Frontier Oil Corporation (FTO)
Q4 2009 Earnings Call
February 25, 2010 11:00 AM ET
Executives:
Kristine Boyd - Manager Investor Relations
Michael C. Jennings - President & Chief Executive Officer
Doug S. Aron - Executive Vice President & Chief Financial Officer
James Stump – VP Refining Operations
Nancy J. Zupan - Vice President & Chief Accounting Officer
Analysts:
Evan Calio - Morgan Stanley
Presentation:
Operator
Good morning ladies and gentlemen and welcome to Frontier Oil Corporation’s Fourth Quarter Earnings Conference Call. My name is Christine and I will be your operator for today’s conference. (Operator Instructions).
I will now turn the call over to Ms. Kristine Boyd, Manager of Investor Relations. Ms. Boyd, please go ahead.
Kristine Boyd
Thanks Christine. Good morning and thanks to all of you who are joining us this morning for our fourth quarter 2009 earnings call. Here with me this morning are Mike Jennings, President and CEO, Doug Aron, EVP and CFO, Jim Stump, VP of Refining Operations and other members of our executive management team.
Before we get started, I would like to read our Safe Harbor Statement. The primary purpose of this conference call is to describe the assets, operations and certain current and historical financial conditions associated with Frontier Oil Corporation.
This information and associated comments made during the course of this conference call may include forward-looking statements concerning the company. These may include statements of plans and objective for future operations, statements of future economic performance or assumptions or estimates.
The accuracy of these forward-looking statements is subject to a wide range of business risks and changes in circumstances that are described in the company's reports that are filed from time to time with the Securities and Exchange Commission. Actual results and outcomes can different from expectations.
I would now like to turn the call over to our President and CEO, Mike Jennings.
Michael Jennings
Thanks a lot Kristine and good morning to all of you. As we stated in our press release this morning, Frontier reported a fourth quarter net loss of $75 million of $0.72 per share and a full year loss of $84 million or $0.81 a share.
The loss we generated this quarter was a function of low throughput at our El Dorado Refinery due to turnaround maintenance and continuing low benchmark margins and modest crude differentials.
Even so we ended the year with strong financial position having a cash balance that exceeded our outstanding debt.
We also finished the year with an income tax receivable in the amount of about $175 million reflecting both our shift to LIFO inventory accounting and some very good additional work in the tax area addressing our refinery expansion projects and maintenance capital projects.
Let me take just a moment to discuss our change to LIFO inventory reporting. Frontier is no longer using the First In, First Out method of accounting for inventories and is joining many of the other independent refiners using LIFO accounting.
The LIFO valuation of our 2009 inventories reduced reported 2009 pretax income by $253 million, which will result in a tax refund of about $86 million. Overall including the other tax projects, we expect to collect about a $100 million in cash tax refunds during 2010.
As we indicated in our November release, a negative effect of a lower pretax income reported using LIFO is that we are now prevented due to bond covenants from paying quarterly cash dividends or repurchasing our share until our trailing 12 months EBIDTA exceeds two times interest coverage.
For the time being this is a binding constraint but we intend to resume payment of the dividend as soon as it’s possible.
I’m very pleased with the work we’ve done to manage our liquidity, taxes, and working capital position but let’s make no mistake I’d rather see those funds coming to us from the refining gross margin line.
For the time being, our margin opportunities are constraint and we’re therefore spending considerable effort to reduce both capital and operating costs and mange our balance sheet in this environment.
The Cheyenne Refinery represents the main focal point for many of these activities and we’re making good progress on the plan played out previously. Cheyenne has the good fortune of being located near two of the largest low geological risk crude plays in the world the Balkan trend and the Canadian tar sands and we are working to capitalize on this location by improving the plant’s cost structure and liquid yields, which will obviously flow through to capture rates used by those in analyst community.
At Cheyenne, we have succeeded in pushing through bottlenecks on a significantly lighter crude slate to improve product yields and we are making a lot of headway in this area. We’ve also realized reductions in fixed costs and our assessing additional opportunities for cost and yield improvement throughout the plant.
Jim Stump will provide some more detail on the efforts we have underway. Fundamentally with the exception of the El Dorado turnaround, the items that weighed our fourth quarter were present during most of 2009, though with a typical seasonal downturn in product cracks during the fourth quarter.
The heavy sour crude discounts, which we’ve banked on in the past were largely absent from the marketplace during this quarter though WTI prices did increase by about $9 during the quarter to close the year at $79 or so, about twice the price where this light crudes traded on January 1st.
We don’t expect to see anywhere near this pace of increase in crude price during 2010, but we’re watching the international increase in crude oil demand and believe that the U.S. in time will participate in this global economic recovery, both at the macro level and specifically through the increased demand for the motor fields that we supply.
Concerning our outlook for 2010, we expect moderate refining margins to persist. U.S. refined product inventories remain elevated, while our country’s refineries as a group are operating at around 80% utilization.
Crude debts should widen as we go forward particularly in sympathy with the higher sweet crude prices. The rationalization in excess refining capacity is taking place in our country though at a slower pace than we might have anticipated.
Specific to Frontier, we're working to extract more costs and efficiencies from our refining operations and commercial activities while maintaining a strong and liquid balance sheet.
So with that I'd like to turn it over to Jim Stump for a discussion of our quarterly operations. Jim.
James Stump
Thanks Mike and good morning everyone. As Mike mentioned, in the fourth quarter our two refinery faced conditions very similar to the third quarter with the persistence of weak crack spreads as the narrow crude discounts.
Given these poor economics, the quarter approved to be an opportune time for a six week turn around in El Dorado that was performed on the Cat, the FCC, the gofiner and a number of other downstream units.
The gofiner project was also installed during this turnaround with the exception of the final phase, which will be to tie in new reactor. This will be accomplished during a brief window later in the summer.
I want to congratulate our employees in El Dorado for a very successful and safe completion of one of the largest turnaround efforts Frontier has performed to date. We're also having the FCC turnaround currently planned for the third quarter of this year in Cheyenne. Beyond these outages though there are no major turnarounds scheduled for either plant until 2013.
With a large turnaround during the fourth quarter, El Dorado crude throughput was reduced to an average of about 79,000 barrels per day. Operating expenses averaged about $6.26 per sales barrel higher than the prior quarter partially as a result of fewer barrels due to the turnarounds but also due to additional maintenance overtime and natural gas purchases also caused by the turnaround.
In Cheyenne crude throughput averaged 43,000 barrels per day in the fourth quarter and operating expenses averaged $6.52 per sales barrel.
I want to talk a little bit about the profitability improvement initiative that Mike mentioned that we have underway in Cheyenne and give you some highlights of our progress to-date.
As a result of the labor reductions and other cost initiatives made late last year, we've cut about $10 million from our annual operating cost in Cheyenne. These savings were partially offset in the fourth quarter by an increase in natural gas prices, but we continue to make good progress in those areas.
In addition to operating cost reductions we have made significant headway in yield optimization. Within the weakness and the light heavy differential, Cheyenne ran a significantly lighter crude slate in 2009, with only 49% heavy crude in the slate compared to 76% in 2008.
The switch to a lighter crude slate along with other yield optimization efforts we accomplished lately in the year, we obtained a 9% increase in the light product yield of gasoline and diesel or said in another way we were around 2100 less barrels of crude per day and produced 2300 more barrels of gasoline and diesel per day.
We are continuing to optimize the yields on the new crude slate for Cheyenne and have numerous smaller projects in progress at the refinery to develop additional cost reduction and margin capture opportunities. We are encouraged by our progress towards sustainable earnings improvement and we fully believe in Cheyenne's ability to return to a healthy level of profitability.
Turning now to the first quarter of 2010, heavy and sour crude differentials remained narrow, but we are beginning to see opportunity in the supply and pricing of local crudes near Cheyenne. Margins remain challenging at both plants, but we have seen moderate strength in Cheyenne diesel over the past several weeks.
Both refineries are currently undergoing early spring maintenance so that we’re ready for what looks to be a heavy turn around season for other refiners late this spring particularly in the mid continent.
El Dorado crude throughput is expected to average a 123,000 barrels per day in the first quarter with operating cost of about $4.30 per sales barrel. In Cheyenne crude throughput is expected to average about 37,000 barrels per day this quarter with operating cost of about $7 per sales barrel, which is higher than the third quarter per barrel OpEx due to running fewer barrels in the first quarter. But the OpEx is a reduction of about $3 million on a gross basis quarter-on-quarter. And with that Dough is going to wrap up our call.
Doug Aron
Thank you Jim. Let me start off with the discussion of our cash flows for the quarter. We used $6 million in operating cash flows net of about $45 million increase to working capital. We paid $6 million in dividends and spent $49 million in capital investment. We ended the quarter with the cash balance of $425 million, which exceeded our debt by $78 million.
And as for our capital budget, we spent a total of $171 million in 2009, which is roughly $19 million less than the forecasted number we gave you in last quarters earnings call. This unspent capital will carry over into our 2010 budget, which as of today is expected a total of $141 million.
Our balance sheet remains strong with a debt to capital ratio of 27% as of year-end. In addition we had approximately $400 million of borrowing base availability under our revolving credit facility.
Finally I’ll give you an update on our quarter date crack spreads. For Cheyenne the gasoline crack spread averaged $4.81 for the month of January and has averaged to $5.31 so far in the month of February. The diesel crack averaged $9.24 for January and $8.94 month to-date in February. All of those numbers again for the Cheyenne refinery.
In El Dorado, the gasoline crack spread averaged $5.30 for January and very similarly $5.32 month to-date in February. While the diesel crack was $6.24 in January and slightly worse about $5.56 month to-date in February.
Christine with that, that wraps up our prepared remarks. At this time we will be happy to take questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Evan Calio - Morgan Stanley.
Evan Calio - Morgan Stanley
I have a question – if you could discuss the $0.07 per barrel margin in Cheyenne and help me think about that? I mean is there some inventory effect from the LIFO accounting change or is there a bigger driver there for that – in that relative difference or how should we think about that on a go forward basis?
James Stump
Evan, on a go forward basis, we should think about it closer to our historical capture rate. Unfortunately the LIFO-FIFO accounting change kind of hit us in Cheyenne in the fourth quarter. Nancy, would you mind generally describing that and we’ll offer to follow up on line with more detail because it is little bit technical but it’s not what I would see as continuing effect.
Nancy Zupan
Sure, I’d be happy to. What happened, when we implemented our LIFO, we basically elected to use the earliest purchase price or the beginning of the year value for any increment or bills in inventories that we have during the year.
And in doing this, what it does is it results in more expense in a period of rising crude prices like we experienced in 2009 and especially towards the end of 2009.
What happens is, when we haven’t increased our inventory volumes, what we need to do is the difference our actual purchase price and the basis that we carry the inventory on the books and in our case it’s a January value, the difference between those two prices gives expense and it basically results in higher raw material costs in the period.
And so, as simply as I can explain it, that is what we experienced at Cheyenne in the fourth quarter because we had rather significant increases in volumes of crude oil in Cheyenne in that period.
Michael Jennings
Evan, we’ll take you through the number offline because I don’t want to chew up too much time with this, but basically the effect of a huge increase in WTI prices during the course of the year coupled with a meaningful inventory build in Cheyenne during the fourth quarter and that’s a LIFO effect.
Evan Calio – Morgan Stanley
Okay I appreciate it. Just one another small question. In El Dorado, OpEx was $10 million higher maybe you can discuss the driver of that change as well? I know you discussed it a little bit, but if you can walk me through that please?
Michael Jennings
Jim would you give him some of the details there in terms of demo and turnaround expense and the like.
James Stump
You bet. We finished our FCC revamp during the turnaround and we didn’t talk about that much, but it was basically replacing the top of our SEC regenerator. We expensed demo work, so a big chunk of that capital project resulted in a very significant demolition cost especially associated with the Cat. But elsewhere around the plant, the gofiner revamp also had some demo work. So demo was a very big piece of that $10 million.
Then other turnaround related expense, we do amortize the cost of our turnarounds, but there are several pots of expense money that don't get amortized along with the turnaround.
These are things like operator overtime and other expense work we did during the plan. And as I've mentioned that the turnaround is El Dorado was probably the biggest turnaround that plant’s had in 15 to 20 years.
Operator
(Operator Instructions). There are no additional questions at this time, please go ahead with any additional comments.
Michael Jennings
Okay. Well thank you very much for joining us on the call today. If people have individual questions they'd like to call in we're certainly happy to field those any time today and otherwise we wish you all the best. Thanks so much.
Operator
Thank you for participating in Frontier Oil Corporation's fourth quarter earnings conference call. This concludes the conference for today. You may all disconnect at this time.
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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
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