Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Northern Tier Energy LP (NYSE:NTI)

Q1 2014 Earnings Call

May 06, 2014 12:30 pm ET

Executives

Maria Testani -

David L. Lamp - Chief Executive Officer of Northern Tier Energy Gp LLC, President of Northern Tier Energy Gp LLC and Director of Northern Tier Energy Gp LLC

David Bonczek - Chief Financial Officer of Northern Tier Energy GP LLC, Principal Accounting Officer of Northern Tier Energy GP LLC and Vice President of Northern Tier Energy GP LLC

Analysts

Chi Chow - Macquarie Research

Paul Y. Cheng - Barclays Capital, Research Division

Mohit Bhardwaj - Citigroup Inc, Research Division

Jason Smith - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter Northern Tier Energy LP Earnings Conference Call. My name is Kim, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Maria Testani, Director of Planning and Strategy. Please proceed.

Maria Testani

Thank you, Kim. Good morning, and welcome to Northern Tier Energy LP's 2014 first quarter conference call. The slides that supplement this call can be found on our website at www.ntenergy.com. On the call today is Dave Lamp, our Chief Executive Officer; Dave Bonczek, our Chief Financial Officer; as well as other members of management.

Please read the Safe Harbor statement you'll find on Slide 1, as well as the forward-looking statements section in our recent filings with the SEC. We'll be making forward-looking statements during the call, presentation and question-and-answer session. Actual results may differ materially from what we expect today, and we assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. In addition to reporting financial results in accordance with Generally Accepted Accounting Principles, or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release posted on the Investors section of our website. As a reminder, this call is being recorded and can be replayed by going to the Investors section of our website and clicking on the Calendar of Events or Presentations subsection.

I will now turn the call over to Dave Lamp for opening remarks.

David L. Lamp

Thanks, Maria, and thank you all for joining us today. I'd like to begin the call today with our operating performance for the quarter. Dave Bonczek will provide further details on our financial results for the quarter, as well as some key guidance metrics for the second quarter of '14, after which, we'll take questions, any questions you may have on operating results.

Before I go into the highlights of the quarter, I'd like to make a couple of comments. First, I'm very excited to be the new CEO for Northern Tier Energy. I would like to also comment that our -- that the NTI employees have made significant accomplishments since the partnership's incession -- inception, just over 3 years ago and that we will continue to strive for safe, reliable operations in order to continue to capture the crude advantage we have. I look forward to working with our team to further grow our operations and return value to our unitholders.

Second, I'd like to thank the former executives from Northern Tier who either retired or decided to take on other opportunities. Their contributions have enabled the smooth transition for the newer members of management. From an investor standpoint, part of this transition will include Maria's departure from Northern Tier. We thank Maria for her hard work and wish her luck in her future endeavors. Maria's successor will be Paul Anderson, our new VP of Investor Relations and Business Development. Paul has 25 years of refining experience and was most recently our refinery economics engineer at the St. Paul Park refinery. Please feel free to reach out to Paul, whose contact information is on our website.

Now for our quarterly performance. This morning, we reported our first quarter results and declared our quarterly distribution of $0.77 per unit. Dave will break down the calculation of this distribution a little later. As you can see from our slides, our first quarter 2014 operating income was $78 million compared to $132 million for the first quarter of 2013. This decrease in operating income was primarily due to the result of a 40% decrease in our benchmark crack spread. The benchmark crack spread we utilized is the 6-3-2-1 Group 3 spread to WTI. Gross margin per barrel -- gross product margin per barrel of throughput averaged just over $18 for the first quarter of 2014 compared to almost $26 in 2013 first quarter. This decrease was driven primarily by a more modest benchmark crack spread of $11.47 per barrel in the first quarter of 2013(sic) [ 2014 ] compared to $19.20 per barrel for the same period in 2013. The St. Paul Park refinery was able to recognize a higher gross margin per barrel when compared to the benchmark crack spread due to our favorable crude spread differentials.

Spot crude oil differentials began to tighten in February and March time frame, mainly due to poor weather conditions which affected crude production, and to a lesser extent, refineries returning from downtime. Given the transit lag in crude we run -- in the crude we run, we expect to see these tightened differentials flow through our gross margin in the second quarter of this year. Of note, so far in the second quarter, the benchmark crack spread has maintained a level similar to what we saw at the end of the first quarter of 2014.

During the first quarter of 2014, total throughput averaged 93,000 barrels per day compared to 85,000 barrels per day for the first quarter of 2013. The increase in throughput was primarily due to an 8,000 barrel a day crude distillation unit expansion at the St. Paul Park completed in the second quarter of 2013. A portion of our first quarter 2014 throughput resulted in an increase in our total refined product inventory in anticipation of increasing product demand during the spring season.

Operating expenses per barrel of throughput, excluding turnaround charges, were $4.49 a barrel in the first quarter compared to $4.69 in the first quarter of 2013. These lower costs were primarily due to higher throughput levels I just mentioned, along with lower maintenance cost caused by a delay in maintenance activity due to severe weather during the quarter. Partially offsetting these lower costs were higher natural gas prices, which were a result also of the severe weather.

Turning to our retail segment. Operating income was $1.6 million in the first quarter of 2014 compared to $600,000 in the first quarter of '13. This increase is primarily attributable to higher fuel margins.

With that, I'll turn it over to Dave for further discussions of our quarterly results.

David Bonczek

Thanks, Dave. On a GAAP basis, we reported net income of $71.5 million for the first quarter of 2014 compared to net income of $119.4 million for the first quarter of 2013. Included in these numbers are certain costs related to the reorganization of NTI as a result of the acquisition of our general partner by Western Refining. On a non-GAAP basis, excluding reorganization and related costs, adjusted net income for the first quarter of 2013 was $85.2 million compared to $125.1 million for the same period last year. Adjusted EBITDA for the first quarter of 2014 was approximately $103 million compared to first quarter 2013 adjusted EBITDA of approximately $157 million. As we previously noted, these decreases are primarily due to a weaker benchmark crack spread.

Cash from operations totaled $92 million for the first quarter of 2014 compared to $42 million for the first quarter of 2013. We benefited from lower working capital requirements in the current quarter compared to the prior year quarter, including lower cash requirements for crack spread derivative losses. We currently have no outstanding frac spread derivative contracts related to our 2014 production or beyond.

As you can see on Slide 2, we continue to maintain ample liquidity along with minimal leverage. We had approximately $129 million in cash on hand and total liquidity of $364 million as of March 31, 2014. Our leverage ratio, as measured by total debt to last 12 months adjusted EBITDA, is 0.9x. Total debt has not changed compared to December 2013.

Turning to Slide 4. Starting with adjusted EBITDA of $103 million, then deducting requirements for cash interest, maintenance CapEx and other items, cash available for distribution amounted to approximately $71 million for this quarter, which equates to a $0.77 distribution per common unit. Note that accruals relating to reorganization activities were added back and did not dilute the cash available for distribution. Also, we set aside reserves for turnaround activities of $7.5 million. We expect quarterly turnaround reserves to approximate this amount in future quarters based upon our forecasted costs for our 5- to 6-year turnaround cycle. We also reserve $7.5 million related to discretionary capital projects this quarter. We expect this quarterly discretionary capital reserve amount -- near the same amount for the remaining 3 quarters in 2014. While we have sufficient liquidity to sustain our operations, these cash reserves are required to fund our ongoing turnaround cycles and enable additional minor discretionary projects that may arise.

As we have said in the past relative to our distributions, we are a variable-rate MLP, and quarterly distributions will vary as a direct result of variations in certain factors, including, but not limited to, fluctuations in throughput, the prices of crude oil and other feedstocks, refined product prices, capital expenditures and other cash reserves deemed necessary and appropriate by the Board of Directors of our general partner. Unlike most publicly traded partnerships, we do not have a minimum quarterly distribution.

You can find our updated key metric guidance for the second quarter of 2014 on Slide 5. For the refining segment, we project throughput of between 87,000 and 93,000 barrels per day at the St. Paul Park refinery, and we expect to draw down approximately 3,000 to 4,000 barrels per day of refined product inventory that was built in the first quarter. These throughput estimates are dependent upon the Minnesota Pipeline meeting its maintenance plan, along with maintaining the mechanical availability at the St. Paul Park refinery.

I'll now turn the call back to Dave Lamp for closing remarks.

David L. Lamp

Thank you, Dave. In closing, we are already seeing the benefits of all the work we did in 2013. Our refineries are operating at increased rates, and the crude oil expansion has already paid back its investment, consistent with our previous guidance. Our distillate yield is now approximately 34%. That's about 3% higher than 2012 levels. And our asphalt yield is lower by approximately the same amount. We continue to capitalize on our trucking business, which -- allowing us to source crude directly from the wellhead in the Bakken and decrease our transportation cost to Clearbrook. Northern Tier has accomplished a lot in its short history, and we will continue to work hard to ensure a safe workplace and favorable returns to our unit shareholders. I want to thank our employees for all their hard work, and all of you for your support.

With that, we'll take questions, Kim.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chi Chow from Macquarie.

Chi Chow - Macquarie Research

Dave, congratulations on your appointment, and good to have you aboard.

David L. Lamp

Thanks, Chi.

Chi Chow - Macquarie Research

I got a question on the reorganization costs, the $9.4 million. Is that just a 1Q impact, or is there any carryforward into the current quarter here or later in the year?

David Bonczek

There will be some carryforward. It was essentially in 2 pieces. About 1/3 of it related to accelerated vesting on equity-based compensation, and then the other 2/3 is related to severance-type costs. So we'll likely see something in Q2 as much -- as well, but probably less than half of that amount.

Chi Chow - Macquarie Research

Okay. And then looking at your guidance on refining operating expense in the second quarter, it looked like it's really popped up here. Any specific reason for that, for the higher OpEx guidance?

David L. Lamp

Just strictly catching up on maintenance that we've deferred in the first quarter because of weather. That's it.

Chi Chow - Macquarie Research

Okay, okay. I guess on that end, can you talk about the demand trends you've seen in the market? How did the weather impact the first quarter results and, I guess, the market? And how are things turning now in the second quarter, both, I guess, on demand and operations?

David L. Lamp

Well, demand is fairly strong in our markets today. It wasn't in the first quarter, you saw the seasonal decline due to weather, which was probably more severe. But we still managed to move our products. And as Dave mentioned, we built a little bit of inventory to carry over from first quarter to second quarter in anticipation of improved prices. Right now, the demand seems to be strong, but there's some regional turnarounds going on in that area. We don't -- we haven't seen, though, the farm effect kick in yet, which diesel prices have been fairly strong. So I'm pretty optimistic that it will be a good spring and summer.

Operator

Your next question comes from the line of Paul Cheng from Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

Dave, congratulations for the move.

David L. Lamp

Thank you.

Paul Y. Cheng - Barclays Capital, Research Division

And Maria, I want to just wish you the best wishes for your next venture, and thank you very much for the help as we run [ph] about our coverage on the company. We really appreciate it.

Maria Testani

Thank you, Paul. Appreciate it. Thank you.

Paul Y. Cheng - Barclays Capital, Research Division

Dave, several questions. First, when we're looking at your retail operation, historically, that is one that's an integrated system. So when you're looking at that, is that really statistically important for the St. Paul or you will consider as a potential candidate to be sold or dropped down to the Western Logistics, given the recent high multiple in other transactions that we have seen?

David L. Lamp

Well, it's certainly an option, Paul. I don't think we've made any decisions at this point of which way we'll go with that. But you're right. The multiples have been higher for, recently, the several deals that have occurred. It is an integrated model, however, the way we run the facility and the retail. And it's important part of the refinery's net back. So whatever we do, we'll take all that into consideration.

Paul Y. Cheng - Barclays Capital, Research Division

Second question. Based on your configuration, I mean, is there much of a flexibility between the interchangeability between the light oil and the Syncrude that you run? Or that you really can't really switch from one to the other?

David L. Lamp

Well, we have some equipment limitations today that cause us to run the slate we're running today. One of the things that looks like a good opportunity to me and to the rest of the team is to fix some of those constraints, and they're not very high dollar constraints, and allow us to basically eliminate the Syn altogether and go to Bakken and the heavy-type formula and optionality that we can play between those 2. So that's kind of our ultimate strategy.

Paul Y. Cheng - Barclays Capital, Research Division

Dave, can you share with us roughly what kind of fix you need, and any dollar amount that you can associate with that? And also some timing, when you will make that decision.

David L. Lamp

Well, I think anything you do in a refinery takes time, as you know, Paul. So permitting and everything, normally, you're looking at a project cycle of 3 years. This involves probably a couple of facets. One is to replace the desalters that we have that limit us on the ability to handle big swings in viscosity. Two is to do something about the overhead system, and I'll call it the lights, because going from Syn to Bakken, it means you have to be able to handle more lights. So there have to be something done around the Isom [ph] and probably some on the crude tower overheads. But that's about it. So I think all in, they're kind of complete in 3 years if we get after it here, which we plan to. And that transition will be made at that time.

Paul Y. Cheng - Barclays Capital, Research Division

But I mean, Dave, when you will actually officially sanction it? Any kind of time now you're talking about within this year, or you already decided that this is a good project you're going to go ahead?

David L. Lamp

Well, we're still kicking it around. But I think it's one of the lower-hanging fruits out there that we're going to harvest as fast as possible. We don't have board approval for it yet, but we'll be seeking it soon.

Paul Y. Cheng - Barclays Capital, Research Division

Are we talking about $50 million, $70 million kind of investment?

David L. Lamp

I don't have a number right now, Paul, but that's probably heavy.

Paul Y. Cheng - Barclays Capital, Research Division

And then a final one for me. How much is your crude right now that you're running in St. Paul you gather by your own?

David L. Lamp

Say it again.

Paul Y. Cheng - Barclays Capital, Research Division

How much is the crude that you run in St. Paul that you actually gather yourself?

David L. Lamp

Today, we're gathering about 15,000 to 16,000 barrels a day. We're trying to push that towards 20,000-plus. So that's -- those are barrels we first purchased. We buy from third parties on additional barrels to up to about 56,000 barrels a day.

Paul Y. Cheng - Barclays Capital, Research Division

Is 20,000 the maximum that you can push to, or you can actually do more than that?

David L. Lamp

We'll have to do some other things to get higher than that. But ultimately, we want to buy in the field and be able to pick and choose our qualities. So I mean, I think that's another strategy to reduce feedstock cost that we'll be looking at in the future.

Paul Y. Cheng - Barclays Capital, Research Division

Any economic that you can share in terms of when you gather your own crude instead of buying from the third party outlet? Is that an improvement of $1, $1.50, $2 per barrel or any kind of things that you can share?

David L. Lamp

Our walking-around number is about $1 benefit to first purchase versus third party. And that's without any quality overcharge or anything else.

Operator

Your next question comes from the line of Mohit Bhardwaj from Citigroup.

Mohit Bhardwaj - Citigroup Inc, Research Division

Dave, please accept my congratulations on your new role as well.

David L. Lamp

Thank you.

Mohit Bhardwaj - Citigroup Inc, Research Division

My question is on your strategy as you look at NTI and considering the opportunities it has as far as Western Refining goes. Western Refining has previously talked about synergies, and I just wanted to get your view on that. Where do you see the opportunities are between WNR and NTI, especially keeping in mind the physical difference between the refineries?

David L. Lamp

Well, I think there's quite a few potential synergies, all of which are under study today. But one is just combining the management team and the marketing aspects that we did. We anticipate some G&A savings in that. Two is, of course, and we touched on it earlier, but NTI has some typical MLP-type assets that would command a higher multiple in what they do under the variable distribution model, so we'll be exploring those. And I'm sure there's some additional aspects that could happen. Were just talking with the retail, but I mean, those are the main buckets.

Mohit Bhardwaj - Citigroup Inc, Research Division

Right. And finally, one more for me. Just looking at the RINs expense for the quarter, if you could just guide us how you're looking at that and what number it was and what's the guidance for entire 2014.

David Bonczek

Yes, we incurred about $5 million of expense in the quarter for Q1, a little bit higher than the spot market, really, because we bought up some RINs at the end of Q4. So we carried those higher prices into Q1 as we utilize those RINs. Our expectation for the rest of the year, we'll be about 85% covered in our -- covering our own RINs, so we'll have to buy about 15%. That will equate to maybe 12 million to 15 million units short, so put whatever price on that you want, $5 million to $15 million in that -- or $10 million to $15 million, in that range.

Mohit Bhardwaj - Citigroup Inc, Research Division

And David, can I just ask one more follow-up on the 4 strategies that you're highlighting? Anything on the acquisition side that you're looking at?

David L. Lamp

Well, I think as you probably heard from Western, we'll look at everything that comes on the market. But in this business, they come and go. And we're going to be picky and choosy of which ones we look for, but we'll evaluate everything.

Operator

Your next question comes from the line of Jason Smith from Bank of America.

Jason Smith - BofA Merrill Lynch, Research Division

I just want to echo my congratulations to you, Dave. And Maria, I wish you the best of luck going forward. I had a few quick questions just on the guidance again. Dave, you made some comments about demand being up in the second quarter. It looks like your retail gallons, forecasted gallons are actually down about 3% sequentially and, I think, 8% year-over-year. Can we just talk about what's driving that?

David Bonczek

I mean, the retail, we kind of see a consistent demand there for the most part. No significant increase or decrease. We are trying to build out the network, as we said. Part of our strategy is just to get more and more out of the wholesale market.

David L. Lamp

Our incremental production goes south for the most part, so...

David Bonczek

Yes, so we have other outlets besides our own retail network. South, as Dave mentioned, or through our wholesale rack as well, especially during some of the turnaround activity that was mentioned in our region.

Jason Smith - BofA Merrill Lynch, Research Division

Got it, okay. And then you might have addressed this in the prepared remarks, and I missed it. But on throughput for the second quarter, your running of heavy Western Canadian Select looks a little bit lower relative to historical levels. Can you maybe just talk about that?

David L. Lamp

Well, I think we mentioned that Minnesota Pipeline has some maintenance going on, and part of our plan is dependent on how well they perform and how close to plan they actually convert. And part of that plan is running -- we had to lighten up the slate just because of the -- they have one line out for hydro testing. And until that's complete, we'll be cut back on the heavy.

Jason Smith - BofA Merrill Lynch, Research Division

Got it. And last one for me. Just on the debt service, on the discretionary capital expenditures, $7.5 million through the rest of this year. Does that get you kind of where you need to be, or should we expect that to seep over into 2015?

David Bonczek

I mean, as we mentioned, our existing liquidity levels are certainly sufficient. You could argue we wouldn't even have to replenish the cash that we spent last year, which was roughly $44 million. But Dave did touch on some projects that we have in our viewfinder here. So we do feel it's prudent to replenish that cash, give us some dry powder here, as well as just to fund the turnaround cycle, which is ongoing, of course. So I would say rest of this year, similar to that amount, but certainly, it's subject to board approval.

Operator

[Operator Instructions]

David L. Lamp

Sounds like that's all we have, Kim.

Operator

This concludes our question-and-answer session. I will now turn the call back to Mr. Dave Lamb.

David L. Lamp

Okay. I'd like to close again by thanking our employees for their hard work and continued commitment to safe operations and reliable operations. Thank you for participating in our call today, and we'll see you next quarter. Thank you.

Operator

Ladies and gentlemen, this includes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Northern Tier Energy LP's (NTI) CEO David Lamp on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts