CVR Refining's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.20.14 | About: CVR Refining, (CVRR)

CVR Refining LP (NYSE:CVRR)

Q4 2013 Earnings Conference Call

February 20, 2014 12:00 PM ET

Executives

Jay Finks - Director, IR

John Lipinski - President and CEO

Susan Ball - CFO

Analysts

Jeff Dietert - Simmons & Company

Ed Westlake - Credit Suisse

Mohit Bhardwaj – Citigroup

Operator

Greetings and welcome to the CVR Refining LLC Fourth Quarter 2013 Conference Call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Jay Finks, Director of Investor Relations. Thank you, Mr. Finks. You may now begin.

Jay Finks

Thank you, Shay. Good morning, everyone. We very much appreciate you joining us this morning for CVR Refining fourth 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 fourth 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 may be deemed to be forward-looking statements. Without limiting the foregoing, the words outlook, beliefs, anticipate, 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 fourth 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, good morning everyone and thank you for joining our earnings call today. This morning we released our 2013 fourth quarter results in which we reported an adjusted EBITDA of $117.5 million and that compares to $196.2 million a year ago. Our 2013 fourth-quarter consolidated net loss was $110.2 million, as compared to $54.6 million of net income in the fourth quarter of 2012. Impacting our Q4 2013 results were losses on derivatives not settled during the period of $126.2 million and we realized an unfavorable FIFO, first-in first-out inventory impact of another $62 million.

Susan will provide you more details on the financials reported this morning. We also declared a fourth quarter distribution of $0.45 per common unit. The distribution will be paid on March 10th to unit holders on record as of March 3. For 2013 we have paid or declared $3.68 of distributions to our unit holders. On a full-year basis, adjusting to the $0.18 from the pre-IPO period, our calculated full-year distribution would have been $3.86 per common unit. This exceeded the $3.45 to $3.70 full-year outlook provided during our third quarter conference call.

Operationally both plants ran exceptionally well during the fourth quarter resulting in a record quarter for crude throughputs for our fiscal. This was the primary contributing factor allowing us to exceed our full-year distribution outlook. Coffeyville processed approximately 1,223,000 barrels a day of crude. Additionally Wynnewood processed about 79,500 barrels a day of crude, again resulting in total crude throughput of approximately 201,800 barrels a day in the fourth quarter. We continue to focus on logistics and crude gathering as this has a direct impact on improving our refining margin by lowering our overall crude cost.

To the full-year 2013, we gathered over 52,700 barrels a day as compared to 44,200 barrels a day in 2012. This is a 19% year-over-year increase. During the fourth quarter of 2013, we gathered a little over 52,500 barrels a day. Our gathered barrels in the fourth quarter were slightly down due to the inclement weather we witnessed in the Midwest. In January 2014 we gathered just over 54,000 barrels per day.

At this point I'll turn the call over to Susan to talk more about financials and then I’ll pick up the call after she stops. Susan?

Susan Ball

Thank you, Jack. Good morning, everyone. As Jack previously mentioned, in the 2013 fourth-quarter our adjusted EBITDA was $117.5 million, as compared to $196.2 million in the same quarter of 2012. In the fourth quarter of 2013 the more significant adjustments used to derive adjusted EBITDA or adjustments related to the increase or decrease in our inventory values that are realized under the first-in first-out, FIFO inventory accounting method and losses on derivatives not settled. As Jack mentioned we realized an unfavorable FIFO inventory impact of $62 million and losses on derivatives not settled during the period were $126.2 million.

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

Additionally adjusted EBITDA is further reduced for cash needs associated with debt service and any other future operating and capital needs as determined. Available cash for the distribution for the fourth quarter was $67.4 million or $0.45 per common unit.

In the fourth quarter of 2013, our realized refining margin adjusted for FIFO was $11.48 per barrel, as compared to $25.93 in the same quarter of 2012. Driving this decrease was lower overall NYMEX 2-1-1crack spreads, negative product basis and increased RINs expense. The NYMEX 2-1-1 crack spread averaged $21.08 per barrel in the fourth quarter of 2013, as compared to $33.32 per barrel.

In the fourth quarter of 2012, the PADD II Group 3 2-1-1 product basis averaged a negative $6.80 per barrel, as compared to a negative $1.13 per barrel in 2012 fourth quarter. The PADD II Group 3 2-1-1 crack spread averaged $14.28 per barrel in the 2013 fourth quarter, as compared to $32.19 in the same period of 2012.

Our full year 2013 RINs expense was a $180.5 million, as compared to $21 million in 2012. In the fourth quarter of 2013, our RINs expense was approximately $26 million, as compared to $5 million in the fourth quarter of 2012. Offsetting the negative impacts of product basis and RINs expense during the 2013 fourth quarter, we realized wider crude discounts to WTI as compared to a year ago. Our consumed crude discount to WTI for the fourth quarter was $1.07 per barrel to $0.28 per barrel in 2012.

The Coffeyville refinery reported a refining margin, adjusted for FIFO impact of $142.8 million in the fourth quarter 2013, as compared to $321.9 million in 2012. Coffeyville's refining margin adjusted for FIFO impact was $12.69 per barrel in the fourth quarter 2013, as compared to the $28.08 per barrel in the same period in 2012.

In the fourth quarter of 2013, the Wynnewood refinery reported a refining margin adjusted for FIFO impact of $69.6 million as compared to $31.5 million in the fourth quarter of 2012. The fourth quarter of 2012 was impacted by the major turnaround that Wynnewood underwent at that time. On a per barrel accrued throughput basis, Wynnewood’s refining margin adjusted for FIFO impact was $9.51 per barrel in the fourth quarter of 2013, as compared to $14.67 per barrel for the same period in 2012.

Direct operating expenses excluding the turnaround expenses were $4.70 per barrel of crude oil throughput in the fourth quarter of 2013, as compared to $6.20 in the fourth quarter of 2012. Again that was adjusted for the turnaround. Again, this increase was due to lower throughputs in the fourth quarter of 2012 due to the full plant turnaround at Wynnewood.

Coffeyville’s direct operating expenses, excluding turnaround expenses with $4.33 per barrel of crude throughput in the fourth quarter of 2013, as compared to $4.75 per barrel in 2012 fourth quarter. Wynnewood’s direct operating expenses excluding turnaround expenses were $5.27 per barrel of crude oil throughput for the fourth quarter of 2013 as compared to $14.8 per barrel in the fourth quarter of 2012.

We ended 2013 with cash and cash equivalents of approximately $280 million. Our $400 million ABL had $27 million issued standby letters of credit resulting in an availability under the ABL facility of $373 million. As of February 18th, our current cash balance was $504 million and we had $373 million available under our ABL.

Our total long-term debt outstanding was $583 million. This was comprised of the $500 million 6.5% unsecured notes, $51 million of capital leases and approximately $32 million drawn against the $150 million in our company revolver, that is provided by our parent, CVR Energy. As a reminder the revolver was put into place to fund profit and gross CapEx at the time of the IPO.

As of December 31, we had open commodity derivative positions of 23.3 million barrels. The weighted average fixed price associated with all open positions is $28.12 per barrel. Our open commodity derivative positions were comprised of approximately 74% for distillate crack swaps and 26% for gasoline cracks.

Fourth quarter 2013 capital expenditures totaled 63.7 million. Of the total expenditures in the fourth quarter $50.4 million related to maintenance and environmental capital and $13.3 million related to growth capital. In 2014, we estimate that our total capital spending will be approximately $343 million, of which $240 million is estimated to be environmental and maintenance capital and $103 million is growth capital.

Our 2014 estimated environmental and maintenance capital expenditures will be funded with the annual cash reserves of $125 million as well as cash on hand. And as you recall at the time of the IPO, we retained a $160 million of IPO proceeds to pre-fund the known environmental and maintenance capital projects. The growth capital will be funded through our 150 million intercompany revolver.

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

Jack Lipinski

All right, thank you, Susan and thank you for providing all the detail on our financials and explaining a number of the issues regarding margins and like, saved me from talking about it all this year I guess. But before I go on, I would like to highlight a couple of safety milestones, which were achieved earlier this year or during 2013. In October, employees at our Coffeyville refinery celebrated two years without a loss time injury and in June they achieved one year without an OSHA recordable injury. Employees at our Wynnewood refinery achieved one year without an OSHA recordable injury in January 2014. Safety has been and will always remain our top priority. I want to thank our employees and management team for their continued support of our strong safety culture.

Little bit talking about Q1, in the first quarter of 2014, our total crude throughput is expected to be between 185,000 and 200,000 barrels per day stream day. To be clear our plan, as we rate them, are rated on a calendar basis which takes into account variations in crude slates, planned and unplanned downtimes and market seasonality to arrive at a long term calendar average. Our weighted capacities at both plants is 185,000 barrels a day comprised of a 115,000 barrels per calendar day at Coffeyville and 70,000 barrels per calendar day at Wynnewood. On a stream day basis, Coffeyville is capable of running in excess of 125,000 barrels per stream day and Wynnewood can exceed 80,000 barrels per stream day. A little bit about capital, some of the projects that we will complete this year.

As you know, we've been talking about our hydrocracker project at Wynnewood. We anticipate that this project will be completed and commissioned at the end of the third quarter in 2014. This project is designed and we fully expect it to improve overall distilled yield at the refinery by an additional 2% to 3%.

Looking a little bit about the markets, it’s been very interesting looking at the third quarter and fourth quarter of last year and looking at where things have gone today. We saw in November and December a rise in the RBOB crack which was offset as Susan had discussed about negative gasoline basis. In particular we saw negative gasoline basis in December approaching $14 a barrel. So, when you take a look at our results, these results are very favorable, showing basically the strength of our operations and the efficiency of our plant at a time when we were having a significant negative basis in the group.

Historically also in December, January, February and sometimes into March, we find ourselves having to cut back significantly on total crude throughput as a result of just congestion in our area. Basically winter comes, gasoline demand falls, there is no agricultural demand and typically every other year or so we find ourselves in a situation of having to cut back. Fortunately for us there have been very minor disruptions to our plants run at the maximum available capacity. So we find ourselves in a pretty good spot going forward. As a result you can see in our estimates for the quarter being 185,000 to 200,000 barrels a day and of course we will improve on that if at all possible.

We continue to grow our logistics business. We have several smaller projects underway to tie-in other locations and grow our business as we go forward. If you take a look back at where this company started back in 2005, we gathered something around 7,000 barrels a day and we have grown it sevenfold in eight years and actually almost eightfold in eight years. So, that’s -- one of the focal points of the Company this year is to continue to grow our crude and logistics business.

And with that I will turn it over for questions. Operator?

Question-and-Answer Session

Operator

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jeff Dietert from Simmons & Company.

Jeff Dietert - Simmons & Company

I was hoping that you could share your thoughts on Permian prices and you look at WTI Midland trading at $8.50 below, WTI in Cushing, there is some maintenance on some of the Permian basin refineries; but could you share your thoughts on what’s happening with those Permian prices and how you pick those off as we work through this maintenance later in the year?

John Lipinski

Well, it’s an interesting question. I believe that Permian will trade at a discount to Cushing, not at $8. My view would have more like, something like $3 and $4 and part of that is driven by the Eagle Ford. Eagle Ford crude is closer to the Gulf. It’s going to get there first and its production levels are increasing so rapidly, we’re starting to see the Gulf Coast become the next bottleneck for crude. It’s no longer the mid-continent. It’s now becoming the Gulf.

And so crudes will have to compete for the market. Midland will have to -- obviously it’s very good crudes breakthrough [ph] for us because we run almost 40,000 barrels a day. So it’s very nice for CVR Refining. But this is pretty much where I expected things to happen and that is the bottleneck will become the Gulf. The other fields across the nation will have to price at a discount to get into the Gulf and given that the Eagle Ford is a 800 pound gorilla down there, even though it has crudes that most people -- it has ultra-light crude which most people would prefer not to have -- you're now seeing just dislocations in the market which are expect to continue. I would expect those dislocations to continue for the next year, year and half. If we continue to have 1 million barrel a year growth in crude year-over-year, it's going to be very interesting to see what ’15 turns out to be.

Jeff Dietert - Simmons & Company

Also in the Permian are you seeing different quality grades? I think historically it’s been mainly WTI and West Texas Sour. But we’re seeing some high API gravities come in. Is there kind of a third quality grade developing or are you seeing it still pretty steady with history?

John Lipinski

Well, right now what we’re buying is pretty much the historical grade, Midland Sweden. It is getting lighter. Everything, and I believe this was going to happen -- you’re going to see a massive dislocation eventually with the ultra-lights because a couple of things. One, most refineries aren’t configured to condensates and they’re almost condensates. And secondly they make a lot of gasoline and that’s something that we really don’t believe long term is where this country is going. With Cap A [ph] standards and efficiency standards going on we would expect to see gasoline begin to fall year-over-year. So the crudes that make more gasoline obviously will have to be valued at a lower price than the more routine crudes, the 40 API crudes that are in my view real crudes.

Jeff Dietert - Simmons & Company

Got you. And you talked a little bit about a potential bottleneck in the Gulf Coast. What are your thoughts on WTI discounts and how does that influence your thought on hedging cracks going forward?

John Lipinski

Well, as you can see from our hedging program, when we see over $30 distillate cracks, we’re pretty happy with those kind of numbers because these are East Coast numbers; and we’re in an ag market where we typically don’t see a severely negative product basis because of the demand for diesel in the ag market. So we tend to focus on those. We’re opportunistic when we take off gasoline cracks.

My view is that for the last couple of years we’ve been looking at profitability based on rent WTI. I believe the profitability is more rightly being based off of LOS WTI, which more reflects the price of crude that most U.S., Gulf Coast and mid-continent refiners actually can price off of. There is still this dislocation. I think ultimately LOS will tighten against WTI. If you ever get into a situation where crude exports has kind [indiscernible] another dislocation in the market because I’m not sure what guys on the East Coast are going to do if all of a sudden price of Bakken and WTI and Midland suite all go up. So it’s a difficult situation and I think that’s a political football and I’m going to pine on whether I think it’s going to pass or not. I certainly don’t think anything is going to happen in ’14.

Operator

Thank you. Our next question comes from Ed Westlake from Credit Suisse.

Ed Westlake - Credit Suisse

I guess just coming back to the basis, obviously last hurricane season was fairly light and so there was a lot of gas that was stored all over the country that didn’t get used and obviously that’s why you’ve got that sort of wider basis now. Any signs that it's clearing up because obviously we still see some pretty good runs out of the Gulf Coast and gasoline inventories still feel pretty tight?

John Lipinski

Absolutely this morning if you were going to look at the group and these are all numbers against the NYMEX screen. So just to be clear, you take whatever the NYMEX print is and then this basis would be plus or minus. And right now gasoline is about $0.07 under the NYMEX screen and distillate is about $0.06 under the NYMEX screen as we speak.

If you go back into December, that was $0.35 negative gasoline and almost $10 negative on diesel. So if you look year-over-year for this time, if you look back at ’13, ’13 was still little better than what we see today. If you go back to ’12, we’re actually better this time a year ago than we were in ’12. So I think things are returning to more normal, but again the comment I made earlier that is the differential between LLS and Brent may likely show up as a basis differential in the Gulf and midcontinent.

Ed Westlake - Credit Suisse

Yes. And do you think it’s cleaning up because of exports or are you seeing some sort of early signs -- I doubt this demand given how cold it’s been across the country?

John Lipinski

Well, our area fortunately for us, because our marketing guys have been very proactive. We’ve been continuing to be able to move product at exceptionally high rates during this time of the year which is normally not -- we wish February would normally go away. That’s not the situation this year. We still have very high inventories in Group 3. I don’t follow the rest of the pad, but certainly Group 3 we have almost historically high levels of products, both gasoline and diesel but it’s moving. Those are not going anywhere. So I think again keep your figures crossed for us a few more weeks and March will come, the sun will shine, things will warm up, stuff will start to grow and the inventory will start to drop.

Ed Westlake - Credit Suisse

Yes and we can get even more gold medals on the ice skating. I hope you’re watching that as well?

John Lipinski

Yes. I have a daughter completely ensconced in that for NBC.

Ed Westlake - Credit Suisse

Yes, I thought you might be looking over the shoulder. Just on secondary products. Obviously crude fell in the fourth quarter. Crude was tight in the third quarter. Crude's rallied a bit now. Are you seeing any of those impacts in terms of the margins on some of the stuff that we don’t track?

John Lipinski

Well, one of the things as I said, we’re now seeing crude backward dated, okay? Crude is run -- it’s been on a long steady run and so it’s backward dated. Obviously if it's backward dated, you basically -- whatever we acquire the oil for; you subtract the backwardation month to month for what we delivered the crude. So if it’s in Contango, it’s to our benefit if it’s backward dated negative but we are also seeing wider crude differentials this year than we did last year. So net-net-net, we’re in a better position this that we were last year.

Operator

[Operator Instructions] Our next comes from Mohit Bhardwaj from Citigroup.

Mohit Bhardwaj – Citigroup

This is Mohit Bhardwaj from Citigroup. My question is on RIN expenses. We saw close to $180 million in expenses for 2013 and so far in 2014, the RIN prices have actually gone up. If you could just comment on your outlook, where you see the cost going during this calendar year?

John Lipinski

Well, the year started out near $0.30. And then currently they’re trading in the 50s. If you take the range of what possibilities there are, we think our RIN expense would be somewhere between $75 million and $150 million on a complete upside. I think what you’re seeing right now is whoever controls the RIN market and I’m not suggesting that it's a controlled market but certainly it’s not a very transparent one. People are trying to play it believing that EPA may come under enough pressure that they will back off from the volume obligations that they came out with in their preliminary estimates.

I think that would be a travesty for the American consumer. If EPA were to do something like that and they are just literally falling into the arms of the corn lobby. Frankly I believe the ethanol lobby is happy with where things are right now because their corn prices are down and they’re making more money than they ever did before. So what you’re seeing is just a political play and I believe that those who own RINs are just sitting on the sidelines and keeping kind off the market or if they’re on the market, they’re at a higher price waiting to see what EPA does in late April or early May.

Mohit Bhardwaj – Citigroup

And one more question on product basis, just to follow up on what Ed was talking about. We have seen quite a bit of fluctuation in the NGL prices as well in the regions and you do collect out of that 54,000 barrels per day of gathering some NGLs which eventually get into the gasoline pool. So the negative impact of product basis, because the Gulf Coast refiners are running hard, are you guys getting some benefits from the NGL gathering that you guys do?

John Lipinski

Okay, let me just clarify something. We gather crude. We don’t gather NGLs. We purchased NGLs out of Conway. We have pipeline space and storage in Conway and we bring natural gasoline, butanes and other materials down to our refinery and can move material out of the refinery back up to Conway. So there is a separation. What we’ve gather is we gather crude. We also purchase NGLs and obviously if NGLs come under pressure and there is a differential against gasoline price for example, which is part one of the bigger ones that we routinely do, then it’s a simple blending opportunity for the NGLs. So just to be clear, we gather crude but we buy NGLs.

Operator

Thank you. Our question comes from Ed Westlake from Credit Suisse.

Ed Westlake - Credit Suisse

Yes, it was just a follow-on just on the -- I think you mentioned 2% to 3% diesel yield uplift from the recent investments. Maybe just any color on the next wave of the potential self-help at the refineries?

Jack Lipinski

We have other projects. A lot of these are in process. We have a few that we may be bringing to our board. Obviously Wynnewood has been a phenomenal success for us. When we bought it a little over two years ago, we had expected it to run 83,000 barrels a day and you could see what we ran last quarter and a lot of that was done with very little capital. It was done with intellectual capital putting engineers and their managers and their money. We are looking forward to some additional capital expenditures which will improve our ability to produce perhaps even more crude or produce more diesel. That’s our goal. It’s not so much running as more crude, it’s producing more diesel. So when I have more clarity on what we are doing -- because we will have some presentations for my board and these are not massive projects, not in a scheme of what we're talking about. We've kind of become masters of doing small stuff that make big impacts. So, yes, we will be doing more.

Ed Westlake - Credit Suisse

And then separate sort of project which is perhaps more of a strategic project is in terms of trying to get the scale to, perhaps you can launch logistics MLP?

Jack Lipinski

Absolutely. I have said it before; that’s one of the reasons why we keep looking either -- obviously prices are very high and if you go to buy something, you have the guys who are already MLPs bidding up the prices. We will either build or buy or organically grow our business to -- our hope is to eventually spin another MLP.

Operator

Thank you. At this time I will turn the call back over to Jay Finks for closing comments.

Jay Finks

Thank you, Shay. I would like to thank everyone for listening to our conference call today. As a reminder our conference call will be available for replay over the next 14 days. Please visit our website cvrrefining.com or contact Investor Relations for additional information. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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