Alon USA Partners' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Alon USA (ALDW)

Alon USA Partners LP (NYSE:ALDW)

Q2 2013 Earnings Call

August 7, 2013 10:00 AM ET

Executives

Claire Hart – SVP

Paul Eisman – President and CEO

Shai Even – SVP and CFO

Analysts

Arjun Murti – Goldman Sachs

Rakesh Advani – Credit Suisse

Jeff Dietert – Simmons

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Alon USA Partners’ Second Quarter Earnings Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions. (Operator Instructions). This conference is being recorded today, August 7, 2013.

I would now like to turn the conference over to Claire Hart, Senior Vice President. Please go ahead.

Claire Hart

Thank you, Teresa. Good morning, everyone, and welcome to Alon USA Partners 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 on Monday earnings release, but in case you didn’t, you can obtain a copy from our website, alonpartners.com, under the Investor Relations section.

Before I turn the call over to Paul, please be aware the information reported on this call speaks only as of today, August 7, 2013 and therefore, you’re 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 Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based up 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 materially differently 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, also refer to the statements regarding forward-looking statements incorporated into our news release issued on Monday. And please note that 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. We are very pleased with our operations in the second quarter as the Big Spring refinery ran exceptionally and set an all-time quarterly in crude charge rate. Market conditions in the second quarter is significantly impacted our results as we experienced contraction in crude oil differentials and increased RIN cost.

We recorded net income in the second quarter of $45.3 million or $0.73 per unit as compared to net income of $100.2 million for the same quarter last year. For the first six months we reported net income of a $138.8 million or $2.22 per unit as compared to $148.3 million in the same period last year. We are pleased to distribute this to unitholders and announced a distribution of $0.71 per unit on August 23rd to unitholders of record as of the close of business on August 15.

As I mentioned the Big Spring refinery operated very well in the quarter and set an all-time quarterly crude charge record during the period. Crude oil differentials contracted significantly during the quarter with the WTI Cushing, 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 repriced in Midland dropped to $0.36 per barrel from a $11.41 per barrel in the first quarter.

Given transportation cost to Cushing and the absolute product value difference between sweet and sour crudes we feel the current Midland sour differentials unsustainable. In the interim, we are maximizing the amount of sweet crude we are processing at Big Spring. The total through put 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 $4.20 per barrel in the same quarter last year.

We continue to look at the number of projects and actions to further improve the profitability of our Big Spring refinery. 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 if 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 grill for first quarter 2014 turnaround to increase distillate recovery and debottleneck to refinery. Early estimates are that this project could increase our distillate yield by 2% on crude and increase crude throughput by as much as 3000 barrels per day at a relatively low cost. We are also working on projects to improve LPG recovery and of a more significant increase to 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 the Big Spring refinery is strategically located and that we will have a continuing fee stock price advantage over much of the industry.

In our wholesale marketing business we’re enjoying significant increases in both branded and unbranded sales versus the same quarter last year branded and unbranded sales are up by an identical 16%. In addition to increasing the possibility of our business and integration of our marketing back to Big Spring this increased volume is contributing to our ability to generate rents internally.

Looking forward, crude oil differentials were obviously narrowed. The startup of pipelines from West Texas to the Gulf and the expansion of the seaway after now resolve the logistical constraints to get West Texas crude to alternative markets. However, we feel that some of this is overdone and that’s a longer term differentials and we’re fundamentally safe and relative value to crude oils and the cost associated we’re getting these crude oils to suitable markets.

For example in the second quarter, West Texas they are actually sold at a higher price than WTI. From a yield perspective, WTI is a more valuable crude than sour crude and we feel pricing will adjust to reflect this. We also believe that 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 production activity and crude production growth in West Texas to Eagle Ford and other areas in the Mid-Continent and Canada. And we expect these barrels to make it to the Gulf Coast where we will very soon push out all light crude oil imports. At that point, we believe that discounts for WTI from Brent will widen benefiting the economics of Big Spring.

Fundamentally, it is too good to operate in a peace stock rich environment. Throughput guidance for the third quarter is 69,000 barrels per day at Big Spring. Our initiatives to increase RINs 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 bio-diesel within our Big Spring system next month. We expensed $8 million of RINs cost for the quarter and expect our RINs cost for the year to total $20 million. We see that the positive that the EPA in their announcement yesterday acknowledge the issues with the ethanol blend well and 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

Thank you sir. We will now begin the question and answer session. (Operator Instructions). And our first question comes from Arjun Murti with Goldman Sachs. Please go ahead.

Arjun Murti – Goldman Sachs

Yeah, thank you. Just a follow-up to your comments on the WTS WTI spread which is kind of a parody and you mentioned it’s unsustainable. I think we certainly agree with you over the long run, I think just wondering during this period of pipeline startups to the Gulf Coast and a lot of those refineries preferring the medium barrel. What you see as the mechanism to widening out versus say over the next year, is there not risk to widening out doesn’t actually happened for a longer period of time than was to say the next four quarters.

Paul Eisman

I mean fundamentally we see WTI is more valuable crude in the extend people can run it. I understand there is some blending economics in the Gulf Coast, I think that is more and more light crudes and make it there. I think that – at the end of day the value of these relative of these crudes tend to play out and how they’re priced. So, I don’t know when that will happen, I’m not saying it will happen immediately but we do expect over the long run that WTS will lower in price relative to WTI’s reflected value. The other thing is well people will adjust I mean I mentioned in our comments that we’re running more WTI, we’re up to 25,000 looking in how we can more and we think with some minor capital expenditures we can significantly change that. So, I think at the end of the day I think all that bounces out, it may take some time but I think at the end of the day it will.

Arjun Murti – Goldman Sachs

That’s, great. And if I missed in your prepared remarks, I apologize but any update on sort of discretionary capital spending at Big Spring over the next maybe rest of this year 2014. Thank you.

Paul Eisman

Yeah, I mentioned some projects we’re looking at, we’ve not – these are projects that not yet been approved by the board but they’re very attractive. So, I don’t really have a number for you I would tell you we’re looking at projects that can generate additional earnings and therefore additional distributions with the understanding that the capital spend needs to be accretive to the unitholders.

Arjun Murti – Goldman Sachs

Got it. Thank you so much.

Operator

Thank you. (Operator Instructions). And our next question is from Ed Westlake with Credit Suisse. Please go ahead.

Rakesh Advani – Credit Suisse

Hi, actually it’s Rakesh Advani instead of Ed. I just had a quick question. If you’re looking at the third quarter you’ve seen a differentials that will obviously come down margins (inaudible) tend to lower versus the 2Q. I’m just wondering if you see yourself in a situation where the cash available for distribution in the third quarter kind of below zero. Would you in a series and try and raise debt to pay out some kind of distribution or what would be your thought process there?

Shai Even

The thing is right now when we are looking at our model we may see a cash distribution because maybe the difference between your models and reality is maybe associated with our capital expenditures of quarter. And we think that was the plan to continue to make distribution very strong that formula that we’re disclosing in the prospective we gone through the plan to make distributions for more than the cash generated by the entity. Regarding back to mainly to the – on previous question regarding improvement project we really haven’t decided that how we’re going to plan this even this it will be upward and we may see a drop down of this project coming from (inaudible) so that’s something that will be discussed and will subject to future programs.

Rakesh Advani – Credit Suisse

Okay. So I guess just coming back to that CapEx comment, I mean suppose you were in the situation where you – you couldn’t cover those

CapEx requirements, obviously your distribution would be negative on that basis. Would that be an option for you or no?

Shai Even

Yeah, your question is in order to cover if we have any negative cash then will you look at different options including support from our parent company.

Rakesh Advani – Credit Suisse

Right. Thank you.

Shai Even

Right now we don’t expect negative cash.

Rakesh Advani – Credit Suisse

Okay. Thank you.

Operator

Our next question is from Jeff Dietert with Simmons. Please go ahead.

Jeff Dietert – Simmons

Good morning. Jeff Dietert with Simmons.

Claire Hart

Hi, Jeff.

Jeff Dietert – Simmons

Good morning. Following up on WTS, I think historically at Big Spring, you run more 80% WTS and 20% WTI. Do you have it crossed?

Paul Eisman

No, it’s typically been 80% WTS.

Jeff Dietert – Simmons

Yeah.

Paul Eisman

We have the capability run up to 100% but we optimized that number.

Jeff Dietert – Simmons

Yeah. And now you mentioned that WTI is – it has a better yield and more attractive the – what WTI and WTS trading imparity with one and other. Do you ship the feedstock away from WTS towards WTI?

Paul Eisman

Yeah, absolutely to the extent we can. So, I mentioned that we’re already at about 25,000 barrels per day if you look at the math as percentages. So really much higher it’s higher percent is today than what we’ve been historically and we’re running additional pass to see we can get more WTI into the refinery. The issue around just switching to WTI is that it has somewhat limits the capacity of the refinery because of the light and so it’s a lighter crude. We find limits at different places, at the same time with WTI we have a better products laid making with asphalt. So we look at the economics of all that and depending on the crude differentials and the margins at the time we could push us to running more WTI even if we run a few less barrels. So, those are the kind of analysis we’re trying to understand because I mean typically for the last many, many years it’s been economic to run tower. So, this is a new era for us and we’re trying we’re very quickly trying to adjust to it and reoptimize refinery to reflect that.

Jeff Dietert – Simmons

Got you. So, to the certain degree, you’ve already made some adjustments and you potentially could shift further towards WTI.

Paul Eisman

Yeah.

Jeff Dietert – Simmons

What would be the limit and how much WTI, you could take as a (inaudible) or percent of total.

Paul Eisman

Theoretically today we can run a 100% WTI, the question would be what will be the capacity the refinery has a 100% WTI refinery. And so that’s the analysis we need to do and reflect those economics in our models and as I said depending on margins and differentials of time decide what’s optimal. So we’re moving in that direction. The other thing we can do is look at what kind of capital investments we might make to alleviate the capacity limitations that we see when we run more WTI. I don’t think those are costly capital projects and we’re also looking at those. And what we don’t know is how long this – I’d call this normally is going to stay where it is.

Jeff Dietert – Simmons

Got it. And secondly on – in your RINs comment, $8 million expense in Q2 and approximately $20 million for the year. Was that ALDW or ALJ?

Paul Eisman

That’s ALDW.

Jeff Dietert – Simmons

Okay. All right. Congratulations on strong Big Spring’s performance. Thanks for your comments.

Paul Eisman

Well, thank you very much.

Operator

(Operator Instructions). And Mr. Hart there are no further questions at this time please continue.

Claire Hart

Thank you very much everybody on the call for your time and your interest in the company. We’re looking forward to talking to you next quarter. Thank you very much.

Operator

Ladies and gentlemen, this concludes the Alon USA Partners’ second quarter earnings conference call. Thank you for your participation. You may now disconnect.

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