach facility, we have a current agreement in place to do essentially the same thing. And we're looking at our other facilities in Southern California, but also in Bakersfield.

Chi Chow - Macquarie Research

What's the capacity on the Willbridge and the Long Beach terminals?

Paul Eisman

Alan, do you have those?

Alan P. Moret

Yes, Long Beach, the capacity is a little over 10,000 barrels a day of rail unloading, if fully utilized. And at Willbridge, we think it starts at about that same range, but it's expandable to larger numbers, 2x to even 3x that potentially.

Operator

And our next question is from the line of Paul Cheng with Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

A number of quick questions. On the rail operation, Paul, let's say when the market condition change, how quickly that you can correspondingly change? Do you have any kind of lock in due to the contract term? Or it’s like every 30 days, if the market condition change, you can correspondingly change?

Paul Eisman

On which operation, Paul?

Paul Y. Cheng - Barclays Capital, Research Division

On the rail operation, for your train operation in the Krotz Springs.

Paul Eisman

The Krotz Springs rail, is that...

Paul Y. Cheng - Barclays Capital, Research Division

Yes.

Alan P. Moret

I mean, we're basically contracting a month in advance of where we're sourcing the crude. And as Paul said, we were bringing crudes in from West Texas, and those aren't attractive now, so we have to -- I mean, we are looking to bring in from other regions.

Paul Y. Cheng - Barclays Capital, Research Division

Right. So you do not have long-term contract whether it is with producer or with the rail operator or with the unloading or loading terminal facility operators?

Alan P. Moret

That's correct.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And secondly then, Shai, the $17 million pretax and $11.6 million related to the reformer outage, is that all opportunity cost most? Or that's part of the repair cost is in there? Can you say please, how much is the repair cost?

Shai Even

No, the -- so none of that is a facility cost. I think it's all actual cost. So there is a $2 million or approximately $2 million affecting our operating expense for the quarter, and then the other $15 million affecting increase in the cost of goods sold for the quarter. About half of that is due to hydrogen purchases, naphtha sales and alkyl purchases [ph] and the other half -- approximately half of the $15 million is due to sale of excess crude in an environment of the contraction between WTI and LLS.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. On the -- okay. And in, Shai, in the -- I think in the footnote, you said that there's a $9.3 million of the environmental compliance. Is that including the $8 million RIN cost or that this is totally different?

Shai Even

No, that -- the $8 million of RIN cost is included in the $9.3 million.

Paul Y. Cheng - Barclays Capital, Research Division

Yes. So what was the remaining, $1.3 million?

Shai Even

The $1.3 million , additional $1.3 million associated with the benzene cost, so we have to accrue for benzene cost if we are producing over the limit.

Paul Y. Cheng - Barclays Capital, Research Division

Paul, on the Bakersfield in California, are you guys pretty much done with all the engineering that how are you going to run the light oil? And also that in terms of having -- I presume that -- are you going to wait until you get the permit before you try to get the marketing arrangement that to sell to the local market, as well as to bring in the crude? Or how is that focused?

Paul Eisman

What will happen is once we have the permits, we can start the project. And the project is probably a 6- to 9-month project. And so we've run the facility before. Remember that we were running Paramount and Bakersfield on a combined mode and running the hydrocracker and making product for the local market. So we've entered this market before, and I think we know how to do that. That's not -- that is in terms of timing, that's not a particularly tough issue. So we're -- we are continuing with some engineering for the projects. We're looking at the economics of the projects. We're working and there's a lot of continued efforts to support the permitting of this. And so once we get there, we'll make a decision as to what we're going to do to move forward.

Paul Y. Cheng - Barclays Capital, Research Division

Right. Paul, I mean, based on the preliminary study that you guys have, what is the capital cost you need in order to restart Bakersfield?

Paul Eisman

We're not -- I don't think we're ready to disclose that at this point because we're doing additional work, remembering that the cost though, really 2 projects. One is the restart of Bakersfield and the second one or the construction of the logistics facilities to support, not only Bakersfield, but potential third-party logistics services. So I'm not prepared to talk about either contribution or cost, but we are continuing to work on those.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Shai, just some quick number for the balance sheet if you don't mind. What is your market value of the inventory over bulk? And in your debt of $530 million, is that initial term debt inside there?

Shai Even

Yes, the market value of inventories on balance sheet at LIFO is $204 million, approximately, $205 million and LIFO reserve was about $66 million. So that's the difference between book and the market value, which means that market value is approximately $271 million and the short current portion of the long-term debt is about $9.5 million, and the long-term debt is $520 million.

Operator

And our next question is from the line of Roger Read with Wells Fargo.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

I would say my questions have been answered, so I'll turn it back to you all.

Operator

We do have one more question from the line of Ed Westlake with Crédit Suisse.

Rakesh Advani - Crédit Suisse AG, Research Division

It's actually Rakesh Advani. Just wanted to follow up on the Bakersfield comment. Have you guys signed any LOIs? Or is there any indication of who wants to move the crude to the West Coast [indiscernible]?

Paul Eisman

Yes, we're continuing to develop that business, and that's all I'll say at this point. We think there are opportunities. We feel like the Bakersfield facility is pretty well cited and established to support a logistics project, but we are working with potential customers and suppliers to make this work.

Rakesh Advani - Crédit Suisse AG, Research Division

Because -- I guess, you guys are just waiting to get the permits, et cetera, come through in the fourth quarter?

Paul Eisman

Well yes, obviously, getting the permits is supportive of working out -- working the commercial arrangements, but we're working those in parallel.

Operator

[Operator Instructions] Showing no further questions, I'll turn the call back to management for closing remarks.

Paul Eisman

Thank you all very much for your time today and for your interest in the company. And we look forward to talking to you in about 3 months. Thank you.

Operator

Ladies and gentlemen, this concludes the Alon USA Energy Second Quarter Earnings Conference Call. You may now disconnect, and thank you for using ACT Conferencing.

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