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Alon USA Energy, Inc. (NYSE:ALJ)

Q1 2014 Earnings Conference Call

May 2, 2014 12:00 PM ET

Executives

Stacey Hudson - IR Manager

Paul Eisman - President and CEO

Shai Even - CFO

Analysts

Chi Chow - Macquarie Capital

Ed Westlake - Credit Suisse

Jeff Dietert - Simmons & Company

Roger Read - Wells Fargo Securities

Paul Cheng - Barclays Capital

Evan Calio - Morgan Stanley

Sam Margolin - Cowen and Company

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Alon USA Energy First Quarter Earnings Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Friday, May 2, 2014.

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

Stacey Hudson

Thank you, Vince. Good morning, everyone and welcome to Alon USA Energy’s first quarter 2014 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 may 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. For a discussion of factors that could affect our future financial results and businesses, please refer to the disclosure and risk factors disclosed by the Company from time-to-time in its filings with the SEC. Furthermore, please also refer to statement regarding forward-looking statements incorporated in our news release issued yesterday. 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 Web site. Finally, please be aware that all our statements are made as of today, May 2, 2014, based on information available to us as of today and except as required by law, 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. In the first quarter we recorded adjusted earnings of $0.06 per share. This reduction in profitability relative to the first quarter of 2013 was driven primarily by lower differentials for crude oil prices in Cushing and Midland versus the Brent benchmark. Adjusted EBITDA for the first quarter was approximately $73 million. Since the end of the first quarter we’ve seen widening of crack spreads and crude oil differentials that will be supportive of profitability in the second quarter.

Domestic gasoline and distillate product inventories are at the low-end of the range while crude oil inventory at Gulf Coast is at historically high levels. This is fundamentally constructive to crack spreads and we’ve seen improvement since the first quarter. In addition, we’ve seen the Midland differential versus Cushing widen during the quarter, which will be supportive of Big Spring profitability. This also benefits Krotz Springs as we shipped 30,000 barrels per day of Midland priced crude to Krotz Springs. The Big Spring refinery had an excellent operating quarter with the total throughput of 73,300 barrels per day. In fact Big Spring recorded its record quarterly crude rate in the first quarter and its record monthly throughput rate in March.

Direct operating expenses during the quarter were somewhat higher than expected at $4.39 per barrel, driven primarily by higher fuel gas prices. The natural gas benchmark price in the quarter averaged $4.72 per million Btu as compared to $3.48 in the same quarter last year. The price of WTI crude oil has declined relative to our sour crude oil alternative and we are optimizing the refinery by increasing the amount of WTI crude processed, while maintaining maximum crude charge rates.

In the first quarter almost half of the crude processed at Big Spring’s WTI up from approximately 20% in the same quarter last year. We started our planned turnaround at Big Spring yesterday. The turnaround will be completed in the stage manner with the FCC coming down first, followed by the crude unit approximately mid-month. We expect the turnaround works to be completed by the middle of June. Throughput at Big Spring is expected to average 46,000 barrels per day in the second quarter and 67,000 barrels per day for the year.

As a reminder, we will also complete the revamp of the vacuum tower during this period. This project allows us to increase distillate recovery at the plant by 2,000 barrels per day, while increasing our ability to better utilize existing equipment to increase throughput, while also improving the energy efficiency at the refinery. The capital cost of this project is $25 million and generates benefits of nearly $20 million per year at expected margins.

In our wholesale marketing business both branded and unbranded fuel sales during the quarter were strong, versus the same quarter last year branded sales gallons were up 6.5% while unbranded sales were up over 50% as high production levels out of the Big Spring refinery were successfully moved to market. In our retail marketing business fuel sales were up 2.5% versus the first quarter of last year. Fuel margins decreased to $0.183 per gallon as compared to $0.203 per gallon in the first quarter of last year.

Merchandise sales were flat versus the same quarter last year as severe winter weather impacted traffic into our stores with merchandise margin during the first quarter of this year at 31.5%. As we moved into spring, we’re seeing improved performance of our retail system. We’re continuing to spend money to remodel our stores and expect to invest this year to build several new stores.

The Krotz Springs refinery results were impacted by a number of factors. We experienced three ice storms during the quarter, all of which impacted operations to some degree. High winds and falls associated with this winter weather had an impact in our ability to lower barge crude to the refinery. Finally as planned, we took a short outage in the Krotz Springs refinery crude unit to clean some of the trays inside the tower, along with an overhead cooler to allow us to maximize crude for the remainder of the year. As a result of all of these factors the throughput of Krotz Springs is limited to just over 62,000 barrels per day for the first quarter.

Direct operating expenses were higher at $4.56 per barrel in the quarter, resulting from the reduced throughout, higher cost associated with the crude unit outage and also due to the previously mentioned higher natural gas price. On the positive side, the refinery is operating well since the completion of the crude unit maintenance. We’re also now benefiting from improved crack spreads and wider differentials for the Midland priced WTI, but also for LLS versus the Brent benchmark. We expect to operate Krotz Springs at 73,000 barrels per day for the second quarter and to average 71,000 barrels per day for the year.

In California, we expect to go out very soon for public comment on our permit application to construct a crude oil rail unloading facility and potentially restart our Bakersfield refinery. We’re pleased with the support that we’ve received for the project thus far from many segments of the Bakersfield community and look forward to working with the entire community to answer the questions.

Our asphalt marketing business was impacted by weak demand, both seasonally and in aggregate. We remain optimistic that we’ve reached a trough in demand and in improving budgets especially in California, will lead to increased demand as they adjust budgets to repair the roads. We’re pleased that Scott Rowe has joined our team to lead our asphalt marketing business. Scott has a long and successful history in this business and we look forward to growing our asphalt marketing business and improving our operating and financial results under his leadership.

We’re also pleased that we were able to further strengthen our balance sheet during the first quarter. We reduced net debt by almost $60 million during the quarter to $328 million. Yesterday, we redeemed $40 million of the Krotz Springs bonds leaving a balance of $35.6 million. Our primary focus in the second quarter will be the successful completion of the Big Spring turnaround and the vacuum tower revamp project. In addition, we expect to have a good quarter at Krotz Springs along with improvement in our retail and asphalt marketing business. Finally, we expect to move the California permitting process forward as we receive and respond to questions from the community.

With that, we’re glad to answer any questions that you might have.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Please ask one question and one follow-up and then re-queue for any additional questions. Our first question comes from the line of Chi Chow with Macquarie. Please go ahead.

Chi Chow - Macquarie Capital

Yes. Good morning.

Paul Eisman

Hi Chi.

Chi Chow - Macquarie Capital

Hi. Paul you mentioned the -- you gave us a nice update on the permit application in California. Can you also talk about what’s happening on the third-party usage at the Paramount and Long Beach facilities?

Paul Eisman

Yes, we continue to deliver, receive/deliver crude oil out of the Long Beach facility and we feel like we’re moving forward on commercial discussions to start doing so at the Paramount facility also.

Chi Chow - Macquarie Capital

Okay. Can you share any sort of volumes at Long Beach in the quarter?

Paul Eisman

Do you know what those are?

Shai Even

I don’t know the exact volume for the quarter, but we know that the terminal had a capacity of about 18 cars a day and most days we’re bringing in railcars in the 10 to 15 railcar throughputs.

Chi Chow - Macquarie Capital

Okay, okay, thanks. Then secondly I want to ask you a little bit about this Gulf Coast crude supply situation. We can certainly see at our end the pad 3 crude inventories stacking up. But we can’t see what’s specifically happening within the regions. I want to get your views on how you’re seeing the supply demand trends in the Louisiana market and at Krotz Springs as the year has progressed, any comments there? I know you’ve seen more barrels coming into St. James as the year goes on or any other thoughts?

Paul Eisman

Well, I mean just directionally if you look at the graph for pad 3 crude inventories, I mean it’s pretty dramatic how they have increased since the beginning of the year. We are at historically high levels and we do have -- there are impacts associated with that. I mean for instance when we had to cut back the Krotz Springs refinery in the first quarter it is much more difficult to place those barrels into a location, because inventory levels, all the inventory the tankage is being used on a Gulf Coast. So I think we’re starting to get to some operational issues in terms of tankage and infrastructure on the Gulf Coast. In terms of how that moves forward it’s really hard to tell. Cushing is getting drained pretty much and I think that that will slowdown obviously. But production is continuing increase so we’re just going to have to watch it and see.

Chi Chow - Macquarie Capital

Great. Any thoughts on how LLS prices may trend through the year here?

Paul Eisman

Your guess is as good as mine. Obviously we’ve seen a widening of that differential. I think it’s in the $6 to $7 range today.

Chi Chow - Macquarie Capital

Right.

Paul Eisman

That’s up from the first quarter and has moved as these inventories have continued to increase on the Gulf Coast. We still believe that those are fundamentally transportation-related, as there are markets today that can consume those barrels. But the last market is a Jones Act shipment to the Northeast at this point. And you do get into question whether or not sufficient Jones Act shipping available, if not then the differentials could widen for a while until those resources are made available.

Chi Chow - Macquarie Capital

Okay, great. Thanks Paul, I appreciate it.

Paul Eisman

Sure Chi.

Operator

Thank you. Our next question comes from the line of Edward Westlake with Credit Suisse. Please go ahead.

Edward Westlake - Credit Suisse

Yes, just obviously we have at ALDW call, but just on Krotz Springs I mean obviously there was some sort of I think an ice storm and some maintenance in the first quarter and can you give us a sort of sense of any opportunity cost with that as we try and think about that earnings?

Paul Eisman

Yes, directionally we think the opportunity cost for the shortage or shortfall and it runs at Krotz Springs was in the $8 million to $10 million range.

Edward Westlake - Credit Suisse

Right. Okay, good. And then in the second quarter I presume you’ve given that guidance for higher runs and obviously the crude first come in so we should start to expect a better performance particularly with the cracks that we’re also seeing on the product side?

Paul Eisman

Yes, we do. I mean we’ll see how the quarter progresses in terms of cracks and differentials, but April was very good, the operations were good while we’ve given guidance for the quarter, it had a fairly high rate and we expect to achieve that. It’s hard to tell what the rest of the quarter is going to look like, but as I mentioned in my comments fundamentally when you look at product inventories and crude inventories, it’s constructive and so we’re fairly optimistic that the Krotz Springs should have a good quarter.

Edward Westlake - Credit Suisse

And then just on the timing and I am getting into the specifics, but could you just run us through again the different stages and how long they might take for the logistics in Bakersfield?

Paul Eisman

Yes, so we are -- the permit, you’re talking about the permit I guess the timing for that?

Edward Westlake - Credit Suisse

Yes, yes.

Paul Eisman

And we expect to go out for public comment this month and that’s a 45 day public comment period and then we estimate about two months to answer those. And then followed up by continued questions and discussions with the people in Kern County, but we are still optimistic that we can achieve that and receive that permit by the end of the year.

Edward Westlake - Credit Suisse

Okay, great. Thanks very much.

Paul Eisman

You bet.

Operator

Thank you. Our next question comes from the line of Jeff Dietert with Simmons. Please go ahead.

Jeff Dietert - Simmons & Company

Good morning.

Paul Eisman

Good morning.

Jeff Dietert - Simmons & Company

I was hoping you could help me with some a little bit more detailed questions, but interest expense has been up the last couple of quarters is that 28 million a reasonable go forward quarterly run rate?

Paul Eisman

Yes we do have a supply and offtake agreement actually three supply and offtake agreement for each refining center and the supply offtake agreements including certain cost included as interest expense into -- to enter in this arrangement and the component of this is the result of difference between market moves from the contagion to liquidation, but because the current market right now is in liquidation we have about $6.5 million of additional interest expense included this quarter compared to the third quarter of 2013.

Jeff Dietert - Simmons & Company

Okay. And secondly at Big Spring as we think about cash operating cost for the second quarter I assume natural gas prices probably are down a little bit on the energy cost, but typically with maintenance period there is a little incremental fixed cash operating cost associated with that. Could you talk a little about what cash up cost looks like for 2Q?

Paul Eisman

I don’t know that I have that number with me, and in terms of -- one thing I can tell you is that for every -- where we operate every dollar change in fuel gas price book would end up impacting $0.30 a barrel in terms of operating cost but there is a lot of things moving in the second quarter with the shutdown, the startup and how that’s moving and I know we have those numbers but I didn’t bring them to this call.

Jeff Dietert - Simmons & Company

Okay.

Shai Even

We do know that when natural gas increased actually we are getting overall a benefit because the benefit that we are getting on this really over production exceed the cost including the operating expense.

Paul Eisman

The values of LPG typically go up at the same time.

Jeff Dietert - Simmons & Company

Okay, good. And lastly it seems like with the cold weather that’s -- certainly the demand for asphalt is going up, could you talk about how that might flow through, do you think the regional budgets will go up and allow an increased expenditure on asphalt, how do those dynamics work?

Paul Eisman

Yes, I think we’re in two or three major markets I will talk -- Texas the economy is good and the budgets are in pretty good shape and our mine pricing is at the stage spending money to recur the roads we operate primarily West Texas where the roads are getting a lot of ware and tare because of the all the trucks going up and down the roads. The state I think realizes it’s critical to maintain the quality of roads to keep that economic activity going and so they are spending money to do that.

In California, we’ve seen I think a significant improvement in the budget situation out there, where they’ve actually moved to projections some level of surplus and they’re trying to decide how to spend that money. I think some of that if you go out to California you see what’s happened to the roads, anyone you talk to out there would tell you that some of that money needs to be spent to improve and repair the roads. So we expect that to happen, we don’t have any numbers at this point it’s just expectation that that will happen.

In aggregate across the United States we expect demand for asphalt increase by 3% to 5% year-over-year for next few years which given the fact that asphalt demand has dropped almost in half from levels not that long ago is a slow recovery. But it is a recovery, and the fact is, is that our asphalt business is pretty much a fixed cost business. I mean all of these costs are incurred whether or not we sell a tonne of asphalt. It is cost to run the tanks, to heat the tanks and those kinds of things. So the next 100,000 tonnes we sell really doesn’t cost us very much and gross margin tends to go down to the bottom-line. So in that case relatively small changes in demand can have disproportionate impacts on profitability. And so we’re hopeful that we’ll see that going forward this year.

Jeff Dietert - Simmons & Company

Thanks for your comments Paul.

Paul Eisman

Yes, thank you.

Operator

Thank you. Our next question comes from the line of Roger Read with Wells Fargo. Please go ahead.

Roger Read - Wells Fargo Securities

Hi. Good morning.

Paul Eisman

Good morning.

Roger Read - Wells Fargo Securities

I guess let’s talk a little bit California if we could, I know trying to pick the date of the permit is a challenge. But assuming you get it and you’re able to get the crude rail done there. What is your experience with the Bakersfield again and then with the others as well in terms of running a -- I am assuming a WTI like crude in those units?

Paul Eisman

It was, I don’t know this WTI but it’s the light sweet crude it comes from the Bakken, it comes from Colorado it could come from I guess potentially from West Texas. But in any case it would be -- light crude doesn’t necessarily fairly have to be sweet but it seems like there is more of the sweet available at this point, so that’s kind of what we’re thinking about. The refiner view is actually configured much better to run light crudes and what’s configured to run the heavy. It historically it operated in California and used local crudes and it has a coker. The problem with it is that you don’t have enough hydro-processing capabilities to treat the coke products and that was part of the problem that the previous owners have with the refinery and the economics of operating that refinery. When we look at it though if we’re not ruing the coker and we don’t need to running light sweet crude because we’ve got an asphalt market. Then we have got sufficient processing capability such that we can handle all the products and make all finished products out of the refinery instead of unfinished intermediates after we sold in a discounted ways to tough market. So we actually think the refinery is much better configured on the light sweet crude that we will move into the refinery by rail.

Roger Read - Wells Fargo Securities

Okay, so -- but I guess kind of getting back to the question what is your experience with running a light barrel? I mean is this based on that’s what the unit looks like or what you know you can do? I am just trying to understand, a lot of times when there is teething issues and we kind of start something back up and I am just trying to get a feel for how to work this in once we hear about the permit award that sort of thing?

Paul Eisman

Well we’ve -- obviously we and others have a lot of experience running the light sweet crudes in refineries we do that exclusively Krotz Springs and do a lot of it at Big Spring. So our engineers have looked at it and reviewed the operations and modeled them and we’re confident we could do this, we don’t see any particular problems, technically in terms of running a light sweet crude in Bakersfield.

Roger Read - Wells Fargo Securities

Okay. And then for the other units out there if this is able to work out and you can get the crudes in there. What’s the right way to think about the other two units in terms of volumes, timing et cetera? Or is that even really on the table here?

Paul Eisman

To that we obviously we put -- and it’s something we told taking about Paramount here specifically, we put -- when we start the operations in Paramount, we put the units up in a way such that we could restart it if the economics changed. That is more of a heavy crude refinery so what we’ve got to have to make that work is obviously is relatively good asphalt pricing versus the cost of the heavy crude. We’re not seeing that today so we’re not pushing that mode but if the economics develop we could certainly do that. But that’s really not the focus in the short-term.

Roger Read - Wells Fargo Securities

Right. Okay. And then my last question, you made the comments about running. I mean this is not news but running the Midland barrels at Krotz Springs. Obviously the differentials today are pretty good but can you give us an idea of what the transport costs are sort of what’s a net back at today’s -- today at Krotz Springs unit I guess?

Paul Eisman

Yes Roger if you take the Midland price, Midland WTI price and add $5 to it, that’s our delivered cost in the Krotz Springs.

Roger Read - Wells Fargo Securities

Okay, that’s helpful. Thank you.

Paul Eisman

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Paul Cheng with Barclays. Please go ahead.

Paul Cheng - Barclays Capital

Hi guys, good morning.

Paul Eisman

Good morning.

Paul Cheng - Barclays Capital

Paul in Krotz Springs when you’re bring in the Midland crude, are you based on I mean in terms of when we would see that showing up in your P&L, is it based on the three months or 30 day lag, or just a 60 lag?

Paul Eisman

So, I would think of -- the way that I would think of it is look at just much like you would do with Big Spring. We buy the crude and the inventory system is full if you will, so the crude translates into Krotz Springs’ crude supply on the trading month differential. So today we’re buying crude let’s say Midland is $8 under WTI for June trading today that’s what we’ll see as our cost discount in June.

Paul Cheng - Barclays Capital

Yes because we have heard from some of the refinement that if you have a inventory arrangement with a bank sometimes that it was delayed parcel and that’s what we saw then and the result turned out to be a longer lag so I am just trying to understand?

Shai Even

So we’ve discussed it in the past that we’re bringing to our counterparties the crude oil contract and we’re obviously securing the goods for us the same way that we’re procuring the contract -- the crude ourselves so for example when during the trading month of March we had a lot of differentials between the Cushing and Midland that will benefit into crudes price forward.

Paul Cheng - Barclays Capital

Okay.

Paul Eisman

The way we’re doing that really doesn’t impact any kind of lag time that we’ve got.

Paul Cheng - Barclays Capital

Okay, perfect. Secondly, that so far when you’re looking at Long Beach or Paramount when your customers bringing in oil into your well and unloading facility have you noticed that whether that preference is more for the Permian grade or it is the Bakken grade?

Paul Eisman

No it’s, we’re doing this for our customers and we don’t -- typically it evolves what they’re doing and I’d prefer not to really talk about that here.

Paul Cheng - Barclays Capital

And how about Bakersfield that does it make any difference between whether you’re going to bring in or that you have a preference if you did that going to move ahead and we start that facility based on the configuration, is that better to run the Bakken or Eagle Ford or will it make no difference?

Paul Eisman

Well, we think that’s a differential the Eagle Ford is close to the Gulf Coast and has ways to get there that aren’t very costly so if you’ve got a differentials to support the rail movement we think that’s more likely to occur out of the Bakken or out of the Niobrara or something like that where you’re farther away from big Gulf Coast market so we would expect something like that to come in for our use relative to -- if we were to restart the Bakersfield refinery, the facility we have proposed to build in Bakersfield has ability to handle though both light and heavy crudes. And so we think we provide a lot of flexibility to potential customers to bring whatever crude they want to bring into the facility.

Paul Cheng - Barclays Capital

Paul, do you a number rough number you can share what is the asphalt cash margin in April so far?

Paul Eisman

I don’t think we have anything for April at this point. I am sorry, Paul.

Paul Cheng - Barclays Capital

That’s fine. A final one, the last couple of weeks that there is couple of transactions happened in the retail space and the price that people are paying seems to be very high, so the question is that in your retail operation do you really need it statistically speaking, if not, is there any plan to look at maybe it’s a way that knock the value there?

Paul Eisman

Yes I didn’t quite understanding the question. You’re talking about the -- such a transaction.

Paul Cheng - Barclays Capital

That’s correct.

Paul Eisman

Okay.

Paul Cheng - Barclays Capital

I mean that seems to be at a very high multiple, a very high price, so the question is that for your operation is retail is statically important for you to have, if not, will you look at trying to unlock the value by selling your retail or spin-off well probably not spin-off because it’s probably too small but to sell yes?

Paul Eisman

Well, we think the Susser transaction was one obviously that’s constructive towards value of the assets and so we think we’re glad to see to the market actually value these assets. And as it’s always obviously positive for us in terms of our view related to and how this might impact the transaction obviously we can’t comment on anything related to that. You made the comment but I think it is accurate that these assets are strategically important to the offtake out of the Big Spring refinery that’s true both on the wholesale side and the retail side. So obviously that’s a factor in anything that you might decide to look at.

Paul Cheng - Barclays Capital

Got you, okay, very good. Thank you.

Paul Eisman

Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Evan Calio with Morgan Stanley. Please go ahead.

Evan Calio - Morgan Stanley

Hi. Good afternoon guys.

Paul Eisman

Hi Evan, how are you?

Evan Calio - Morgan Stanley

Good, just a follow-up on the Big Spring turnaround and can you repeat the run guidance for 2Q and what will be running during your turns, so meaning I just want to understand better what you might be able to capture for differential that you will help to widen or maybe kind of move for May and June?

Paul Eisman

So a move at our guidance is 46,000 barrels per day for the second quarter. I think 67,000 for the year and then the second part of the question is?

Evan Calio - Morgan Stanley

Yes and just how you’d be running what is there any portion of the refinery that you’d be running in May and June. You’ve said you just started to turnaround today?

Paul Eisman

So where the FCC is down today so we’ve started the turnaround but we’re still running the crude unit today at 70,000 barrels per day and we’ll do that till about mid-month and then we’ll shutdown crude unit and at that point for about a week we’ll have everything shutdown so we can do work on utilities, electrical, steam, water systems that you can’t get to unless the entire refinery is down that will go on for about a week and at that point we’ll restart the FCC because of we are running the crude unit right now. We are putting gas oil in inventory, so we’ll have inventory to be able to run the FCC, shutdown the crude unit and then we’ll finish that turnaround hopefully finish all the work at about the middle of the month and restart everything and go forward.

Evan Calio - Morgan Stanley

Great, that’s helpful. And let me ask you second question on crud quality, I mean can you discuss what you’re seeing at Big Spring given your location as a direct handler and we’re from midstream and trucking companies and increasing challenge moving condensate and I was just curious if you’re seeing any distressed barrels or there any blending opportunities in the market this is obviously before you’d headed into your turnaround?

Paul Eisman

Yes I mean we saw in the first quarter especially early in the quarter the crude lighten up and then we saw this the 30,000 barrels that we delivered to the Krotz Springs and saw the Krotz Springs, it got lighter during the quarter also, so we did see some lightening of the crude in the quarter the best thing to resolve itself in March. We didn’t seem to have that issue in March. Now at Big Spring, we can be somewhat limited by how light the crude is so we watched that. We spent a lot of time and effort ever watching that to make that that we’re not getting condensate into the refinery. We understand people are trying to blend and do all those sorts of things. One of the advantages we feel that we have by being actually physically located in the Permian is that we have more ability and maybe some others to pick and choose which crudes actually get delivered to the refinery.

And so we have ramped up our crude quality control process to check what we’re receiving. As we watch these things lighten up we can still talk to the producers or pick and choose which crudes we want to run and we think mange that a little bit better. The last advantage we have is we do have a way to make the crude heavier and that’s by running a little more sourer. So obviously our economics are pushing us to run more sweet. We made significant progress moving that forward but at the end of the day the biggest driver is making sure we maximize throughput in the refinery. And so rather than cut throughput in the refinery, we would rather run a little more sourer and make sure we get every barrel we can through the facility.

Evan Calio - Morgan Stanley

So are you running that Permian blend or can you maybe API level where you start to reject barrels?

Paul Eisman

A number of API I don’t have a number that what we’d reject. I think we look at that. We look at it crude-by-crude, but on aggregate a number change in API is a pretty significant change when you’re limited by your ability to handle light crude, so we watch that a lot and there are specific crudes that we will reject. But I think the key for us is having good quality control procedure so we know what’s happening to us.

Evan Calio - Morgan Stanley

Yes I mean I guess like you’ve given the explosive activity in the Permian from upstream operators and you really want three refineries in the basin, I mean do you see any -- are you having any consideration to locking in delivery or locking in basin basis differential with an upstream producer and I’ll leave it at that?

Paul Eisman

Yes, we have not elected to pursue that. I mean we get the question sometimes about trying to hedge that or do something to lock things in. The approach you are talking about is a little bit different trying to do something with the producer. I think historically producers I find them a little bit reluctant to lock in something. It is difficult to get them to commit to pipeline projects sometimes. And so locking in differentials is a pretty significant thing and in terms of trying to do that other ways through hedging I think you run into liquidity issues. I think you run into cost issues and certainly from our perspective for the most part we believe our investors want exposure to the market and that’s what we typically try to provide.

Evan Calio - Morgan Stanley

Okay, makes sense guys. Thanks for taking my questions.

Paul Eisman

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Sam Margolin with Cowen and Company. Please go ahead.

Sam Margolin - Cowen and Company

Hi everybody.

Paul Eisman

Hi Sam.

Sam Margolin - Cowen and Company

I want to just to back to the Midland market one more time I think Evan just touched on it but if we can sort of presume that the Big Spring turnaround is going to have an impact on pricing, I want us to know if there were any incremental opportunities maybe to move more out to Louisiana if the constrains were logistical or just at the refinery and I don’t know if maybe there is a certain price where you could even move more and kind of create a merchant crude market the way you’re doing in California around that Krotz Spring system where you get Midland?

Paul Eisman

Yes today we tend to and we’re shipping the maximum amount we can through the system that we have that can deliver the Midland barrel in the Krotz Springs, so that remains our focus to do that. I think as the stepping down the road a little bit as more pipeline capacity comes out opens up out of the Midland market into the Gulf Coast, it gives us the additional opportunities to do but those are the pipelines I think we are all waiting to see what happens in called the late summer timeframe when they come into play.

Sam Margolin - Cowen and Company

Okay, thanks, and then just as a follow-up. It was mentioned also that the activity levels in the Permian are ramping up and this is pretty early stage to bring this up and kind of out of left field but I was wondering if there are any talks about even Greenfield facilities not necessarily on the condensate project side but even on the crude side similar to like Dakota Prairie Project or something like that maybe if you have heard anything small kind of Greenfield assets being thrown around discussed?

Paul Eisman

Yes I’m not aware. I have not heard of anything like that. I mean just directionally in terms of philosophically there is so much cost in the refinery that’s associating with infrastructure. We’re not talking about tankage and steam systems and stuff like that. That’s why it’s historically made much more economic sense to expand existing facilities rather than build Greenfield facilities and so I expect that approach going forward to the extent that we increase capacity. It’s much more likely that most that will occur within existing facilities rather than new facilities.

Sam Margolin - Cowen and Company

Alright, thank you so much.

Paul Eisman

Okay, thank you.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the conference over to Mr. Eisman for closing remarks.

Paul Eisman

Okay. Well, thanks to everyone for you time and your interest in the Company and we will talk to you next quarter. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Alon USA Energy’s first quarter earnings conference call. Thank you for your participation. You may now disconnect.

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Source: Alon USA Energy's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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