Western Refining's (WNR) CEO Jeff Stevens on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Western Refining, (WNR)

Western Refining, Inc. (NYSE:WNR)

Q2 2014 Earnings Conference Call

August 5, 2014 11:00 AM ET

Executives

Jeff Beyersdorfer – Treasurer and Director, IR

Jeff Stevens – President and CEO

Gary Dalke – CFO

Analysts

Jeff Dietert – Simmons & Co.

Paul Sankey – Wolfe Research

Roger Read – Wells Fargo Securities

Paul Cheng – Barclays

Mohit Bhardwaj – Citigroup

Operator

Good morning, and welcome to the Second Quarter 2014 Conference Call. After the speakers’ opening remarks there will be a question-and-answer period. (Operator Instructions). As a reminder ladies and gentlemen this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms please disconnect at this time. Thank you.

I would now like to turn the call over to Mr. Jeff Beyersdorfer, Treasurer and Director of Investor Relations of Western Refining. Mr. Beyersdorfer, please go ahead, sir.

Jeff Beyersdorfer

Thanks, Maria. Good morning and thank you for taking the time to listen in today and for your continued interest in Western Refining. Again, my name is Jeff Beyersdorfer. I am the company’s Treasurer, President and CEO. I am here with Gary Dalke, our CFO; Mark Smith, our President, Refining and Marketing; and other members of our senior management team. We will reference our earnings call slides throughout the call this morning. The slide presentation, in addition to our earnings release can be found in the Investor Relations section of our website at wnr.com.

Before we proceed I would like to make the following Safe Harbor statement. Today’s presentation will contain forward-looking statements and I refer you to the forward-looking statement section of our earnings release and recent filings with the SEC. 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 in the press release, which is posted on the Investor Relations section of our website.

As a reminder, Northern Tier Energy and Western Refining Logistics will conduct calls later today to discuss specific second quarter financial results for each company. I will now turn the call over to Jeff.

Jeff Stevens

Thanks, Jeff. Welcome to Western’s second quarter earnings call. After my opening remarks Gary will review our earnings in more detail and provide operating guidance for the third quarter. Then we will open up the call for your questions.

We had a very good second quarter in terms of safety, reliability and total throughput, which was a quarterly record for our Southwest refineries. I’d like to thank all of our Western employees for their continued hard work and dedication that helped us achieve this milestone. In the second quarter combined throughput at El Paso oil and gas was a 165,000 barrels per day. At El Paso we continue to benefit from the widening WTI Midland Cushing differential, which averaged $8.40 per barrel in Q2 as compared to $3.50 per barrel in the first quarter of 2013.

Estimated crude production in the Delaware Basin is currently about 560,000 barrels per day, up about 25% from this time last year. This growing production has exceeded the pace of pipeline development which we think will continue to result in periods of wide Midland Cushing crude differentials. Also at El Paso we continue to purchase additional volumes of cost advantaged Delaware Basin crude. In July we ran approximately 55,000 barrels per day of Delaware Basin crude and expect to reach our goal of substituting all of our light sweet crude at El Paso for cost advantaged crude by mid to late next year.

Gallup ran well during the quarter, with throughput down slightly compared to the first quarter due to a planned catalyst regeneration in April that lasted approximately 10 days. Crude production in the San Juan Basin continues to increase, with Gallup benefiting from a widening crude oil discount to WTI/Cushing. We are also making good progress on reducing operating expenses. Wholesale volumes were up 3%. However both wholesale and retail margins were off slightly compared to Q1 due to increasing crude prices.

With continued growing production in the San Juan Basin we believe the start-up of the TexNew Mex extension will provide valuable takeaway capacity throughout the region. We anticipate completing these projects and introducing line sale in late 2014 and becoming fully operational in early 2015.

During the second quarter Western received cash distributions from NTI and WNRL totaling approximately $36 million. We also paid a dividend of $0.26 per share and in July our Board of Directors authorized another $0.26 per share dividend in the third quarter. During the quarter we repurchased approximately $18 million in Western shares and in July we purchased an additional $43 million. Since the beginning of 2012 we have returned approximately $730 million to shareholders via dividends, special dividends and share repurchases. In June we settled the convertible note and now have successfully completed fixing the balance sheet. Leverage at the end of the quarter is 1.3 times and we have no new near term maturities.

Turning to the third quarter, both El Paso and Gallup continue to run well and our Southwest product margins continue to be very favorable. The WTI Midland/Cushing differential continues to be very strong averaging $8.50 per barrel so far in Q3. Overall our focus continues to be operating our refinery safely and reliably, expanding our logistics portfolio and returning cash to shareholders.

Now I’ll turn the call over to Gary, who will go through our second quarter financials in more detail.

Gary Dalke

Thank you Jeff. As we did last quarter we remind everyone that we consolidate the results of all three entities, Western, WNRL and NTI. Prior year results don’t include contributions from NTI or WNRL. NTI and WNRL will also continue to report on a standalone basis.

On a GAAP basis, the company reported Q2 net income attributable to Western of a $156.7 million or a $1.56 per diluted share. This compares to Q2 2013 net income of a $149.3 million or a $1.46 per diluted share. Excluding special items the company had net income of a $128.8 million or a $1.29 per diluted share in Q2 which compares to net income of a $126.8 million or a $1.25 per diluted share in Q2 2013. A reconciliation of our net earnings to earnings excluding special items is included in our press release.

Gross margin at El Paso was $20.95 per barrel and at Gallup was $15.34 per barrel. Gross margin at EL Paso for this quarter compared to the prior year quarter was helped primarily by the wider Midland/Cushing crude oil differentials. At Gallup gross margin was down due to weaker product margins.

Direct operating expenses for the quarter were $3.86 per barrel at El Paso and $9.03 per barrel at Gallup. Pro forma gross margins and operating expenses excluding the impact of WNRL are included in our supporting slides.

Total consolidated SG&A was $54.6 million for the quarter, which includes $24.8 million associated with WNRL and NTI. Adjusted EBITDA for the quarter was $314.4 million, which includes $92.9 million from WNRL and NTI. Total consolidated capital expenditures for the quarter were $40 million which includes $14 million for WNRL and NTI. We anticipate that full year 2014 capital expenditures for standalone Western will be in line with our budget of $231 million.

A bridge from Q1 to Q2 2014 ending cash position can be found on page five of our slides. On Page six of our slides, you will find our capitalization table as of June 30. Finally, you can find our third quarter operating guidance on page seven of our slides. Total throughput guidance for El Paso includes four days of partial downtime we had in July as a result of a small backing unit fire.

I will now turn the call back over to Jeff Stevens.

Jeff Stevens

Thanks, Gary. The second quarter was another very good quarter for Western. The third quarter is progressing well and we continue to see a strong margin environment. We are making great progress on our growth initiatives, in particular the TexNew Mex project. I’m confident that by executing safely and reliably Western will continue to deliver strong financial performance going forward. Maria we’re up now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Jeff Dietert of Simmons.

Jeff Dietert – Simmons & Co.

Good morning.

Jeff Stevens

Good morning Jeff.

Jeff Dietert – Simmons & Co.

I believe from your El Paso throughput it looks like LP expectations for 3Q I believe there was some downtime early in the quarter. Is El Paso back up and operating normally at this point?

Jeff Stevens

Yeah we had the – as Gary mentioned we had the small fire in one of the crude units, that was extinguished very quickly. Our group at El Paso did a great job safely returning it back to full rate within just about three days and we’re running at capacity at both of our refineries today.

Jeff Dietert – Simmons & Co.

There’s been a lot of maintenance at refineries in the Permian basin so far this year but with El Paso back up, [inaudible] reported back up it seems like all the refineries are operating now and yet WTI Midland still trading $10 a barrel under Cushing. Could you talk about your expectations for the impact of BridgeTex coming online. It appears in our analysis that there might not be enough gathering capacity to immediately fill BridgeTex but what are your thoughts on the impact of BridgeTex and WTI Midland differentials going forward?

Jeff Stevens

Well Jeff, as we talked about in the past this is really a kind of a cat and mouse game between production and between takeaway. And the guys at the end with production have been doing an outstanding job of raising the level of crude production in the area as the takeaway projects get finished and up and operating we’ll ultimately see how they balance out. But our expectation is that we’re going to for the next couple of years see volatility in that market, particularly when there is any planned or unplanned downtime by the regional refiners.

We’ve seen that today BridgeTex has been filling up today and we continue to see a very wide Midland/Cushing differential and our expectation is that we’re going to continue to see volatility if the production continues on the page that it is today.

Jeff Dietert – Simmons & Co.

Okay and could you talk about your current state of analysis on drop downs and especially as it relates to the potential for refining assets dropping down in the Northern Tier? What’s your status of evaluation there and what do you think about the pace of potential refining drops in particular in the Northern Tier?

Jeff Stevens

Well obviously Jeff, we like all of our assets. We think that we’re in a good position and we have a lot of options. And all I can tell you is that we’re very engaged in that process of evaluating the different options but at the same time looking at both the short-term and long-term ramifications of any drop downs. But what I can tell people is that we have the shareholders and the unit holders’ best interest and we’ll continue to run the company with that in mind.

Jeff Dietert – Simmons & Co.

Thanks for your comments.

Jeff Stevens

Thanks Jeff.

Operator

Our next question comes from the line of Paul Sankey of Wolfe Research.

Paul Sankey – Wolfe Research

Hi good morning everyone. Could you expand a little bit more on that previous comment, just firstly could you talk a little bit about what you think shareholders want you to do and secondly could you just talk a bit more about the short-term and long-term ramifications? Thank you.

Jeff Stevens

Yeah I think Paul, ultimately the shareholders want us to do what’s in the best interest long-term and this is a decision that we’re carefully evaluating right now. And there are obviously taxes and other issues related to a potential drop down like this. So we’re looking at all aspects, all the different ways of potentially executing that type of drop down and we will obviously when it’s the right decision to take we will let the market know.

Paul Sankey – Wolfe Research

Understood we noticed that most – a much more specific question we noticed more volatility around your capture at Gallup. Could you – is there any issues there in terms of how the [play’s] changing relative to the capture? Thanks.

Jeff Stevens

No, I think we saw in the quarter a little bit historical, the product margins were a little bit lighter then we have historically seen. No real difference in change of market conditions. But you know the margins were a little bit lighter than we would historically have done. But I think that we will see Gallup continue to make good progress on both its expenses and I think Gallup will also start to see some favorable margin capture relative to lower crude start piece in the future and benefit from both of those options.

Paul Sankey – Wolfe Research

Great, thanks. And then just finally to clarify again on a previous point, your view is that regardless of additional pipeline capacity that could take away Midland Crude it’s still going to be a market that’s characterized by high volatility in spreads particularly as relates to refining downtime.

Jeff Stevens

Yeah, absolutely Paul I mean I don’t think we are going to see a $10 Midland/Cushing for the next 24 months but I think what we will see it move around based on different product outages, based on as new production comes on. There is still a lot of work to be done to clear all the takeaway and that work is still in progress and so I think we are going to continue to see volatility relative to those margins.

Paul Sankey – Wolfe Research

Thank you.

Jeff Stevens

Thanks Paul.

Operator

Our next question comes from the line of Roger Read of Wells Fargo.

Roger Read – Wells Fargo Securities

Hi, good morning.

Jeff Stevens

Good morning Roger.

Roger Read – Wells Fargo Securities

I guess just to take one more swing at the whole drop down thing. Any guidance you can gave us all in terms of maybe some of the milestones or timing that you would think of, I mean as you say you might have some of the these major items solved or at least to have path of progress by end of this year or is it 2015 event, is it determined or in determinant?

Jeff Stevens

I think Roger Read that is isn’t a timetable on this. All I can tell is that we are engaged in the process and we are taking it very seriously and that when it makes sense – if it makes sense to make that kind of transaction we will execute on it.

Roger Read – Wells Fargo Securities

Okay, on to more of the operational thing, since what’s going on in Midland Basin is by far the most important thing to you, can you kind of walk us through two things; one, you mentioned you know running up to kind of full volumes at El Paso. Once you get to that level what is the possibility of moving crude upto Gallup, or is that not an option? And then where we at the TexNew Mex line in terms of getting it operational, getting it filed, making that you know fully operable asset?

Jeff Stevens

So in regards to the TexNew Mex we believe that we will be putting a line fill in later this year, probably December and then we believe that it will become fully operational early in Q1 of 2015. So we will be bringing the additional crude from the Four Corners area down and we will be able to run that crude at El Paso, which is a positive for El Paso because of the crude quality characteristics of that crude and relative to what Western is doing I think the way to think about it is we pre-invested a significant amount of money in a gathering system, both pipeline and [trust] so we can continue to control the quality of the crude coming into El Paso. And as we talked about we also are looking at a pipeline from our Delaware Basin back into the Wink area which would service eventually be able to get barrels to Midland and find a take away for the lighter crudes that we are buying in our region.

So I think the bottom line is that we are looking at this from a logistics point of view that there are a lot of good projects out there that we can do and really capitalize on all of this crude growth that we are seeing.

Roger Read – Wells Fargo Securities

Okay, and my last question, given all the light in out there obviously some changes here in condensate export policy. Anything you are looking at where you would try to do more separation? I am almost thinking like a condensate supporter which I know most of that’s been kind of talked about along the Gulf Coast. But anything you might consider doing in West Texas, simple distillation and then be able to create the exportable product or pipelines et cetera?

Jeff Stevens

Well I think where we are at is we are in a position in El Paso to run a significant amount of light crude. And right now in the very light crudes we are not seeing discounts that warrant bringing that crude to El Paso. So we continue to run our system and pick and choose the crudes based on economics, based on yield and our performance in the refinery. And if lighter crudes become discounted we will look at bringing more those in and try to capitalize on those but as far as a spilt at this point it doesn’t make sense for us in our market.

Roger Read – Wells Fargo Securities

Okay, great. Thank you.

Jeff Stevens

Thanks Roger.

Operator

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

Paul Cheng – Barclays

Good morning guys.

Jeff Stevens

Good morning Paul.

Paul Cheng – Barclays

Jeff first I have a request, it may not be that important yet but I think over the next one or two years there is some of the [inaudible] will become new emerging investment theme in the sector. Is it possible in the future when you report the quarterly result you will show what is the GP cash flow, the number of unit in the WNRL as well as NTI because those number may change over time as you do drop down and all that. So that I think will be helpful to all your investors.

Jeff Stevens

Sure, Paul I think that’s a good suggestion.

Paul Cheng – Barclays

Several quick question, first, do you have the market value of your inventory in excess of bill?

Gary Dalke

Paul what I have do handy is our current cost versus our LIFO value is so, current cost currently is about $220 million in access of our current LIFO value.

Paul Cheng – Barclays

Perfect. And then Jeff when we looking at the dropdown I know that you guys talking about the wholesale business could be one of the answer to dropdown. Outside the wholesale business what is the remaining EBITDA you think you may have that is within the [seek up] that you could drop down?

Jeff Stevens

Well as we guided through our S-1 process and work through the different EBITDAs of the different business, we think over the next 12 to 24 months there is somewhere around 100,000 to a 150,000 – $100 million to $150 million in potential EBITDA.

Paul Cheng – Barclays

That’s including the wholesale, right?

Gary Dalke

Yes it is.

Paul Cheng – Barclays

Okay, and I think that there’s always two school of thought in terms of the pace of dropdown to the logistic, one is by I think championed by Tesoro, is not a lot more aggressive in trying to push their LP so that they can pick on the organic investment using their own balance sheet. The other one is more by MPC and more measured. Where that Western volume between or that you are leaning more towards into the Tesoro mode or you are leaning more towards to the MPC model?

Jeff Stevens

I think Western’s approach is a balanced approach that we outlined to the market and part of it is that are paced drop downs that make sense from a timing standpoint to maximize the value to both the shareholders and unit holders but Paul I think we are somewhere in-between.

Paul Cheng – Barclays

Okay and can you tell…

Jeff Stevens

The growth on a pretty steep outward movement in that system as we bring TexNew Mex on that will add volume to that system and we still believe that we will be at that close to a 100,000 barrels by the middle of next year.

Paul Cheng – Barclays

Two final question first, by now that you’re probably already locked at least two months of your crude purchase, could you share with us that what is your estimate after crude differential in your two facilities at Gallup and El Paso? Comparing to the second quarter, are you seeing that crude differential or is that about flat or were soft? And secondly I think earlier that Paul and a number of people that asked about the pace of [inaudible] logistically does it make sense as an end game for you to fully acquire NTI?

Jeff Stevens

Well as for the NTI, we said before that we really like that asset and if it makes sense to acquire more ownership within NTI we’ll seriously consider taking that decision. Relative to the crude, I think that’s about the same as Q2.

Paul Cheng – Barclays

Thank you.

Jeff Stevens

Thanks Paul.

Operator

(Operator Instructions). Our next question comes from the line of Mohit Bhardwaj of Citigroup.

Mohit Bhardwaj – Citigroup

Hi thanks for taking my question. Jeff just wanted to ask you on the crude gathering and potentially having a 100,000 barrels per day for crude that’s going to be run at El Paso coming from your own gathering system. So how do we get from 55,000 to 60,000 to 100,000 is how much of this is because of TexNew Mex and when you guys start TexNew Mex in the beginning of 2015 what volumes do you expect in the beginning?

Jeff Stevens

Relative to the TexNew Mex it’ll probably start off somewhere between 10,000 to 15,000 barrels a day of crude. So obviously we’ll see a significant increase in throughput in the Delaware basin. We do have some projects on the books and gathering lines today that will be probably built and operational late in the fourth quarter that will add volumes. So just looking at the – talking to the producers looking at the availability of crude that we want for El Paso we just feel like that, that there will be enough new production on to more than exceed that total of a 100,000 by the middle of next year.

Mohit Bhardwaj – Citigroup

Okay and just on rent expense?

Jeff Stevens

I think we may have lost our caller there. Operator do we have any other question in the queue?

Operator

There are no further questions at this time sir.

Jeff Stevens

Okay Mohit if you like to call back to us we’ll be more than happy to take your question offline and once again I’d like to thank our employees for a great quarter and thank you for your participation in today’s call. Have a great day.

Operator

Thank you. That concludes today’s second quarter 2014 Western Refining’s earnings conference call. You may now disconnect your lines at this time and have a wonderful 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!