Par Petroleum Corporation (OTCQB:PARR) Q4 2013 Earnings Conference Call March 31, 2014 10:00 AM ET
Will Monteleone - Chairman & Chief Executive Officer
Brice Tarzwell - Chief Legal Officer
Andrew Shapiro - Lawndale Capital Management
Welcome to the Par Petroleum Corporation 2013 earnings call. My name is Polite and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.
I will now turn the call over to Brice Tarzwell, Senior Vice President and Chief Legal Officer of Par Petroleum. Mr. Tarzwell, you may begin.
Good morning and welcome to Par’s earning call for the year and quarter ended December 31, 2013. By now everyone should have had access to our earnings release. For a copy of that release, please visit Par Petroleum's website at www.par- petro.com. We anticipate that our annual report on Form 10-K will be filed later today. This call is being recorded and a replay will be available for 7 days.
Before we begin, we’d like to remind everyone that comments made by management today may contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that may involve significant risks and uncertainties which would cause actual results to differ materially from the results discussed in the forward-looking statements. Information about the risks we face and the uncertainties associated with Par Petroleum’s forward-looking statements can be found in the company's annual and quarterly reports filed with the SEC.
Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements.
We’ll next turn to remarks from our Chairman and Chief Executive Officer Will Monteleone and then on to Q&A. Will?
Thank you, Brice. Joining me on the call today are Chris Micklas, Chief Financial Officer, and Peter Coxon, Chief Operating Officer.
We’d like to apologize for rescheduling the call to this morning. At this point, you should have our earnings release and we expect the 10-K will be filed later today.
The format of today's call will be the following. A few general comments on the state of the business, then a review of the fourth quarter and full year results followed by Q&A session.
Moving on to the general comments. 2013 was an important year for Par in building a platform capable of future acquisitions and utilizing our unique tax assets. It was a year of tremendous change for the business and one where the foundation for value growth is being established.
As an anecdote, at the beginning of the year we had 12 employees, a handful of contractors and revenues from the prior year of $25 million, including revenues of our predecessor. At this point, we have 536 employees and almost $900 million in revenues most of which we generated in the fourth quarter.
Fourth quarter was a transformational period for the company and we are making significant progress on multiple fronts to increase profitability. One, improving our crude procurement efforts; two, regaining market share in Hawaii; three, integrating our logistics assets inside Texadian to more reliably capture discounted heavy Canadian crude; four, evaluating additional acquisition opportunities, and five, continuing to develop and refine our strategy for long-term shareholder value creation.
We are currently operating under a transition services agreement with Tesoro Corporation that was part of the Hawaii acquisition. We have provided notice to Tesoro that we will be exiting the TSA on May 1. In order to facilitate this cut-over, we are actively building out a platform of key staff and replacing contractors to improve our processes and systems. We expect our overhead cost to decline starting in the second quarter upon exit of the TSA.
We are currently incurring duplicative costs as we prepare to take control of the information systems and other administrative aspects of the business. We believe the integration will enhance operational effectiveness, allow the pursuit of additional acquisitions and the integration of acquired businesses in a cost efficient manner.
Before moving to the review of financial results, I’ll provide some brief commentary on the basis for the presentation as well as key considerations.
Given the significant activity inside Par over the last year, there is limited comparability on a year-over-year basis. However we will be making sequential comparisons regarding Texadian and Piceance Energy as we believe those comparisons are relevant.
We closed on the Hawaii acquisition on September 25, 2013 and the fourth quarter is the first full quarter of the Hawaii operations under Par’s control. We will discuss the details of this within the refining, distribution and marketing business. However there is neither sequential nor year-over-year comparisons available under our management.
Moving on to the review of the fourth quarter and fiscal year results. During the fourth quarter, we reported the consolidated net loss of $42 million and negative adjusted EBITDA of $22 million. Adjusted EBITDA excludes among other items the following: $3 million of acquisition and integration costs, $10 million in interest and financing charges most of which is non-cash; $3 million in losses related to change in fair value of common stock warrants, and $1 million of expenses associated with settling the bankruptcy related matters.
For the full-year 2013, we reported a consolidated net loss of $71 million and negative adjusted EBITDA of $16 million. Adjusted EBITDA excludes among other items the following: $10 million of acquisition and integration costs; $20 million in interest and financing charges most of which is non-cash; $10 million in losses related to a change in fair value of common stock warrants, and $6 million of expenses associated with settling bankruptcy related matters.
Moving on to the refining, distribution and marketing business. During the fourth quarter, we reported revenue of $750 million, negative gross margin of $16 million and segment operating loss of $20 million which includes DD&A expense of $2 million.
Since the acquisition, revenues were $778 million, negative gross margin was $14 million and operating loss was $19 million which includes DD&A expense of $2 million. We've operated at an approximate throughput of 64,000 barrels per day or 68% utilization and our manufacturing costs have averaged $3.46 per barrel of throughput.
We are introducing two benchmark crack spreads to provide an indication of trends in the market. As mentioned previously, the Hawaii market is quite unique and the plants’ economics reflect components of both Singapore and West Coast refineries. We are reflecting the Singapore market with a Brent 4:1:2:1 index or one part gasoline, two parts distillate and one part fuel oil referencing the Singapore market product prices and the West Coast market with a Brent 4:1:2:1 index referencing San Francisco market product prices.
When comparing average crack spreads for the fourth quarter of 2013 compared to the fourth quarter 2012, Singapore and the West Coast declined $1.07 and $4.17 per barrel respectively. Our gross margin per barrel of $0.59 reflects consumption of feedstocks the majority of which was procured prior – procured before the acquisition closed and a compressed time period of heightened geopolitical unrest in Syria and Libya.
Since the fourth quarter, we have seen improvements in our gross margin due to our crude procurement efforts and have primarily sourced barrels from North and South America. Other areas of improvement include regaining market share lost as a result of the prior owner’s decision to convert the plant into a terminal.
Now moving on to Texadian. During the fourth quarter, Texadian revenue was relatively flat at $5 million compared to the third quarter. During the fourth quarter, segment operating income was $1 million which included approximately $378,000 of DD&A expense versus $2 million of operating income for the third quarter which included $599,000 of DD&A expense.
For the full year, Texadian generated $100 million in revenues and $9 million of operating income, which includes DD&A expense of $2 million. We continue to explore growth alternatives for Texadian as we believe our logistics footprint is well-positioned to capture dislocations in crude prices in Canada and the upper Midwest.
In furtherance of our growth objectives, Texadian is reestablishing its market presence in Calgary, Alberta. This opens up supply and logistics opportunities to access incremental Canadian crudes as well as broaden our sourcing capabilities to benefit our refining business.
In addition, Texadian’s access to the partially completed tank and dock facility near Wood River, Illinois has allowed for increased throughput which started in the late fourth quarter. We anticipate this facility will allow us to more reliably access crude in the Midwestern U.S. and drive improved asset utilization of our leased equipment.
Moving on to Piceance Energy. I’d like to remind everyone that Piceance Energy is accounted for using the equity method. During the fourth quarter, Piceance generated revenue of $17 million versus $15 million for the third quarter, an increase of approximately $2 million.
During the fourth quarter, Piceance generated an operating loss of $3 million which included approximately $9 million of DD&A expense versus an operating loss of $2 million for the third quarter which included $7 million of DD&A expense. The sequential change in operating income was largely driven by higher DD&A expense, offset by higher natural gas and natural gas liquids prices.
For the full year, Piceance generated $61 million of revenue and an operating loss of $7 million, including DD&A expense of $27 million. During 2013, total production averaged 40.8 million cubic feet equivalent per day versus 42 million cubic feet equivalent per day for the four months ended December 31, 2012.
We are seeing improved cash flow inside Piceance driven by increases in natural gas and natural gas liquids markets starting in December 2013. The Board of Directors of Piceance Energy meets quarterly to determine if pursuing a drilling program is in the best interest of the company.
Now for a few comments on Par overhead and trust activity. For the full year, our acquisition and integration costs were $10 million. Overhead costs remained elevated due to acquisition and integration costs associated with closing the Hawaii acquisition.
Fourth quarter trust expenses were relatively flat compared to the third quarter and trust expenses are beginning to wind down as we work to clean up the remaining disputed claims. There are 28 remaining claims totaling $40 million, inclusive of a $10 million reserve and $22 million for the U.S. government. We are diligently working to resolve all these remaining claims and move to the next chapter in Par’s growth.
This concludes my prepared remarks and at this time I’d like to turn it back over to the operator for Q&A?
(Operator Instructions) Standing by for question, we do have Edward Collari [ph] from Arbiter Partners.
Hi, Will, thanks for taking my call. I was wondering if you could give me some idea of why you felt those crack spreads were relevant and what kind of sensitivity you would expect and if it’s on a dollar to dollar basis or percentage basis? Thanks.
Sure. Good morning, Edward. We’re providing the two spreads as effectively indicators of market activity. But these aren’t intended to be bridgeable between our gross margins but more directional. So it's more relevant to say the quarter-over-quarter comparison, or sorry, the year-over-year comparison and what direction the market is moving as an indicator.
So again if you look at our yields and what we provided in the press release, the selection of the 121 reference has to do with our relative yields within the plant.
And sorry, to the extent that they improve or get worse year over year, would you expect that sort of to be a percentage change to your gross margin or dollar to dollar absolute change?
I think it’s really directional. So I am not sure that there is an adequate, either absolute or relative percentage application to our margins.
You mentioned a duplicative cost. Is that something that that occurred in Q4 or is that something that was Q1, Q2…
Occurred both in Q4 and it’s ongoing during Q1.
And your next question comes from Lee Cooperman.
Thank you. I realize the company kind of is in a major transition as you remake the whole book of activity. But I was curious, do you have any aspirational goals for the company that you can share with us in terms of targets that you might look at two, three years from now? And secondly, if you could review the tax status of the company in terms of loss carry-forward, so we can kind of value that asset?
Sure, absolutely. I will start with your second question first. On the tax status side, the net operating loss carry forward balance inside the 10-K remains at $1.3 billion and it’s on an unrestricted basis would be available to us to the extent we are generating positive taxable income. So no change to the current tax status.
And in terms of aspirations for the business, I think it actually dovetails nicely with your prior question is that we have a significant tax asset that in order to utilize that we would need to remain acquisitive and buy cash flowing businesses and build businesses inside of Par that would allow us to utilize that NOL. So I think we would continue to look at additional opportunities, I think, outside of additional acquisitions. We are evaluating listing on a larger exchange, improving shareholder liquidity and really trying to take Par into a place where we have the more diversified shareholder base.
And our next question comes from Andrew Shapiro from Lawndale Capital Management.
Andrew Shapiro - Lawndale Capital Management
Hi thank you. Lee actually asked a few other questions I had regarding the NOLs. Could I get into – or drive into little bit more detail on particular areas of focus for you and your acquisition team? Is it currently busy doing things, or are you still integrating and the team is focused on the Hawaii asset in particular to get that to becoming pretax income generating? And if you are doing both on the dual path, what areas are you leaning towards or most heavily focused on in the acquisition front?
Sure. So I think simply said, we’re doing both and we are very active in evaluating additional opportunities and we’re focusing primarily in the energy space… I should say exclusively in the energy space. And that is, I guess at this point the most amount of detail we are comfortable providing. We are in active dialogue with multiple counterparties right now and I think we will continue to do so. Or simultaneously obviously we have a major effort underway here to improve the profitability at the plant in Hawaii and improve the operations. And so really a dual track focus at this point in time.
Andrew Shapiro - Lawndale Capital Management
Okay. And the acquisition idea I talked with you about previously if you please give me a call off-line. I want to give you an update on that and perhaps it does fit within your framework.
(Operator Instructions) And our next question comes from Jason Sledge from Urkoi Capital [ph].
Hi Will, it’s Jason Shells [ph]. Can you update us on the current status of the debt and cash on the balance sheet and maybe what the liquidity is available for the company to make acquisitions?
Sure. So you'll find in our 10-K that comes out later today, at year-end our total liquidity position was roughly $80 million of available cash or available credit facilities to us. And then we’ve also provided a subsequent update as of March 25 with roughly the same balance – it remains at roughly $80 million. So that’s 2 points in time for you on our liquidity – sorry, Jason, what was the other part of your question?
What’s the current net debt position or debt and the cash at year end?
At year end, we will provide that inside the 10-K and we will come up with that for you once that’s released today.
Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.
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