Frontier Oil CEO Discusses Q3 2010 Results – Earnings Call Transcript

Nov. 4.10 | About: Frontier Oil (FTO)

Frontier Oil Corporation (NYSE:FTO)

Q3 2010 Earnings Conference Call

November 4, 2010 11:00 AM ET

Executives

Kristine Boyd – Manager, IR

Mike Jennings – Chairman, President and CEO

Jim Stump – VP, Refining Operations

Doug Aron – EVP and CFO

Joey Purdy – VP, Refinery Supply

Bill Rigby – VP, Refinery Planning & Optimization

Nancy Zupan – VP and Chief Accounting Officer

Analysts

Jeff Dietert – Simmons and Company

Doug Leggate – Bank of America

Jacques Rousseau – RBC Capital Markets

Paul Sankey – Deutsche Bank

Blake Fernandez – Howard Weil

Chi Chow – Macquarie Capital Advisors

Daniel Burke – Johnson Rice

Operator

Welcome to the third quarter 2010 earnings call. My name is Monica and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Kristine Boyd, Director of Investor Relations. Kristine, you may begin.

Kristine Boyd

Thanks Monica. Good morning and thanks to all of you who are joining us this morning for our third quarter 2010 earnings call. Here with me this morning are Mike Jennings, Chairman, President, and CEO; Doug Aron, EVP and CFO; Jim Stump, VP of Refining Operations; and other members of our executive management team.

Before we get started, I would like to read our Safe Harbor statement. The primary purpose of this conference call is to describe the assets, operations and certain current and historical financial conditions associated with Frontier Oil Corporation.

This information and associated comments made during the course of this conference call may include forward-looking statements concerning the company. These may include statements of plans and objectives for future operations, statements of future economic performance or assumptions or estimates.

The accuracy of these forward-looking statements is subject to a wide range of business risks and changes in circumstances that are described in the company’s reports that are filed from time-to-time with the Securities and Exchange Commission. Actual results and outcomes often differ from expectations.

I would now like to turn the call over to our Chairman, President and CEO, Mike Jennings.

Mike Jennings

Thanks Kristine. Good morning and thank you all for participating today. This morning Frontier reported $8 million in net income or $0.08 per share of earnings during the third quarter, compared to the 2009 third quarter loss of $9 million or negative $0.08 a share.

The third quarter 2010 results included strong performance at the El Dorado refinery where we achieved record throughput and record light oil product, but it also included the effects of lost production and incremental maintenance expense due to the Cheyenne Refinery crude unit fire.

We don’t want to get caught in the trap of reporting earnings before bad news, but I believe it’s important to communicate the effects of the Cheyenne fire on our third quarter results, which we approximate at about $21 million before taxes. This includes repair and maintenance costs plus the effect of loss margin on foregone production.

Jim Stump will provide more detail on this estimate a little later in the call, and thankfully no employee or contractor was injured during the course of this fire or the subsequent repair activities. But the experience provided a tangible example of the costs associated with process safety incidents inside petroleum refineries, and we at Frontier continue to work very hard and invest money to avoid such incidents in the future.

At the refineries during the quarter, El Dorado produced gross margin before expenses of $7.19 a barrel, while Cheyenne logged $10.98 a barrel. These margins were driven by relatively strong crack spreads which on 211 basis averaged $11.10 per barrel at El Dorado and $16.21 at Cheyenne.

As for operating costs, El Dorado spent $3.77 per sales barrel, while Cheyenne recorded $8.80, which included all costs related to the fire. In measuring Cheyenne’s progress versus our cost initiative, I think it’s more relevant to look at the months of July and September, given the repair expenses and lack of production fell principally in August.

The average OpEx for July and September was about $5.50 a barrel at Cheyenne compared to the same average OpEx of $6.50 per sales barrel for the third quarter of 2009, and this 2009 figure excludes the effects of an environmental accrual made during that quarter.

Year-to-date and through the end of the third quarter, excluding major nonrecurring items, our operating costs in Cheyenne were about $74 million in 2010 versus $84 million in 2009; a $10 million step down. We have made substantial progress on Cheyenne’s cost structure and are continuing these efforts. The market fundamentals we experienced during the third quarter were significantly better than the comparable period in 2009. Frontiers combined diesel crack was 75% higher and gas crack was 33% higher. But comparisons against ‘09 are obviously a pretty low hurdle.

When compared to the second quarter of 2010, margins were about in line for diesel and 5% improved for gasoline. Macroeconomic improvements should drive refined product margins higher and these improvements are in place, but we think it’ll be a gradual climb out.

Crude differentials are continuing to improve with an average light/heavy diff landed at the Cheyenne refinery of $13 a barrel in the third quarter of 2010. This is about $6 a barrel better than the third quarter of 2009. And despite this improvement, the local sweet barrel remained relatively attractive due to good differentials on Bakken and similar crudes. Thus, we ran approximately 65% light crude in Cheyenne during the third quarter.

We’ll bring heavy crude utilization up substantially during the fourth quarter following further improvements in the heavy differential. Our efforts to improve flexibility, operating costs, and yield structure at Cheyenne are paying off, and we’re well positioned to benefit from increases in Canadian, Bakken and Niobrara crude production.

El Dorado has been running with very high crude rates and a slightly sweeter crude slates than normal, but it too will adjust crude charges towards the heavy barrel during the fourth quarter with plans to process about 30,000 a day of heavy Canadian and total crude rates of around a 133,000 a day.

Most recently, El Dorado has been running very full with daily crude rates of nearly a 140,000 barrels a day, and we’ve been keeping the downstream processing units very full with both gasoline and diesel production. We continue to optimize production at both plants and are pursuing small debottlenecking projects that will better allow us to utilize all available production capacity.

Our expectations for the fourth quarter reflected continuation of what has been in place during the last six months. Product margins are pretty good with an expected seasonal decrease in gasoline margins. Distillate margins are supported by recovering US economy and by improved competitiveness of the US refining industry. Displacing imports with indigenous production and now exporting refined products to other markets is really a big step forward for the US refining industry.

Heavy crude differentials have settled back to a little less than 20% off of WTI, similar to where they were prior to the Enbridge pipeline outages, and we believe that lower asphalt and resid prices, as well as steadily increasing Canadian crude production will allow differentials to continue forward at at least these levels.

With that, I’ll turn it over to Jim Stump for a discussion of our quarterly operations.

Jim Stump

Thanks Mike, and good morning, everyone. Mike already mentioned the outstanding operating performance at El Dorado for the third quarter. Cheyenne was on track to do just the same thing and had an excellent month in July, until the incident that happened at the end of the month.

During Cheyenne’s crude outage, Rockies crack spread has climbed and when the refinery returned to full operation at the end of August, we ran a daily crude rate as high as 52,000 barrels per day and captured another good month for the quarter.

In the third quarter, El Dorado matched the quarterly record crude throughput at the prior quarter, averaging just over a 132,000 barrels per day, while setting a new record for total throughput of a 145,800 barrels per day, due to the additional intermediates we used in the third quarter. We also achieved a new record for light product yield of almost a 128,000 barrels per day in gasoline and diesel production. Operating expenses averaged $3.77 per sales barrel or $50 million on an absolute basis.

For the third quarter in Cheyenne, crude throughput averaged about 31,500 barrels per day and operating expenses averaged $8.80 per sales barrel with $32.9 million on an absolute basis. These amounts do include $6.1 million for fire related repairs and $1.8 million for the accelerated maintenance we were able to complete during that outage.

The per barrel OpEx number was also affected negatively by the minimal production we had during the fire repair outage. During the crude outage, our loss of production can be summarized as just under 1.3 million barrels of crude not processed at an average margin of just over $10 per barrel, resulting in lost opportunity costs of $30 million, which puts the total pretax effect on earnings at the $21 million referenced by Mike earlier in the call.

For the fourth quarter, El Dorado’s expected average crude rate is about a 133,000 barrels per day, total charges of about 144,000 barrels per day, and expected operating costs about $3.80 per sales barrel.

Cheyenne’s expected average crude rate in the fourth quarter will be about 48,000 barrels per day, total charges about 50,000 barrels per day, and expected operating costs right around $5 per sales barrel. We’re well on our way to meeting this robust operating forecast for the fourth quarter with each plant setting new monthly crude throughput records in the month of October with corresponding record production of live products in Cheyenne and gasoline in El Dorado.

As Mike mentioned, we’ll be increasing heavy crude runs to both refineries in the fourth quarter, partly due to the Enbridge supply disruptions to some of our Mid-Con peers, but also due to generally wider crude differentials in our regions.

For the fourth quarter, we obtained about 5.5 million barrels of heavy Canadian crude at an average differential of about $19 prior to transportation costs. The average light/heavy differentials for the fourth quarter is expected to be about $3.5 per barrel wider than the third quarter, and we expect to run about 23% heavy crude in E Dorado and about 60% heavy crude in Cheyenne.

The final phase of the El Dorado gasoil project direct installation will be completed this quarter in time to meet our low sulfur gasoline requirements that start on January 1st, 2011. We are also looking forward to the improvement in FCC charge quality that the project provides. We continue progress on a profitability initiative in Cheyenne with the LPG recovery project on track for completion in late second quarter 2011, followed by a number of energy efficiency projects that we’ll initiate in 2011, once the LPGs have been separated from the field gas.

Due to some integration with some future turnarounds just a few of these projects will take a while to complete and will wrap up over the next several years. Our next schedule major turnarounds will be the FCC and Alky Units in Cheyenne during the spring of 2011 and the El Dorado Alky Unit next fall.

And with that, Doug is going to wrap up.

Doug Aron

Thanks Jim. Let me start off with the discussion of our cash flows for the third quarter. We used $10 million in operating cash flows net of a $38 million increase to working capital and spent $21 million in capital investments. We ended the quarter with a cash balance of $414 million which exceeded our debt by $66 million.

As of September 30th, we had a remaining income tax receivable of a $110 million related to 2007 through 2009 tax returns. Of this, I’m pleased to report we received $74 million in October of this year and expect to receive the rest of that receivable sometime in late 2011.

Our expected 2010 capital forecast has been reduced from the $113 million that we reported to you on our last quarterly call to an estimated $92 million, due mainly to project work that had to be deferred during the Cheyenne crude unit outage and which will be included in our 2011 capital budget.

Our current perspective on capital spending reflects an effort to limit outlays to approximately our depreciation. We believe this is an achievable goal for both 2010 and 2011 with the exception of the aforementioned Cheyenne LPG recovery project, which is the fundamental component of our margin improvement activities at that refinery. This project will add roughly $20 million to capital spending in each of this year and next and has an expected payout of less than two years.

During the third quarter, crude and product inventory changes had a material impact to raw material cost at each of our refineries under the LIFO Inventory Accounting method.

In Cheyenne, increases in the inventories reduced gross margins by about $0.65 per sales barrel and in El Dorado increases in inventories reduced our gross margin by about $0.26 per sales barrel.

Our hedging results contributed a loss of $2.1 billion after taxes in the third quarter results due to an increase in crude price through the quarter.

Finally, let me update you on our quarter-to-date crack spreads and crude oil differentials. In Cheyenne, the gasoline crack spread averaged $9.19 for October and unfortunately has deteriorated to about $2 month-to-date in the month of November. A few things going on with that month-to-date crack spread we believe. First has been a relatively large increase in crude oil price that we haven’t been able to keep up with in terms of pricing our gasoline and then further is the traditional seasonally weakness as gasoline season has ended and inventories have climbed.

The good news, however, is that our diesel crack spread averaged $17.45 for the month of October and is currently averaging $19 month-to-date in November. The light/heavy differential, as Jim Stump mentioned, which includes transportation lays into our Cheyenne Refinery at an average of about $16 per barrel for the fourth quarter.

Switching to El Dorado, our gasoline crack spread averaged $6.56 for October and is $3.40 month-to-date in November. The diesel crack spread $13.98 for October and about $12.50 month-to-date in November.

The light/heavy differential for El Dorado, which includes slightly more transportation than does Cheyenne is expected to average $12 for the fourth quarter.

And with that, Monica, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from Jeff Dietert of Simmons & Company. Please go ahead.

Jeff Dietert – Simmons and Company

Good morning.

Mike Jennings

Hi Jeff.

Doug Aron

Good morning, Jeff.

Jeff Dietert – Simmons and Company

Mike you mentioned on your early discussion the benefits of some of the very active oil directed drilling activity in the Midwest and how it’s impacting the Bakken, Permian, in Niobrara. Could you talk about your strategies for taking advantage of those especially the Niobrara considering its proximity to your plant?

Mike Jennings

Yes, it’s going to be a pretty brief discussion Jeff, because we’re developing those and we’re not completely ready to share them yet. But I guess the point of the matter is that we have significant drilling activity, very significant leasing activity within sort of a 100-mile radius of our plant. The initial production rates from some of those wells though very few have been completed are encouraging. And thus, we think it’s going to be a meaningful source or at least a competing crude stream versus Bakken. Joey, can you add to that please?

Joey Purdy

Yes, I mean what you’ve said there Mike’s pretty accurate. I mean we’re still in that early stages, we’re not seeing a lot of the physical barrels come out yet. But it is obviously very encouraging a lot of activity and we’re working on how we’re going to we can possibly take advantage of that.

Jeff Dietert – Simmons and Company

Very good, thank you.

Operator

The next question comes from Doug Leggate of Bank of America. Please go ahead.

Doug Leggate – Bank of America

Thanks, good morning, fellows. A couple of things if I may; first of all can you be a little more specific on how you see your OpEx guidance let’s say over the next 12 months in light of the ongoing progress in reducing costs. And a familiar one to that, Cheyenne is obviously capable of doing a lot more in terms of heavy runs and I guess El Dorado could creep up higher also. Given your commentary and given what’s happening to differentials, can you give us an idea as to what you think the – if you push these things pretty hard into this light/heavy differential environment, what could these things really run? And I may I’ll have a follow up after those two questions.

Mike Jennings

Sure. Doug, first I’ll take them in inverse order. Looking at the fourth quarter, each plant is expecting to run slightly in excess of 30,000 barrels a day of heavy crude, and that’s based on traded differentials and that the average base is $16, $17 a barrel range, as compared to Bakken crude, which Mike traded at the $3 to $4 per barrel range. So obviously we still have even in Cheyenne significant incentive to run some amount of light crude.

At the high water point, the heavy consumption capability in Cheyenne has been historically about 40,000 barrels a day or 90%, 91% of total crude slate. We don’t have a driver to be there yet. And as long as product margins are pretty fulsome, we will fill our downstream units and probably do so by topping off with some sweet crude.

El dorado by comparison, first we have about 50,000 barrels a day of transportation capacity through Spearhead that more heavy crude will become available in the Mid-Con following the Keystone extension to cushing. But our processing capability in El Dorado assuming reasonable crack spreads meaning that we want the downstream units full really gets up to sort off the 35,000 barrels per day before we start slacking downstream units in favor of running more heavy crude. So those are kind of the obvious limits, maybe up to 80,000 barrels per day of heavy crude without too much confession of total light product production.

OpEx looking forward, we think there is some opportunity in El Dorado, particularly around energy costs. Couple of other things that we’re doing. The Cheyenne number as we’ve communicated a number of times getting to $5 a barrel from sort of $7, $7.5 where we were has taken some fairly high stepping and I don’t see much further opportunity inside $5 a barrel looking forward in 2011.

Doug Leggate – Bank of America

That’s great. So I guess the run rates that you’re looking at in the fourth quarter, knows like you’re pricing product late product yields, I guess that would be a good number to, can I think about going forward in to 2011?

Mike Jennings

Yes, Billy anything to add to that?

Bill Rigby

Yes, your point about balancing how much heavy crude we run without giving up making gasoline and diesel is the most important point. With gasoline and diesel margins get very weak, then we go to very high percentages of heavy crude make. But as long as they’re decent to strong, I’m talking about gasoline and diesel margins there and we don’t run very high heavy crude percentages because we would lose some gasoline and diesel makers. One other just kind of small do on about El Dorado, that keeps heavy crude percentage a little bit down and that is as part of our spearhead proportional barrels, we also pick-off some high naphthenic acid barrels out of Canada which don’t show up as heavy barrels, that are intermediate API grade range.

And they tend to be discounted because El Dorado is one of the few refineries in the country that is – that has sufficient metallurgy to run these barrels. And they don’t show up in heavy barrels, but they’re barrels that not many refineries can run. It will take 8,000 to 10,000 barrels a day. They take up spearhead capacity. We can run them, other folks can’t. And so that tends to dilute our heavy percentage a little bit, but these barrels are significant advantage for the El Dorado refinery. And so that tends to get kind of lost in our stats a little but is an advantage that the plan has.

And another discounted stream that represents 5,000 to 8,000 barrels a day.

Mike Jennings

Yes. Okay, thanks.

Doug Leggate – Bank of America

Thanks a lot. My follow-up is probably a little obvious here but it seems with your differentials that you’ve already well 10 for the foreclosures. Is this pretty inevitable but when Q4 ‘09 rolls off, you’re going to be back in a comfortable position to reinstate your dividend. With that cash inflow from the tax refund I guess, coming in as well. Can you just kind of give us your update so one, reinitiating the dividend, the potential of a special dividend on the likelihood of maybe reinitiating share buyback to some point and I’ll leave you there. Thank you.

Mike Jennings

Well that’s a mouth full. All of those things are critically important to us and yes, I think that your modeling is probably pretty accurate. We’re going to generate some cash this quarter through the heavy differential for sure. We have in terms of liquidity available to us, plenty of cash to make distributions to shareholders. I don’t want to get out in front of an actual declaration or the Board of Directors decision on this. But I would tell you that reinitiating the special maintain the concept of, pardon me, reinstating the regular dividend providing a special dividend that accommodates the foregone dividends through 2010 and share repurchases are on the list.

Operator

Our next question comes from Jacques Rousseau of RBC Capital Markets.

Jacques Rousseau – RBC Capital Markets

Hi good morning.

Mike Jennings

Hi Jacques.

Jacques Rousseau – RBC Capital Markets

How many of the dividends did you end up missing for the year, was the three $0.06 dividends?

Mike Jennings

It will end up being four.

Jacques Rousseau – RBC Capital Markets

Okay four, great. What do you think on the 2011 maintenance for the Cheyenne and El Darodo?

Mike Jennings

In terms of capital budget?

Jacques Rousseau – RBC Capital Markets

Yes, just what, in terms of timing and what you guys are looking to do in 2011?

Mike Jennings

So it’s the turnaround schedule. Jim, can you address that please?

Jim Stump

You bet. Next spring we do have sort of our big cycle of turnarounds coming up, our Cat and Alky. And that’s a fairly big undertaking. We are preparing for those turnarounds, pretty aggressively we did absolute turnarounds. We had them scheduled for next fall, but because of some synergies with finish in LPG recovery project and getting the work done a little bit early, we advance them to the spring. But those plans are coming together well we expect actually to pull them off a little cheaper than the last ground to turnaround since we amortized turnarounds in Frontier and we actually are hoping for a small OpEx reduction after the turnarounds are done.

And then the big maintenance activity in El Dorado is the Alky turnaround which will be next fall.

Jacques Rousseau – RBC Capital Markets

Okay, great. And then one last one from me. I was noticing that there wasn’t any taxes in the quarter. I was just curious what the rational was there?

Doug Aron

I’m sorry, there weren’t any taxes?

Jacques Rousseau – RBC Capital Markets

Well the income tax.

Mike Jennings

Yes, Nancy I think you have information on that?

Nancy Zupan

I do actually, in the third quarter we made the decision to carry back our 2009 NOLs to 2005, rather than 2007. And the result of that decision was basically that for state and federal taxes we generated benefits. And those benefits more than offset our tax provision on our Q3 book income. And so that’s why there is no tax liability for the quarter.

Jacques Rousseau – RBC Capital Markets

Okay, great. What are you thinking on the tax rate going forward?

Nancy Zupan

I think you can look back more to a statutory level on a going forward basis.

Jacques Rousseau – RBC Capital Markets

Thank you very much.

Operator

And next question comes from Paul Sankey of Deutsche Bank.

Paul Sankey – Deutsche Bank

Hi guys.

Mike Jennings

Hi Paul.

Paul Sankey – Deutsche Bank

Just follow-up to the cash question. I don’t know if you said this but, do you have a target that cap level you’d like to get back to?

Mike Jennings

Well what we’ve said is that a cash position of somewhere around $150 million to $200 million provides us sufficient liquidity to do the things that we need to do and anticipate working capital swings etcetera. So that says there is likely some substantial surplus cash as to debt-to-capital. I tend to think of it in terms of debt-to-EBITDA and we believe that one times debt to a mid-cycle EBITDA is probably appropriate.

So that coupled with a little bit of liquidity cushion. You can draw your own conclusions but its multiple hundreds of millions of dollars of what we believe is excess liquidity right now. We don’t intent to distribute all that immediately, but we’ll be disciplined about it in recognizing that there is a cost carrying that on our balance sheet.

Paul Sankey – Deutsche Bank

Got you. And you confirmed recent scene that we’ve been highlighting about, how important these products net exports are for US refining, how positive they are. Now they underline that they really can’t be an global excessive refining capacity for exporting so much products or at least that we in the US must have the most competitive refineries. You also spoke about strong distillate demand and rising local crude supply has been positive. And indirectly you’re talking about lower OpEx. Can you just go a little bit more in for the OpEx scene in terms of your sensitivity to cheap natural gas? And the new one, that we’re thinking is cheap hydrogen as well. Could you just talk maybe about excess (inaudible) to dollar changes in prices there and any other information you could give us? Thanks.

Mike Jennings

Thanks. Can you answer? Getting onto the gas since 30 numbers.

Paul Sankey – Deutsche Bank

Yes.

Mike Jennings

Paul on an annualized basis, every dollar change in natural gas price impacts us about $0.08 per share of earnings. It’s interesting that in terms of OpEx perspective, that number is very similar, sort of between $0.07 and $0.08 of OpEx as well on every dollar change in natural gas.

Paul Sankey – Deutsche Bank

Right. And so hydrogen thing important for you?

Mike Jennings

Yes, hydrogen is fundamental to what we do and we’ll be more so going forward. The question is do we have capacity to slack our reformers and generate hydrogen through natural gas sources. And the answer to that is currently we are maxed out in terms of our natural gas based hydrogen plants. We’ll be brining one more on stream here on the month of November to support the go find [ph] in El Darodo. But that it’s really kind of a gas to liquids type analysis and it’s currently very advantageous to us.

As we look forward, I think the distillate picture is frankly pretty rosy. And if you can get towards increased distillate production, increased diesel desulphurization through natural gas based hydrogen, the economics are pretty good. The challenges, the big investment and that is a hydrocracker in those payout based on current economics. And I think it’s a pretty bold bet unless such plants are already sort of half completed. But directionally I believe that’s where the refining space is likely to go based on the high liquids prices that we see and the relative shortness of diesel in the United States.

I’m going to follow-up on little further on your competitiveness point. And the fact is the US refining space is very competitive internationally. And that’s demonstrated by our ability to export through what our often subsidized prices or at least subsidized production facilities. That doesn’t directly pertain to Frontier, but obviously there is less product flowing north to the extent that its flowing south off the Gulf Coast. So I think that trend is pretty firmly in place and likely to continue in part based on dollar weakness but in part just based on very strongly competitive US refining, refinery excuse me.

Paul Sankey – Deutsche Bank

Yes absolutely. Just one final one from me, you made an interesting, a positive statement regarding getting CapEx to DD&A but you won’t quite get that next year, I guess clearly the implication is 2012 and onwards, you believe that you’ll have CapEx at a level actual below DD&A.

Mike Jennings

Paul as long as demand is relatively flat and in what is clearly a mature industry, that’s what the playbook says. And we obviously look inside the plants for small de-bottlenecking investments and thinks that are likely to payout quickly. But we think that capital discipline is fundamentally important to returning value to shareholders and that’s what we intent to do.

Paul Sankey – Deutsche Bank

Thanks Mike.

Mike Jennings

Yes.

Operator

Our next question comes from Blake Fernandez of Howard Weil. Please go ahead.

Blake Fernandez – Howard Weil

Hi guys good morning. I was hoping you could just for one confirm my arithmetic back on the CapEx. DD&A as I see it’s about $80 million and then add $20 million for the LPG. So we’re basically at a $100 million next year, does that sound right?

Doug Aron

Yes.

Blake Fernandez – Howard Weil

Okay. And then the second question is on the M&A front. We’ve seen a recent sale of Marathon St. Paul refinery which is an inland refinery, also Murphy has their superior refinery which is also inland. Those two assets just kind of come to mind is potentially fitting your profile although it doesn’t seem like your appetite on those is really all that great. Given your comments earlier on potential distribution to cash to shareholders. Is it fair to believe we’re moving away from kicking the tires on M&A in really more toward distribution of cash?

Mike Jennings

That’s a fair statement. The plants that have been available for sale have been sort of unique individual assets and not within our market regions. Our view of M&A is that it’s ultimately necessary within the space, but that for Frontier and our shareholders the market consolidating transactions and those with industrial synergies are the ones that are going to make sense. Otherwise you still have a lot of financial sponsors using levered money to buy individual plants. And those are pretty hard to compete against given the way that we keep our balance sheet which we think is prudent. But it also unless you get the timing exactly right, it doesn’t make for a stronger company. That’s our focus on our backyard.

And I would tell you that we continue to look, but we’re not aggressive buyers. We’re looking for things that make strong long-term industrial sense.

Blake Fernandez – Howard Weil

Great, thanks for the comments. Mike, I appreciate it.

Mike Jennings

Yes.

Operator

(Operator Instructions) Our next question comes from Chi Chow of Macquarie Capital Advisors.

Chi Chow – Macquarie Capital Advisors

Great, thank you. I was wondering if I can get your view on where you think contango goes from here to the rest of the year, and maybe into the first quarter of next year.

Mike Jennings

Joey, what do you think about that?

Joey Purdy

Well there is plenty of room in Cushing as we stand. We frankly were little bit optimistic that a lot of Mid-Con turnaround activity was going to push crude into Cushing over the last couple of months and that didn’t materialize. So it seems unlikely that we’re going to see much of an contango event this year. You do typically get some barrels moving from less excess in the Gulf to Cushing in December. So that will likely happen but it doesn’t seem like there is enough or there is enough capacity to absorb that.

So I think there is not much likelihood for the kind of severe contango against that we had 2Q of this year and 1Q of the last year until well out in the next year sometime.

Chi Chow – Macquarie Capital Advisors

All right, thanks Joey. Also do you have any updates on terming out Bakken supply?

Joey Purdy

We’ve done some term, I don’t have the numbers in front of me. I don’t think they’re overall material to kind of forward stream. We’ve got some barrels turned down I think into the third quarter of next year. But it’s kind of well within kind of the base load for the Cheyenne refinery. And for the most part the prices that we’ve termed it up had a similar to what you’re seeing in the marketplace.

Mike Jennings

It’s like our external posture on that is when its term deal or group of term deals, it gets to be material in terms of quantity or duration. We’ll disclose it publicly within six to nine months we tend to just keep those things inside the portfolio.

Chi Chow – Macquarie Capital Advisors

All right, great. Thanks. I appreciate it.

Operator

Our next question…

Mike Jennings

When you talk about that, I missed the question.

Operator

Our next question comes from Daniel Burke – Johnson Rice.

Daniel Burke – Johnson Rice

Good morning guys.

Mike Jennings

Hi Daniel.

Daniel Burke – Johnson Rice

Really Mike, I think the only question I left was just revisiting the performance of Cheyenne, since you’ve come back from the fire. I think, I guess I’m just trying to flirt the observation that you got Cheyenne back up to 60% heavy, and I think you also said you’re seeing record light product production from the refinery. We’re revising some thoughts earlier in the call about trading off the heavy differential versus the ability to produce light products. But can you maybe address just the evolution of Cheyenne coming out of the fire and out of the efforts you’ve put into the plan?

Mike Jennings

Absolutely, at a very high level, the plant is operating much better following the fire than it was prior to the fire. With that said, we did have a production bobble during the month of September, which required us to take the crude unit down for a couple of days to repair some piping that had been replaced. But beyond that things are running very well. It was until October that we got to a substantially heavier fleet. Jim, you want to further develop that question?

Jim Stump

Sure. July was or August was not a lot of – it was a difficult month but since then as the VP of Refining Operations, I have been saying both our plants had really ran better than they ever had before, but the question was about Cheyenne. We did need to shut down on September 7 for a couple of days due to piping leak that we repaired on the 9th. Since September 10th, the refineries ran continuously above our old production records for crude throughput. We set a record back in 2005 of 50,800 barrels per day and we have continuously been above that in crude throughput since September 10th.

We’ve said – as I mentioned before new diesel and gasoline production records in October. How we did that was – we were able to perform quite a bit of maintenance throughout the refinery during the fire repair outage, including work on our crude unit outside of the fire repair which did also include some vacuum tower work, a platform regeneration, diesel hydrotreater catalyst change would repair the coker furnace. Just get the plant in really good shape. And from that I’ll just add a couple of notes, let’s see we had record diesel hydrotreater production rates in October. We’ve improved our vacuum tower lift and therefore we’re getting less, we’re getting more gas over a lot of our cocker feed and divert it to our cat cracker then really we ever have before.

We’ve had very high reliability and refiner utilization. And in general I’ve been associated with Cheyenne refinery since 1990. I think the last couple of months have been the most sustained best operation at plants ever seen.

Joey Purdy

This is Joey Purdy. One point of clarification to the, I mean from the standpoint of maximum production Cheyenne is more robust than El Dorado is, I mean they can make maximum products on 80% sweet or 80% salt for the most part, you’re not quite the same but it’s pretty close. So when you talk about heaving up and soldering [ph] up, El Dorado if you go too far, if you go at the market pace, you go too far, you have to cut production much more dramatic effect that you have in Cheyenne.

Daniel Burke – Johnson Rice

Great, I appreciate those comments. Thanks everyone.

Mike Jennings

Thanks Daniel.

Operator

We have no further questions in queue. I would now like to turn the call over to Mike Jennings for any closing remarks.

Mike Jennings

Yes, we certainly appreciate you joining us on this call this morning. Obviously we’ve come back pretty nicely from the Cheyenne fire. The months of September and October were pretty good. We’re going into the anti-season as I like to call it. But distillate margins seemed to be holding up very well and crude differentials are quite a lot better than they’ve been for period of time with the exception of that little blip in September. So looking forward the prospects are good and we’re having fun here. So we hope that you guys all do well in your investment portfolio. Today it looks like good update in the market. Thanks.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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