CVR Refining's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: CVR Refining, (CVRR)

CVR Refining, LP (NYSE:CVRR)

Q3 2013 Earnings Call

November 1, 2013, 12:00 PM ET


Jay Finks - Director, Investor Relations

John Lipinski - Chief Executive Officer and President

Susan Ball - Chief Financial Officer and Treasurer

Stanley Riemann - Chief Operating Officer


Jeff Dietert - Simmons & Company

Ed Westwick - Credit Suisse


Greetings and welcome to the CVR Refining third quarter 2013 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Jay Finks, Director of Investor Relations for CVR Refining. Thank you, Mr. Finks. You may begin.

Jay Finks

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

Prior to discussing our 2013 third quarter results, let me remind you that 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 maybe deemed to be forward-looking statements. Without limiting the foregoing, the words outlook, beliefs, 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 reconciliations to the most directly comparable GAAP financial measures are included in our 2013 third quarter earnings release that we filed with the SEC this morning before the opening of the market.

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

John Lipinski

Thank you, Jay, and thank you all for joining us. This morning we released our third quarter's earnings and declared our third quarter's distribution of $0.30 per common unit. The third quarter's distribution will be paid on November 18 to unitholders on record of November 11. So far this year we've declared $3.23 in distributions to our unitholders.

In the third quarter 2013, we reported a consolidated net income of $86 million as compared to $318.6 million a year ago. Our 2013 third quarter consolidated adjusted EBITDA was $33.9 million as compared to $447.1 million a year ago.

Impacting our third quarter results were reduced crack spreads, weakened product basis, significantly tightened crude differentials, and absolutely and most importantly, the downtime associated with cat cracker at our Coffeyville refinery.

As you recall from our last earnings call on July 17, we had to take down our cat cracker at Coffeyville due to a failure of a major piece of equipment. The unit was back to full operating rates on September 11. Due to this outage, Coffeyville ran only about 79,400 barrels a day of crude for the quarter.

Wynnewood on the other hand ran approximately 81,300 barrels a day of crude, resulting in a total crude throughput of approximately 160,700 barrels a day. In the third quarter of 2013, our realized refining margin adjusted for FIFO was $8.21 per barrel and that compares to $33.44 a barrel in the same quarter last year.

Partially driving this decrease was the PADD II Group 3 2-1-1 product basis. The group averaged a negative $0.39 per barrel product basis, and look at that as what we actually realized compared to the mercantile stream, as compared to a positive $3.87 per barrel product basis in the same quarter of last year.

During the third quarter, we realized lower crude discounts as compared to year ago, however, we do continue to benefit from attractively priced crudes. Our purchase crude discount, WTI for the third quarter, was $0.37 per barrel as compared to $2.76 per barrel in the third quarter of 2012.

Again, this decrease year-over-year was significantly impacted by the downtime at the cat cracker and Wynnewood, which caused us not only to run lower rates, but to run a much lighter and sweeter crude slate and significantly fewer heavy, heavy sour barrels.

And just parenthetically that also increased our operating cost per barrel running at lower rates. We had cost associated with the outage itself, and so our margin capture was significantly affected by this outage. In the third quarter, we were able to process about 9,000 barrels a day of heavy sour crude as compared to 22,000 barrels a day in the same period last year.

The Western Canadian select discount to WTI averaged $22.92 in the third quarter as compared to $15.53 a year ago. Other differentials, such as Midland sweet crude versus Cushing and others were significantly tighter this year than they were last year.

Crude margins are rapidly changing. For the past couple of years, we've been focused on the Brent-WTI spread, as it's been highly correlated to the NYMEX 2-1-1 crack spread and basically benefited all refiners running WTI-related crudes. This has changed significantly. In the near term, we expect crude differentials to remain volatile, as more North American crudes produced and find their way to the Gulf Coast and East Coast markets, displacing higher-price order burn related imports.

Just pretty much going off my script here a little bit, if you look back last several quarters or even longer, you would look at crack spread, and it was very highly correlated to the Brent-TI spread. The wider the Brent spread, the higher the NYMEX 2-1-1. At the same time too, you saw LLS, Louisiana Light Sweet, trading at a premium to Brent.

Today, we find that Brent, even on prop basis is a little over $12 spread from WTI. And LLS instead of being wider than that, we find LLS today to be somewhere in the range of $2.50 to $2.60 over WTI. There has been a paradigm shift and we expect this to settle out over time. But right now, it's pretty hard to exactly predict where this market's going.

Based on projected increases in Canadian crude production, U.S. crude production as well as pipeline and rail transportation alternatives, we still believe that mid-continent will be price advantage. Some of that comes from the fact that we already believe that the Gulf Coast is starting to become full of light sweet crudes and even ultra-light crudes. As crude production continues even with these pipelines, there have to be a home for it, if the home stops the Gulf Coast, it will back up in to the mid-continent.

Our gathering system had another solid quarter. We gathered over 54,000 barrels a day for the third quarter. In the third quarter, our RINs expense was $57.4 million as compared to $7.1 million in the third quarter of 2012. As of September 30, our year-to-date RINs expense was a $155 million as compared to $16.5 million in the same period last year.

RINs expense for the entirety of 2013 is estimated to be between $175 million and $190 million. But we've seen significant reductions in RIN prices. In my view I always believe that a portion of the RINs price was reflected in the gasoline price. And the fact that we have pretty negative basis on gasoline, when you look at the Gulf Coast, Chicago, the group or other areas in the country, RINs prices are falling because gasoline were just falling, in addition to the fact that there is anticipation that EPA will hopefully fix this broken system.

So with that said, right now, I'll turn the call over to Susan. And I will pick it back up, and then we'll take your questions. Susan?

Susan Ball

Thank you, Jack, and good morning, everyone. As Jack previously mentioned, net income was $86 million in the third quarter of 2013 as compared to net income of $318.6 million in the third quarter of last year. Adjusted EBITDA for the quarter was $33.9 million in 2013 as compared to $447.1 million in the third quarter a year ago.

In the third quarter of 2013, the more significant adjustments to net income to derive adjusted EBITDA or adjustments related to the increase or decrease associated with the impacts realized under our first-in first-out FIFO accounting method, we realized a favorable FIFO inventory impact of $54.3 million in the third quarter of 2013. Gains on derivatives not settled during the period were $38.6 million.

Adjusted EBITDA is further reduced by certain annual reserves that are prorated on a quarterly basis to derive available cash for distribution. These annual reserves are set aside for future cash needs for maintenance and environmental capital expenditures of $125 million as well as $35 million for future major scheduled turnaround expenses.

Additionally, adjusted EBITDA is reduced for cash needs associated with debt service and other future operating and capital needs as determined and maybe adjusted for excess cash and cash reserves previously established. Available cash for distribution for the third quarter was $44 million or $0.30 per common unit.

In the third quarter of 2013, our Wynnewood refinery reported a refining margin adjusted for FIFO impact of $60.2 million as compared to $206.7 million in the third quarter of 2012. Our Coffeyville refinery reported a refining margin adjusted for FIFO impact of $60 million in the third quarter 2013 as compared to $384.8 million last year.

Our Coffeyville and Wynnewood refineries on a consolidated per barrel basis reported a refining margin of $8.21 per crude oil throughput barrel, which is adjusted for the favorable FIFO impact in the third quarter of 2013. This compares to $33.44 per barrel in the third quarter 2012, which was adjusted for favorable FIFO impact.

At the plant level Coffeyville's refining margin adjusted for the FIFO impact was $8.22 reported 2013, as compared to $33.56 per barrel for the same period a year ago. Wynnewood's refining margin adjusted for FIFO impact was $8.04 per barrel in the third quarter of 2013, as compared to $33.07 per barrel for the same period a year ago.

Impacts on the refining margin, where the higher costs associated with RINs, the reduced sales volume associated with the FCCU outage, weakened product basis and crack spreads and the tightening of the crude differentials.

Direct operating expenses excluding turnaround expenses per barrel of crude oil throughput was $7.08 in the third quarter 2013, as compared to $4.39 in the prior year. The increase year-over-year was mainly driven by higher direct operating expenses, which primarily were a result of increased repairs and maintenance associated with the FCCU work. This approximated $28 million and also increased personnel and utilities expenses, all calculated on lowering crude throughputs.

Refinery basis, Coffeyville's direct operating expenses excluding turnaround expenses per barrel of crude throughput was $9.37 in the third quarter of 2013, as compared to $4.13 in the same period a year ago. Coffeyville's increase year-over-year was primarily driven by the FCCU outage. Wynnewood's direct operating expenses excluding turnaround expenses per barrel of crude oil throughput was $4.85 for the third quarter of 2013, as compared to $4.81 in the third quarter a year ago.

The quarter with cash and cash equivalents of $250.5 million, our $400 million ABL facility continues to be undrawn and we had $27 million issued standby letters of credit against this resulting in availability of $373 million.

Our total long-term debt outstanding was $563 million. This was comprised of the $500 million, 6.5% unsecured notes, $51 million of capital lease obligations and $11.5 million, which was drawn against a $150 million in our company credit revolver provided by our parent CVR Energy. As a reminder this revolver is provided by our parent was put into place at the time of the IPO to fund future profit and growth capital expenditures.

Looking forward, we had open commodity derivative positions of 20.6 million barrels as of September 30. Of this, this included 4.7 million barrels at an average fixed price of $28.01 to be settled in 2013. The weighted average fixed price associated with all open positions for 2013 and 2014 is $27.94. Our open commodity derivatives positions are comprised of approximately 73% for distillate cracks and 27% for gasoline crack swaps.

Third quarter 2013 capital expenditures totaled $60.7 million, as the total capital expenditures in the third quarter of $48 million related to maintenance and environmental capital expenditures and $12.7 million related to growth capital.

With that Jack, I will turn the call back over to you.

John Lipinski

Thank you, Susan. Let me spend a few minutes talking about the fourth quarter and then just go back into some of the stats that we're seeing today. We estimate that our total crude throughput for both plants, stayed in the range of 180,000 to 190,000 barrels a day with both plants averaging pretty much nameplate capacity for the quarter, give or take few thousand barrels.

Our 2013, full year distribution outlook given the current market, in the screens you see, the product basis you'll see crude differentials and everything else.

We would estimate the distribution outlook to be between $3.45 and $3.70 per common unit, which includes the per-IPO period. The updated outlook again, is based on what we see in the market today, and again has just taken into our anticipated throughputs and pricing them at market conditions.

Let's talk for a moment just about market conditions. What we've seen happen over the last several months is that refiners on the Gulf Coast now have access -- or Gulf Coast, East Coast, West Coast you pick the locations; they have pretty much relied on offshore crudes priced on Brent. Increasingly we're able to access and continue to access WTI priced barrels. They have increased their overall throughputs, because their margins relative to where they were in the last year or two were significantly better, so we've seen more production.

If you look across to just DoE stats, gasoline inventories are up year-over-year, a little over 7% or about 14 million barrels across the country. And distillate stocks are up about 5 million barrels or 4% year-over-year. Crude stocks are up almost 11 million barrels, 10.8 million barrels year-over-year. The interesting thing is if you were to look at the charts, we're sitting at somewhere 385 million barrels and it's the highest level since 2004.

And if you look back in 2004, levels we have almost 100 million barrels more crude sitting in inventory in the United States over this nine year period. I would expect crude inventories to continue to increase. Ultimately, you will see exports back down, as we become more and more self-sufficient.

I do expect to see the Gulf Coast get itself of light sweet crude sometime during 2014, which will back that all, it's up to system. That's where we think we will be able to take advantage of it. We are starting to see wider and wider, heavy Canadian differentials over $30 a barrel. We will be able to see those starting in December and more prominently in the first quarter of next year.

Again, going back to the fact that refiners ran more, the overall demand for gasoline and diesel has not that much significantly changed year-over-year, but even on the Magellan system, which is really what feeds Group 3 or defines Group 3, we have seen very, very significant increases in inventory year-over-year. Gasoline inventories up 1.5 million barrels this year over last year and that's almost a third increase. Distillate is up about 700,000 barrels a day, which is somewhere between a 12% and 13% increase.

We expect those to work-off, particularly as Gulf Coast refiners are now realizing less and less for their gasoline and we expect them to start trimming back, because too much of a good thing doesn't last forever and I think we're seeing that, in pretty much the markets, and I have been doing this 41 years, this doesn't come as a shock. Changes occur and they occur more rapidly, when you get wider differentials, when cracks are extremely wild, everybody runs and then eventually cracks fall off, and then they get pretty thin and then people cut back and they revert back to the norm. We're still trying to find the norm. We don't know exactly where it's going to be.

We think middle of '14 things will start to settle out. You're going see larger and larger exports of gasoline as we go forward. If you think about the API, the crude is being produced. Its very light crude, Midland sweet is a good quality crude. WTI is a blended crude, but if you look at the ultra lights coming out of some of these shale plays finding themselves, finding their way into the Gulf, they make more gasoline, they are less valuable and at some point, something's got to give and I believe exports will continue to increase.

Now that position brand of the European refiners who depends on us, is a market for the gasoline. Looking forward a couple of years, I'm not sure how the Europeans will survive with no home for gasoline. I also believe the United States with its new, with its ongoing shale revolution will become the refined product producer of choice for the Atlantic base, maybe even further over into Southeast Asia.

So that's kind of my true sense that where I think we are going. We had a very difficult time with this cat cracker, it's unprecedented. If you put it in perspective, we had the flood in 2007 and we were out for 58 days. We literally had to rebuild a major piece of equipment in place, it took us a while to get the material. It was unfortunate, it didn't happen. That's behind us and the plants are running well.

So with that, everyone, we want to take questions. Operator?

Question-and-Answer Session


(Operator Instructions) Our first question is coming from Jeff Dietert from Simmons & Company.

Jeff Dietert - Simmons & Company

With regard to the Coffeyville cat cracker, is there any potential for recovery of losses through insurance or claims with the manufacturer or anything like that?

John Lipinski

No, it was a piece of equipment that, I forget the age 12 years or 14 years old, was inspected during the turnaround. It turns out that there was an anomaly and we have some corrosion in an area that literally cannot be inspected unless we have taken a report, that failed and it was a flue gas cooler, we blew it too, we figured we had to replace and plug-in too, but when we got in there we found out that we could do that or could do a few, but we might find ourselves down again and again and again until we replaced it. So we literally rebuilt it in place. It's probably good for another decade or more. Unfortunately, it was not caused by anything other than extraordinary wear and tear.

Jeff Dietert - Simmons & Company

Could you talk about any upcoming planned maintenance for 4Q or 2014?

John Lipinski

4Q we have no major maintenance planned. And when we would, we have a couple of catalyst change out, several months apart, but that's in '14. But that's in our schedule. Basically, we're doing some upgrades at Wynnewood, we have hydrocracker project and the like, and one of the things is, is every other year, we have to change out some catalyst with the upgrades we're going to be doing. Next year it will be the last time we do that before we get to four year cycle. It's kind of similar upgrades that we did at Coffeyville, so we can get full runs in between turnarounds. But again that's not going to be hugely significant in next year's number.

Jeff Dietert - Simmons & Company

In 3Q, you released $60 million of excess cash, and the cash position I think it's $250 million at the end of the quarter, what do you view as the optimum minimal range for cash?

John Lipinski

Well, I'll let Susan answer that, but what we did is we took a look and said, it's almost answering the question by just saying that we got to the point where we think we are comfortable with our cash and the company cash reserves, working capital needs and like, but Susan, if you'd would like to expand on that a little.

Susan Ball

Yes, Jeff, obviously, we have reserve satisfied again for Canada, larger needs that maintenance, environmental, capital expenditures and the future turnaround and those cash will be obviously retained. Additionally, we did look at our working capital. We looked at daily average expense needs and the cash inflows and had determined that from the proceeds of the IPO, there was excess cash that we could release. And so we're very comfortable with the cash position, but again retaining all the reserves associated with what we're setting aside for future needs.

Jeff Dietert - Simmons & Company

So is there a range or cash that you'd like to target?

Susan Ball

From a working capital change, and again the cash that we're going to target is going to fluctuate because of the reserves that we're establishing, but below those reserves, I would say a 50 million to 75 million range.


Our next question today is coming from Ed Westwick from Credit Suisse.

Ed Westwick - Credit Suisse

I guess we will see what the capture rate happens to Coffeyville in the fourth quarter, but Wynnewood was also a bit weak. And I guess some of the challenges that the industry is having is things like some of the secondary products LPG, asphalt stuff that we don't see in the crack, maybe if you can talk a little bit about some of the product challenges that might be there they need to surface and your view on how they may change going forward?

John Lipinski

One of the things, obviously, we make a few percent asphalt at Wynnewood. And since we came out of last turnaround, we've got higher operating rates on [indiscernible] and relatively have been making more PG graded asphalt. The LPG is obviously, you can follow it, but we have a fairly low liquid loss and most of our products turn out to be gasoline, diesel and jet fuel. We are minimizing, we have actually improved our liquid volume recovery at Wynnewood. Year-over-year you will see some of that in the staff.

The big thing is gasoline. Gasoline basis been impacted in crude differentials. If you take a look earlier in the year, we had very, very wide Midland sweet differentials to Cushing. And we get somewhere between 35,000 and 40,000 barrels a day of crude from the Permian Basin against Wynnewood. If you think about it those crudes actually for a while went to the Permian over WTI, we are starting to see them get a little bit sloppier right now. And in the middle of the year, we do know that Wynnewood does not process heavy Canadian crude. WTI got very, very strong.

So Wynnewood lost some of this crude advantage. We're starting to see the Canadians, as it is seasonally starting to widened out, and we are bringing in the most valuable barrels we can, even trading them in and out to capture margin that may even exceed our refining margin on those barrels. So Wynnewood operationally has been running at higher rates. Its operating costs have been reflected as the higher rates. Its recovery is actually better today at higher rates than it was at lower rates.

So we think things are going our way. But there has been some things in the market. If you just take a look at to gasoline basis, in the crude versus distillate and you look at it historically, it's pretty weak and that's because the Gulf Coast providers ran harder, ran longer and moved more product into our backyard and that just made it a little bit more difficult for everybody in the Mid-Continent, particularly in the group.

Ed Westwick - Credit Suisse

And to follow-up on that somewhere pointing to RIN distortions on pipes, but you seem to be pointing more towards just a supply and demand for gasoline, which might be more unfortunately sustainable than the RIN distortions, maybe a comment on when do you think the gasoline basis might improve, is it seasonal?

John Lipinski

It's seasonal. I mean, we see this every year, it's a little wider. I mean, I'd like to joke that the low point of the gasoline margin occurs on February 9 every year. I am not sure, it's gone to be February 9 or February 10, but usually we are going into what is pretty typically the doldrums for a mid-continent refinery. If we should run a nine month in a year, that nine months would exclude December, January and February. It's just life.

I mean, we are in an ag-market, the harvest is gong on. We actually expect to see distillate inventories strong, it will be harder in a next couple of weeks if you listen to the UAN discussion with Byron Kelley earlier today. I mean the crop is behind schedule. So people are drawing distillate very, very heavily and we expect that to improve. And when gasoline basis gets this bad, the weaker sisters on the Gulf Coast have to cutback.

Ed Westwick - Credit Suisse

And then maybe a final comment on your outlook for Midland. I mean obviously, there is a bit of a pots being build. There is a bit of a turnaround activity with some other refineries and that might have blown out Midland, but structured are you still convinced that the Midland will have a bit of a discount?

John Lipinski

I believe that we'll have a bit of a discount. Well, obviously has to. At some point, when you have more and more crude options to the Gulf. If you think that all the lines that are going to the Gulf, you have got XL South, you have got the expansion of Seaway. You have got the Permian Express. You have got all these pipes going down, you're are going to see some pressure on crude as those lines fill.

But if I am right, and again I think I am, but it's one man's opinion, if the Gulf Coast is already filling with light sweet crude, who is going to take the next the million barrels. And so you'll see distortions of crude between the Permian Basin, between Eagle Ford, between Midland, between all the other players, the front range of the Rockies and even Bakken. It's kind of amazing how much crude is coming on and the indications that we're already seeing is that there is a lot of light sweet in the Gulf. The Gulf is making more gasoline, they're going to have the export or they'll not make it.


We have reached at the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Jay Finks

Thank you, Kevin. I'd like to thank everyone for listening to our conference call today. Please visit our website or contact Investor Relations for any additional information. Thank you.


Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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