CVR's (CVRR) CEO Jack Lipinski on Q2 2014 Results - Earnings Call Transcript

| About: CVR Refining, (CVRR)

CVR Refining, LP (NYSE:CVRR)

Q2 2014 Results Earnings Conference Call

July 31, 2014 12:00 PM ET


Jay Finks - Director, Investor Relations

Jack Lipinski - Chief Executive Officer

Susan Ball - Chief Financial Officer


Jeff Dietert - Simmons

Mohit Bhardwaj - Citigroup


Greetings. And welcome to the CVR Refining Second Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jay Finks, Director of Investor Relations for CVR Refining. Thank you, Mr. Finks. You may begin.

Jay Finks

Thank you, Kevin. Good morning, everyone. We very much appreciate you joining us this morning for CVR Refining second quarter 2014 earnings call. With me are Jack Lipinski, our Chief Executive Officer; and Susan Ball, our Chief Financial Officer.

Prior to discussing our 2014 second quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws.

For this purpose, any statements made during this call that are not statements of historical facts maybe deemed to be forward-looking statements. Without limiting the foregoing, the words outlook, beliefs, anticipate, plans, expects and similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements maybe affected by important factors set forth in our filings with the Securities and Exchange Commission, and in our latest earnings release.

As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise except to the extent required by law.

This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures are included in our 2014 second quarter earnings release that we filed with the SEC this morning before the opening of the market.

With that said, I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

Jack Lipinski

Thank you, Jay. Good morning, everyone. And thank you for joining our earnings call today. As you know, on July 29th we experienced a fire at our Coffeyville refinery. For our call today, Susan and I will first address our 2014 second results. In my closing remarks, I will discuss the incident at Coffeyville and impact on our outlook.

Okay, with that, this morning we released our 2014 second quarter results, in which we reported consolidate net income of $180 million, as compared to $379.2 million of net income for the second quarter of 2013.

In our second quarter 2014, consolidated adjusted EBITDA was $192.9 million, as compared to $250.6 million in the same period a year ago. This morning, we also declared a second distribution of $0.96 per common unit. The distribution will be paid on August 18th to unitholders of record on August 11, 2014.

In the second quarter 2014, our realized refining margin adjusted for FIFO, First-In, First-Out accounting was $13.96 per barrel, as compared to $19.18 barrels for the same quarter of 2013.

Driving this decrease was overall lower NYMEX 2-1-1 Crack Spread, a negative Group 3 product basis. Our total crude throughput for the quarter was approximately 212,000 barrels a day, Coffeyville processed approximately 131,700 barrels a day of crude and Wynnewood processed approximately 80,300 barrels a day of crude.

In our Gathering business, we gathered more than 56,000 barrels a day in the second of ’14 and that compares to 53,800 barrels a day in the second quarter of 2013.

At this point, I will turn it over to Susan to discuss the financials in more detail and then I will return after Susan remarks.

Susan Ball

Thank you, Jack, and good morning, everyone. As Jack previously mentioned, in the 2014 second quarter, our adjusted EBITDA was $192.9 million, as compared to $250.6 million in the same quarter of 2013.

In the second quarter of 2014, the more significant adjustments to net income to derive adjusted EBITDA were adjustments related to the increase or decrease in our inventory values that are realized under the First-In, First-Out or FIFO inventory accounting method and gains on derivatives not settled. We realized a favorable FIFO inventory impact of $24.3 million and a gain on derivatives not settled during the period of $2 million.

Adjusted EBITDA is reduced by certain annual reserves that are prorated on a quarterly basis to derive available cash for distribution. This annual reserves are set aside for future cash needs associated with maintenance and environment capital expenditures of $125 million, as well as $35 million for future major scheduled turnaround expenses.

Adjusted EBITDA is also reduced for cash needs associated with debt service and other future operating needs as determined. Available cash for distribution for the second quarter was $142.8 or $0.96 per common unit net. As noted in the past, we are in variable distribution master limited partnership.

As a result, our quarterly distributions, if any, will vary from quarter-to-quarter due to several factors, including but not limited to our operating performance, fluctuations in the prices paid for crude oil and other feedstocks, as well as the prices received for finished products and other cash reserves deemed necessary or appropriate by the Board of Directors of our general partner.

In the second quarter 2014, our realized refining margin adjusted for FIFO was $13.96 per barrel, as compared to $19.18 in the same quarter of 2013. The NYMEX 2-1-1 Crack Spread averaged $22.05 per barrel in the second quarter of 2014, as compared to $25.95 per barrel in the second quarter of 2013.

The PADD II Group 3 2-1-1 product basis averaged a negative $3.41 per barrel, as compared to a positive $1.83 per barrel in the 2013 second quarter. The PADD II Group 3 2-1-1 Crack Spread averaged $18.64 per barrel in the 2014 second quarter, as compared to $27.78 in the same period of 2013.

Our second quarter 2014 RINs expense was $29.1 million, as compared to $65.5 million in the second quarter of 2013. We currently estimate our full year 2014 RINs expense to be approximately $100 million and $150 million.

The Coffeyville refinery reported a refining margin, adjusted for the FIFO impact of $167.7 million in the second quarter 2014, or $14 per crude throughput barrel as compared to $216.6 million, or $20.30 per crude throughput barrel in 2013.

In the second quarter of 2014, the Wynnewood refinery reported a refining margin adjusted for FIFO impact of $100.6 million or $13.74 per crude throughput barrel as compared to $119.8 million or $17.34 per crude throughput barrel in the second quarter of 2013.

Direct operating expenses excluding turnaround expenses was $4.83 per barrel of crude throughput in the second quarter of 2014, as compared to $4.77 in the second quarter of 2013. The increase was primarily attributable to higher natural gas costs and personnel expenses.

Assuming the same rate of consumption of natural gas for both refineries during 2014 second quarter a dollar change in natural gas would have increased or decreased our natural cost by approximately $2.4 million.

At the refinery level, Coffeyville’s direct operating expenses excluding turnaround expense was $4.48 per barrel of crude throughput in the second quarter of 2014, as compared to $4.69 per barrel in the 2013 second quarter.

Wynnewood’s direct operating expenses excluding turnaround expenses were $5.44 per barrel of crude oil throughput through the second quarter of 2014, as compared to $4.88 per barrel in the second quarter of 2013.

We ended the 2014 second quarter with cash and cash equivalents of approximately $420 million. Our $400 million ABL had $27 million issued standby letters of credit resulting in availability under our ABL facility of $373 million. As of July 28th, our current cash balance was $457 million and we had the $373 million available under the ABL.

Our total long-term debt outstanding including current portions was $582 million. This was comprised of our $500 million 6.5% unsecured notes, $50 million of capital leases and $32 million drawn against the $150 million in our company revolver which provided by our parent, CVR Energy. As a reminder, the revolver was put in place at the time of the IPO to fund future profit and growth capital expenditures.

As of June 30th, we had open commodity derivative positions of 15.8 million barrels. The weighted average cost -- weighted average fixed price associated with all open positions is $27.82 per barrel. Our open commodity derivative positions were comprised of approximately 81% of distillate crack swaps and 19% of gasoline crack swaps.

On June 30, we completed the second underwritten offering by selling 6.5 million common units to the public at $26.07 per unit. The net proceeds were used to redeem a like amount of common units from CVR Refining Holdings. Additionally, on July 24, the underwriters exercised their option to purchase an additional 975,000 units, resulting in CVR Energy owning approximately 66% of our common units. Subsequent to the closing of offerings, there was no increase to our common units outstanding.

Second quarter 2014 capital expenditures totaled $47.4 million. Of the total capital expenditures in the second quarter, $36.4 million was related to maintenance and environment CapEx and $11 million was related to growth capital.

In 2014, we estimated total capital spending to be approximately $245 million to $265 million, of which $178 million to $188 million is expected to be environmental and maintenance capital. We also estimate our growth capital to be approximately $67 million to $77 million.

Our 2014 estimated environmental and maintenance capital expenditures will be funded with the annual cash reserves of $125 million as well as the cash on hand that was established by IPO. The growth capital will be funded through our $150 million intercompany revolver.

With that, Jack, I will turn the call back to you.

Jack Lipinski

Okay. Thank you, Susan. As I mentioned earlier, on July 29, we experienced the fire on the isomerization unit at the Coffeyville refinery. The fire was extinguished in less than an hour and the isom unit itself suffered very limited damage. However, the refinery was subsequently shutdown to issues with its distributed control system caused by fire damage to data cabling electrical systems. We are currently evaluating the damage and estimated cost of repairs. Based on our preliminary reassessment of the damage, it is currently anticipated that the refinery could be down for approximately four weeks from the time we have.

As such, and at this point, we estimate that our total crude throughput will range between 165,000 barrels a day and 175,000 barrels a day for the third quarter of 2014. During this downtime, it is our intent to accelerate some of our planned maintenance for 2014. We were planning a 7-day shutdown of our Number 2 crude unit and Number 2 vacuum unit for decouping and unit cleanups during Q3, that will be affected during this current outage.

Also during the current downtime, we will pull forward certain activities originally slated to be accomplished during the facility scheduled turnaround in the fall of 2015. Included in this will be certain utility maintenance, which can only be performed when the entire plant is down. Clearly and more importantly than the damage caused by the fire was that four of our employees were injured and were subsequently transported to a Tulsa Hospital where they remain hospitalized.

Our primary focus is to continue to provide support and assistance to the injured employees and their families, all of them remain in our thoughts and prayers. Clearly this incident is not indicative of our focus on safety. We remain steady fast in our commitment to providing a safe environment to all of our employees across the company. To the credit of our employees some significant safety achievements were reached during this year’s second quarter.

In May, employees at our Wynnewood refinery celebrated one million man hours without a loss time injury. This follows their January achievement of one year without an OSHA recordable injury and in June employees at Coffeyville refinery surpassed two years without an OSHA recordable injury and also reached 2 million man hours without a loss time injury. Clearly these records have been overshadowed by what happened to us recently, and again our thoughts and my thoughts and prayers go out to our employees and their families.

So with that, operator, we will open it to questions.

Question-and-Answer Session


(Operator Instructions) Our first question today is coming from Jeff Dietert from Simmons. Please proceed with your question.

Jeff Dietert - Simmons

Good morning Jack. Sorry to hear about the fire at Coffeyville. I know that’s unusual given your track record.

Jack Lipinski

It’s unfortunate. We’ll do our best to make sure we keep everybody safe. That’s our goal.

Jeff Dietert - Simmons

I might focus first on Wynnewood. Are there any expected planned downtime for Wynnewood in the back half of the year or are you expected to run of course normal operations?

Jack Lipinski

We do have two cabalist change outs that we will factor in the second half of the year, whether it’s Q3 or Q4 but even it’s necessary we’re just anticipating it right now. We would expect to shorten that Wynnewood to run near its capacity. And during the quarter, both plants operated at virtually their full rated capacity. I mean stream day capacity. We rate our plans based on anticipated and some unanticipated downtime. But the stream day capacity of plants were virtually achieved in by the entire quarter of Q2. And we do have a start-up under the MSAT program, benzene removal in gasoline. We will have startup of our ben-free unit in Wynnewood in the new hydrogen plant.

Jeff Dietert - Simmons

So really when we look at the 165,000 to 175,000 barrels a day, a third quarter guidance. That’s kind of close to normal operations at Wynnewood, most of the loss or throughput will be at Coffeyville?

Jack Lipinski

Right. It’s best to be noted right now. Again we had the issue with the fire. The fire was extinguished and after the fire was extinguished, we started experiencing problems with our distributed control system. And again, it relates to the fire damage for the data and power cables and that’s what -- that is why we find ourselves with the plant being down right now.

We have two major datacenters in the refinery. This fire affected one of them. Other units are capable of running but unless the whole plant can run together, it doesn’t make a whole lot of sense trying to run minimal amounts of crude.

Jeff Dietert - Simmons

And the critical [PADD] (ph) item is repairing be electrical damage you would anticipate. Once electrical damage is repaired that the all time unit would be repaired any other parts of the refinery. So once the electrical equipment is repaired or replaced, the full refinery would be able to come back up.

Jack Lipinski

That’s correct. And again, it’s not just electrical but it’s data cabling which is actually of long repair. But again we are -- we're still in the early stages of developing our work scope and time of schedule.

Jeff Dietert - Simmons

Got you. And secondly, you’ve talked about historically, you’ve got access to about 40,000 barrels a day of WTI, Midland base crudes across your portfolio. Is that something you will be maintain and consume at Wynnewood, with Coffeyville being down…

Jack Lipinski

Not for this period of time. We -- probably we will be in the market reselling crude and that’s committed to the plants.

Jeff Dietert - Simmons

Got you. And taking advantage of the transportation agreements you’ve got in place?

Jack Lipinski

As best we can.

Jeff Dietert - Simmons

Okay. Any thoughts on the Cushing market, it looks like storage levels are down close to operating minimums. There are some new pipelines scheduled to startup late this quarter, early next quarter. You think WTI continues to be tight through the end of the year or you think there might be some relief coming?

Jack Lipinski

Well, if you take a look just at the market, we’re down to about 18 million but all system number like that, that I saw recently which is almost deals for all the capacity. We do have some new pipelines coming in. The [arising] (ph) issue here is you have more takeaway capacity at Cushing and even the new pipes coming in. So some time over -- my belief to sometime over the next year, the Gulf Coast unless we get crude exports which is kind of a wild card and real crude, not just condensates, eventually crude will have to back up at cushion. You just can't store it on the Gulf.

And margins were so good for such a long period of time. Run rates were exceptional, I mean, we were looking a few weeks ago that PADD II was running over a 100% of corporate capacity. We know what really capacity means. Then Gulf Coast was like 94%, 95%. Everybody was making money and now you’ve seen inventories of gasoline and diesel start decline. And I would assume that some of the weaker sisters will be trending because the incremental rental going through their plants probably not that valuable.

Jeff Dietert - Simmons

Thank you, Jack. All the best.

Jack Lipinski

Thank you.


Thank you. (Operator Instructions) Our next question today is coming from Mohit Bhardwaj from Citigroup. Please proceed with your question.

Mohit Bhardwaj - Citigroup

Yes. Thanks for taking my question. Jack, just wanted to understand, you mentioned, the benzene plant coming at Wynnewood and also the hydrogen plant starting up? Do we still have the start-up for the hydrocracker project in third quarter or is it slipping more in fourth quarter, what’s the status on that?

Jack Lipinski

It will depend on when we do the catalyst change up. So it could be Q3. It could be Q4. That’s in our schedule and its going to depend, obviously, on timing when the catalyst actually needs to be change from the process perspective and also from economics, if margins get little thin we will move it forward, if they stay wide, we may write that for a little while, not that it’s going to have a major impact on crude, but a crude product I think. But it will probably happen sometime in the second half of the year and at Coffeyville, we’re also going to be bringing up our [de-hexanizing tower] (ph) to handle our inside economist.

Mohit Bhardwaj - Citigroup

Okay. And as we still wait for a final hear, final ruling on RFS standard to come on and Susan mentioned, the $29 million that you guys spent on rent? How are you thinking about for the rest of the year end going into 2015?

Jack Lipinski

If you take a look and this is just my too sense, not the company view, its Jack view. I think, what you have to read between the lines of everything that you’re hearing from EPA or how much is EPA is been controlled by the White House or whatever.

Obviously, there have been tens and thousands of comments into EPA. I believe what will likely happen, is there will be an increase in the VLO from the originally proposed document or the numbers we saw several months ago.

I do not believe they will go back up to 2013 levels. I think the change will probably occur in some of the biodiesel to advance our wins. Ultimately, I think when everybody realizes that we won’t hit blend, well this year RIN'S will probably temper in their price. Perhaps not to the biodiesel to perhaps that’s kind of might due on the ethanol.

Mohit Bhardwaj - Citigroup

Right. And how are you positioning yourself for it? So just being in the market on a ratable basis per ends or I’m just trying to look for more option for blending both or something else?

Jack Lipinski

Well, it’s all of the above. (Indiscernible) that’s all the above, like as energy policy.

Mohit Bhardwaj - Citigroup

Right. And the margin said that you guys have been able to capture, they still remain pretty strong and Susan mentioned the negative basis over there. Is there something on the marketing side that you guys are doing or are there something else that you want to talk about right now?

Jack Lipinski

Well, no, seriously, if you go back and look at the history of this company, we generally have strong operations which allows us to run our plans very efficiently. We have put a significant amount of capital which is all now showing up in our bottom line over the years. It’s all the enhancing capital for cut point and the like.

I mean, our liquid volume recoveries are up year-over-year. If you would look at our expenses, you’ll se that GR expenses are going up overtime and you say that’s bad thing. I would tell you it’s a very good thing because what we’re doing is we’re recovering more and more LPGs.

At our fuel system, we’re replacing the lower price natural gas. So our costs are going up on one side of the ledger but the earnings are going up significantly lower on the sale side of ledger. So it’s a little bit of all the above. As we look to the highest price markets that we can make. We have the capability of making any number of fuels that are and for refineries, we have a significant amount of complexity analysis to do that. And so it’s looking to the best markets increase in our liquid volume recovery and then mining the plants as essentially as we can.

Mohit Bhardwaj - Citigroup

Great. Thanks for your time.

Jack Lipinski

Thank you.


Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over to management for further closing comment.

Jay Finks

Thank you, Kevin. I’d like to thank everyone again today for listening to conference call. As a reminder, the conference call will be available for replay over the next 14 days. Please visit our website or contact Investor Relations for additional information. Thank you.


Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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