CVR Energy, Inc. (NYSE:CVI)
Q1 2014 Earnings Conference Call
May 1, 2014 2:30 p.m. ET
Jay Finks – Director-Investor Relations
John Lipinski – President and Chief Executive Officer
Susan Ball – Treasurer and Chief Financial Officer
Jeff Dietert – Simmons
Chi Chow – Macquarie Capital
Greetings, and welcome to the CVR Energy First Quarter 2014 Earnings Call. At this time all participants are in a listen-only mode. A 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. Sir you may begin.
Thank you, Kevin. Good afternoon everyone. We very much appreciate you joining us for our CVR Energy first quarter 2014 earnings call. With me are Jack Lipinski, our Chief Executive Officer; Susan Ball, our Chief Financial Officer; and Stan Riemann, Chief Operating Officer.
Prior to discussing our 2014 first 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, believes, 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 reconciliation to the most directly comparable GAAP financial measures are included in our 2014 first quarter earnings release that we filed with the SEC this morning prior to the open of the market.
With that said, I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?
Okay. Thank you, Jay. Good afternoon everyone and thanks for joining us on this earnings call. Hopefully you had the opportunity to listen to the CVR Partners and CVR Refining first quarter earnings calls earlier today. And just as reference, both conference calls are available for playback over the next 14 days.
Today we reported CVR Energy’s first quarter consolidated adjusted net income of $81.9 million or $0.94 per diluted share, and that compares to $156.8 million or $1.81 per diluted share first quarter a year ago.
Susan will provide you more details on the financials reported this morning. CVR Energy also announced its quarterly cash dividend of $0.75 per share, which will be paid on May 19 to stockholders of record on May 12. Let me talk a little bit about our business segments.
I will start with petroleum. This morning CVR Refining released their first quarter results. The adjusted EBITDA for the quarter was $194.1 million as compared to $309.9 million a year ago. CVR Refining also declared a first quarter distribution of $0.98 per common unit to be paid on May 19 to unitholders on record on May 12.
You also know that CVR Energy owns approximately 71% of the common units of CVR Refining, and therefore receives a proportional amount of distributions from CVR Refining.
Operationally, our refineries ran exceptionally well during the first quarter resulting in a record throughput of approximately 201, 900 [ph] barrels a day, and this exceeds our first quarter estimate of 185,000 to 200,000 barrels a day which I stated on our last conference call.
Coffeyville processed approximately 124,000 barrels a day of crude while Wynnewood processed about 77,900 barrels of crude. Just parenthetically on the CVR Refining coal, we estimated our operational guidance for Q2 to be between 190,000 barrels a day and 205,000 barrels a day of both the combined throughput at our plants.
Turning to fertilizer, this morning CVR Partners announced their first quarter results which met our expectations. The 2014 first quarter adjusted EBITDA was $29.9 million as compared to $43.8 million in the first quarter of 2013. CVR Partners also declared a 2014 first quarter cash distribution of $0.38 per common unit to be paid on May 19 to unitholders of record on May 12.
And again here CVR owns approximately 53% of the common units of CVR Partners and therefore receives a proportional amount of distributions from CVR Partners. And operational guidance for the year for CVR Partners [indiscernible] million tons for the calendar year, we expect UAN production for the second quarter to be between 230,000 and 240,000 tons.
At this time, I will turn the call over to Susan to talk about financials.
Thank you, Jack, and good afternoon everyone. Net income attributable to CVR Energy stockholders was $126.7 million in the first quarter 2014 as compared to $165 million in the first quarter of last year.
Non-controlling interest which contributes to the reduction in the 2014 first quarter net income associated with the CVR Energy stockholders was $87 million as compared to $47.7 million in the same period last year. Adjusted net income for the 2014 first quarter was $81.9 million as compared to $156.8 million in the first quarter of 2013.
The more significant adjustments to net income during the 2014 first quarter to derive adjusted net income were adjusted related to the increase or decrease in our inventory values that are realized under the first in, first out or the FIFO inventory accounting method. We realized a favorable FIFO inventory impact of $21.6 million and gains on derivatives not settled during the period of $88.3 million. These adjustments for the first quarter of 2013 were a favorable FIFO inventory impact of $4.7 million with gains on derivatives not settled of $32.5 million.
These gross adjustments to net income are reduced for the portions that’s attributable to the non-controlling interest and are further reduced for the net tax impact associated with them.
For the first quarter of 2014, our effective tax rate was 24.5% as compared to 30.6% for the first quarter 2013. This decrease is primarily attributable to the increase in non-controlling interest ownership for full period basis of 2014 as compared to 2013.
CVR Refining’s adjusted EBITDA for the 2014 first quarter was $194.1 million as compared to $309.9 million in the same period in 2013. In the first quarter 2014, CVR Refining’s realized refining margin adjusted for FIFO was $15.98 per barrel as compared to $26.44 in the same quarter of 2013. Driving this decrease was the overall lower NYMEX 2-1-1 crack spreads and overall increased combined negative product basis. This primarily contributed to the decrease between the periods.
As of March 31, CVR Refining had open commodity derivative positions of 18.1 million barrels at an average fixed price of $27.76 per barrel. The open commodity derivative positions were comprised of approximately 72% of distillate crack swaps and 26% for gasoline crack swaps.
As Jack previously mentioned, CVR Refining announced a 2014 first quarter distribution of $0.98 per common unit, as a result of the approximate $144.6 million that will be paid out by CVR Refining, approximately $41.9 million will be paid to the public unitholders with approximately $102.7 million being paid to CVR Energy.
As noted earlier, CVR Partners’ first quarter adjusted EBITDA was $29.9 million as compared to $43.8 million in the same period last year. The primary contributing factor to the decrease was the 2014 first quarter’s lower average netback price of $253 per ton for UAN as compared to last year’s first quarter average netback price of $295 per UAN ton.
CVR Partners announced a cash distribution of $0.38 per common unit for the first quarter of 2014, of the approximate $27.8 million to be paid out, approximately $13 million will be paid to public unitholders with CVR Energy receiving approximately $14.8 million.
We ended the quarter with cash and cash equivalents of approximately $962.1 million on a consolidated basis which included $85.9 million of cash at CVR Partners and $413.4 million of cash at CVR Refining. Excluding the cash of CVR Refining and CVR Partners, we held cash of $462.8 million as of March 31, 2014.
Total consolidated debt, including current portions as of March 31 was approximately $676 million. CVR Energy has no debt, exclusive of the debt that resides at CVR Refining and CVR Partners. We continue to have a strong consolidated balance sheet with both business segments positioned well for continued growth.
With that, Jack, I will turn it back over to you.
Okay. Thank you, Susan. Again, I thank you all for joining us on this conference call. I urge you if you didn’t have the opportunity to listen to the earlier call through our website which is available for playback. And with that, operator, I’d like to turn it over for questions.
(Operator Instructions) Our first question today is coming from Jeff Dietert from Simmons.
Jeff Dietert – Simmons
As you think about the strategy moving forward, is it primarily associated with the organic growth at CVRR and UAN, are there M&A opportunities, how do you think about the go forward plan for CVI? And secondly, you’ve been pretty steady on your $0.75 a quarter dividends, how do you see that evolving over time as we go forward?
Well, certainly the kind of earnings we have support these kind of distributions, so we still have round numbers 350 million of unrestricted cash on our balance sheet. At CVI, I would say that our view is that CVI will continue to support CVR Refining as we need additional capital for growth projects. But that said, our real indication, our real goal here at CVI is to be able to grow the company. Again the company itself has no debt, we have cash. It’s ideally suited so that if we were ever to acquire another company, we could drop down the qualifying income to our MLPs and keep the non-qualifying income at parent and run it separately which gives us an enormous amount of flexibility as we look across the M&A space. So are we looking, we are always looking.
Jeff Dietert – Simmons
And would the potential future outlook be more refining, fertilizer, all of the above, is there an optimum mix that you are looking for?
Well, fertilizer is a very small business, there is a limited number of players and so nobody is after sale, nobody is really unhappy with the assets that they have right now. But certainly if something came up, we would be more than happy to participate. The refining side gives us more opportunity. There may be opportunities that come up as people, they have got themselves refining assets or we look to acquire others, get involved in others. Logistics is one area that we focus on, we're constantly looking for businesses that would give us enough EBITDA to meet our minimum threshold to spend another MLP out of CVR Energy or out of CVR Refining, however that may turn out. So CVI is really the acquisition vehicle that we may end up using going forward simply because it’s unencumbered right company.
Our next question is coming from Chi Chow from Macquarie Capital.
Chi Chow – Macquarie Capital
I want to ask you about the kind of Mid-Continent crude supply situation. There is lot of moving pieces on crude storage at Cushing and not only just all out of the Gulf Coast this year which obviously have an impact on the crude stock but also expected inland production growth this year, there is new pipelines coming into Cushing later this year. I guess couple of questions, how do you see inventory levels playing out at Cushing as the year progresses? And then secondly, how do you see the WTI pricing both at Cushing and Midland reacting to all the changing dynamics?
Okay. Well, I haven’t talked about in a while but we have viewed this as – what we had, what, people are calling super congestion, the term that when the US fills up with crude. But for years we had congestion in Cushing which was alleviated by some pipelines. And we expect this to be somewhat of a saw tooth. I think if you look at inland production is growing at greater rates than most people even anticipate. As new pipelines come on, and there is surplus capacity on those pipelines, we would expect individual grades to come under pressure. But ultimately there are only so much crude that you can move into the Gulf Coast. And when the Gulf Coast starts backing up, it will – in my view it will back up into the Midcontinent and we will remain advantaged. The immediate impact right now is that Cushing is being emptied and Cushing instead of in contango as it was for a long time, it’s in backwardation [ph]. So that basically – if you buy WTI or WTI related crude, you are paying for the backwardation instead of collecting a premium on the contango.
But when the Gulf Coast finally squeals uncles, those crudes is going to have to back up into the Midcontinent, we would see in Midcon or other areas of country, we would see differentials widening again. So long term we have a view that we’re ideally situated. People look at the Gulf Coast refineries right now, and are saying how wonderful it is for them and – but that’s because they didn’t have a situation Midcon refiners had for years. So what’s going to happen is when everything starts soaking, I believe we’re going to see wider differentials because we consume the crude.
Chi Chow – Macquarie Capital
Right. Do you have a sense for exactly when the Gulf Coast might actually squeal, how long is that going to take and then during this transition period, with all the infrastructure coming online, I mean do you envision a situation – I mean there has been some speculation that TI will trade over Gulf Coast crude, [lesser or what not], how do you see this playing out I guess during between now and when that time that Gulf Coast is still –
I have trouble believing that because you have to pay a tariff to get from the Midcon to the Gulf Coast. I mean very simply, in my view again, the differential will always remain pipeline tariff.
Chi Chow – Macquarie Capital
I guess another topic, Susan, I think you mentioned on the other call that rent [ph] costs, were they 75 million to 150 million estimated?
Correct. For the year we have estimated 75 million to 150 million, I know that’s a wide range but obviously with the changing prices as they are volatile.
Chi Chow - Macquarie Capital
Yes, what’s the price you are assuming in that range?
Anywhere from $0.30 on up to $0.70 price basically.
Today they are trading at $0.40.
Chi Chow - Macquarie Capital
Do you have a view on where the EPA may set the ’14 mandate when they finally go around to finalizing something for the industry where you manage to, any sort of view on how that’s going to play out?
There's so many rumors flying around and obviously the corn lobby is very high behind sending comments and it’s kind of like – if you get 2 million comments from 2 million people, that weighs more than comments from industry pressures. When I say weigh, basically weigh, doesn’t mean they are fair points, or any more valid. I believe with the – I believe the EPA is kind of giving handshake saying that they will adjust from their previous announced levels. You also know that they dropped the cellulosic [inaudible]. Beyond that, I don’t know. It’s purely political play. Quite honestly I think right now even the ethanol producers realize that they are making more money than they ever had before and they don’t need the mandate to keep going.
Thank you. We’ve reached the end of our question and answer session. I would like to turn the floor back over to management for any further closing comments.
Thanks, Kevin. I thank everyone again for joining our conference call today. As a reminder, this call will be available for playback for the next 14 days. If you need any additional information, feel free to contact investor relations or go to our website cvrnergy.com. 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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