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Executives

Stacey Hudson – IR

Paul Eisman – President and CEO

Alan Moret – SVP, Supply

Shai Even – SVP and CFO

Analysts

Rakesh Advani – Credit Suisse

Mohit Bhardwaj – Citigroup

Alon USA Partners LP (ALDW) Q3 2013 Earnings Call November 8, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Alon USA Partners’ Third Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, November 8, 2013.

I would now like to turn the call over to Stacey Hudson, Investor Relations Manager. Please go ahead, ma’am.

Stacey Hudson

Thank you, George. Good morning, everyone, and welcome to Alon USA Partners’ third 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.

During the course of this call, we make forward-looking statements based on our current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. Our discussion of factors that could affect the future financial results (Inaudible) and risk factors disclosed by the company from time-to-time in its filings with the SEC. Furthermore, please also refer to the statement regarding forward-looking statements incorporated in our news release issued Wednesday and note that the contents of our conference call today are covered by these statements. On this call, we will discuss non-GAAP financial measures.

You can find a reconciliation of these non-GAAP financial measures to GAAP in our financial release which is posted on our website.

Finally, please be aware that all our statements made as of today, November 8, 2013, based on the information available to us as of today and it’s (inaudible) we assume no obligation to update any such statements.

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

Paul Eisman

Thank you, Stacey, and good morning, everyone. The third quarter was obviously a top one for the industry as it was for Alon Partners. Crude oil differentials contracted significantly, that crude oil market was in backwardation and we saw a seasonal pressure on gasoline margins.

In addition, our results were impacted by unscheduled downtime at Big Spring. As a result, we reported a net loss in the third quarter of $16.1 million or $0.26 per unit, as compared to net income of $120.4 million in the same quarter last year. The FCC outage that occurred late in the quarter impacted earnings by approximately $0.19 per unit.

As a result there will not be a cash distribution in this quarter. We believe that margins reached a bottom late in the third quarter and we are seeing improvement as we’ve entered before with continuing increases in U.S. light oil production, domestic light oil refiners will continue to have significant prudent operating cost advantages over offshore light crude refiners.

The recent widening of the Brent differential to both LOS and WTI provides evidence that the benefit of increasing domestic light oil production is also expanding to the Gulf Coast which will benefit and this will benefit the Big Sprint refinery.

Finally, we believe that the crack spreads experienced during the third quarter are unsustainable. European and other refiners running Brent priced crudes are suffering with exceptionally poor margins. We would expect margins to improve but if worldwide product demand necessitates the current capacities, all these refiners will eventually curtail or shut down their operations. In either case, this bodes well for margins in our refinery.

Our West Texas Refining and Marketing System faced operating issues this quarter as we had unplanned outages in our FCC units.

As a result, our throughput during the quarter was about 6000 barrels per day below our plans. We estimate that these unplanned outages impacted earnings by $12 million during the quarter. As we’ve already announced, we are planning to take Big Spring into the full plant turnaround during the first quarter of next year. As we have mentioned, third quarter results were impacted by contraction in crude oil differentials. The LOS WTI Cushing differential dropped from $15.7 per barrel in the second quarter, to $6.60 per barrel in the third.

In addition, West Texas sour priced and Midland traded at parity with the WTI Cushing. Given transportation cost to Cushing and the product value difference between sweet and sour crudes, this is unsustainable.

Fortunately, this differential has returned to healthy levels look forward in the fourth quarter. A slightly different way to look at the WTI differential is that sweet crudes were discounted during the third quarter with lower yield value.

That being the case, we did take advantage of the situation by using our crude slate flexibility to process record levels of sweet crude during the quarter. Either way, Big Spring is our daily food to benefit from ongoing crude production increases in the Permian Basin.

Margin captured at Big Spring during the quarter was impacted by the yield impact of the FCC outage, backwardation in the crude oil market unusually poor discounts for West Texas sour crude relative to the WTI benchmark and a weak pricing for secondary products specifically LPGs and asphalt.

In addition, our reported margin in the quarter includes approximately $1.2 million of cost associated with our RINs obligation. Direct operating expenses during the quarter was $4.53 per barrel which was higher than our expectation. This was due to higher cost associated with repairs completed during the quarter along with the impact of lower throughput.

This compares to $3.92 per barrel in the same quarter last year. We continue to work on self-help initiatives at Big Spring focused on improving gross margin of the refinery. We are planning to make investment during the upcoming turnaround to improve distillate recovery at the plant by approximately 2000 barrels per day, while also improving the energy efficiency of the facility.

The cost of this project is estimated at $23 million and it generated $12 million per year of increased EBITDA. We are focused primarily on projects to improve our gross margin and reduce our expenses and things benefits are largely independent of the refining margin environment. We’ve also identified additional low cost projects to improve LPG recovery, increased aromatic recovery and produce chemical grade propelling.

All of these projects have payback to less than two years, are focused on increasing margin capture and can be completed in the next couple of years.

However, given our strategically long-term advantage to access to West Texas crude oils, we are also looking at options to expand Big Spring. In our wholesale marketing business, we continue to enjoy significant increases in branded sales. Year-to-date branded sales are up by 14% over the same period last year and we accomplished this despite having 25 branded sites at the end of the quarter versus the same time last year.

By upgrading the quality of our branded sites replacing more volume sites which higher volume site; we achieved a 22% increase in first store field sales versus the same period last year. Throughput guidance for the fourth quarter is 72,000 barrels per day at Big Spring.

As mentioned, we continue to prepare for the plant-wide turnaround at Big Spring in the first quarter of 2014 and our current estimate of throughput for the first quarter next year is 55,000 barrels per day.

With that, we are glad to answer any of your questions.

Question-and-Answer Session

Operator

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

Rakesh Advani – Credit Suisse

Hey actually this is Rakesh Advani. Just a quick question just to confirm the LPG project you are saying that you are pushing it ahead to be in conjunction with the first quarter turnaround, right?

Paul Eisman

No, the project we are doing during the first quarter turnaround is a distillate recovery project.

Rakesh Advani – Credit Suisse

Okay, and then the LPG, is that still for 2015 or is there a timeframe on when…

Paul Eisman

A timetable?

Rakesh Advani – Credit Suisse

A timeframe on when…

Paul Eisman

Yes, we are – as I mentioned in my remarks that we expect to complete all the projects I mentioned within the next couple years.

Rakesh Advani – Credit Suisse

Next couple years. Okay, and then the expansion, sorry, if I missed this, but you are also looking at possibly expanding Big Spring as well?

Paul Eisman

I am sorry, you are breaking up.

Rakesh Advani – Credit Suisse

I said you are also looking at the possibility of expanding Big Spring, is that?

Paul Eisman

Yes, strategically, we think Big Spring is currently in an advantage place in terms of the crude slate in and all the crude oil we have access to. So, we think that, given that strategic advantage we’d like to take the opportunity to look at that and obviously that involves investment which we’ve got to identify the cost of doing that.

We’ve also got to look at markets, what market we need to access to put additional products. So, we are doing that study both on the refining side but also on the marketing side and over the next few quarters, we think that we’ll get that better defined.

Rakesh Advani – Credit Suisse

Okay, and have you guys looked at the possibility of blocking in Midland differentials for 2014?

Paul Eisman

I’ll pass that question to Alan.

Alan Moret

We haven’t done anything at this point on Midland differentials. So yes, we have done anything at this point.

Rakesh Advani – Credit Suisse

Okay and can you comment on any – on how the secondary product market is looking so far in the fourth quarter?

Paul Eisman

What we saw in the third quarter versus the second quarter is we had a run up of WTI prices of about $10 to $11 a barrel and the secondary product that, primarily that’s LPGs and Asphalt where lack of oils just couldn’t keep up. And you know, what we’ve seen now is, that WTI prices drops back down to the $94 range. So, I think, we have seen significant improvements in those secondary products, fourth quarter versus the third, but I don’t have the numbers right now.

Rakesh Advani – Credit Suisse

Okay and just one on the aromatics project, what is the timetable on that, is that also over the next couple of years or is there anything…

Paul Eisman

Yes, yes, we haven’t gotten approval to do this at this point. It’s got a very good return, but it is the kind of project we could complete over the next couple of years.

Rakesh Advani – Credit Suisse

Okay, thank you.

Paul Eisman

Okay, thank you.

Operator

Thank you. (Operator Instructions) And we do have a question from Faisal Khan with Citigroup. Please go ahead.

Mohit Bhardwaj – Citigroup

This is actually Mohit for Faisal. Just a question on Big Spring expansion, I know it’s still very early. Have you guys, is there anything that we should look at it what size expansion and what timeline could that be?

Paul Eisman

I think we are too early in the project to really be able to give you an answer on that. What we look at is, what the next few thousand barrels would cost in the next step, because as you increase the capacity, of the refinery, you run into more and more things that you got to touch and so, we are looking at those investment and trying to decide, is this a 5,000 and 8,000 or 20,000 barrel per day the increase in capacity and that could be determined by the amount of investment it will take to get to various levels.

So we haven’t done that work, but we are in the process of doing that work. We haven’t finished it. But again, we are looking at expanding Big Springs, because we think strategically again, we’ve got a great crude oil advantage.

Mohit Bhardwaj – Citigroup

So, when do you plan to take all these projects to the board, LPG recovery and aromatics and the expansion project for Big Springs?

Paul Eisman

When do we take into the board? I don’t have specific timeframes for any of that.

Mohit Bhardwaj – Citigroup

Okay.

Paul Eisman

We are working on the projects and obviously we are interested in doing it. I think the board is interested in doing those kind of projects that improve our gross margin out of the refinery and so we got to develop the project and it’s kind of up to us to do that and take it to the board, but it really don’t have timing on any of that at this point.

Mohit Bhardwaj – Citigroup

And one final one for me. What is the level of trucking that you guys are doing right now into Big Spring for or Permian Strait.

Alan Moret

In the third quarter, we brought in about 34,000 barrels a day by truck into the refinery site.

Mohit Bhardwaj – Citigroup

And that’s like a $0.50 crude cost advantage?

Alan Moret

Right, yes, in that range, it’s basically – on the crude cost side it’s a discount from Midland.

Mohit Bhardwaj – Citigroup

All right. Thank you very much.

Paul Eisman

Thank you.

Operator

Thank you and I am showing no further questions. I’ll turn the call back to Paul Eisman for closing comments.

Paul Eisman

Okay, well, thank you very much for your time and interest in the company and we’ll be talking to you about next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. We thank you for your participation. You may now disconnect.

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