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Alon USA Energy (NYSE:ALJ)

Q2 2014 Earnings Call

August 08, 2014 11:30 am ET

Executives

Stacey Hudson -

Paul Eisman - Chief Executive Officer and President

Shai Even - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Alan P. Moret - Senior Vice President of Supply

Scott Rowe - Senior Vice President of Asphalt Marketing

Analysts

Jeffrey A. Dietert - Simmons & Company International, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Alon USA Energy Second Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, August 8, 2014. I'd now like to turn the call over to Ms. Stacey Hudson. Please go ahead, ma'am.

Stacey Hudson

Thank you, Paul, and good morning, everyone, and welcome to Alon USA Energy's Second Quarter 2014 Earnings Conference Call. With me are Paul Eisman, President and Chief Executive Officer; Shai Even, Chief Financial Officer; along with other members of our senior management team. During the course of this call, we may make forward-looking statements based on our current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future financial results and businesses, please refer to the disclosure and risk factors disclosed by the company from time to time in its filings with the SEC. Furthermore, please also refer to the statement regarding forward-looking statements incorporated in our news release issued yesterday, and note that the contents of our conference call today are covered by these statements.

On this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP in our financial release, which is posted on our website.

Finally, please be aware that all our statements are made as of today, August 8, 2014, based on information available to us as of today. And except as required by law, we assume no obligation to update any such statements.

With that, I'll turn the call over to Paul.

Paul Eisman

Thank you, Stacey, and good morning, everyone.

In the second quarter, we recorded an adjusted loss of $0.05 per share, as compared to our profit of $0.27 per share for the same period last year. The loss was driven primarily by lower throughput related to the major turnaround that was completed during the quarter at Big Spring, partially offset by record-setting throughput at our Krotz Springs refinery. Adjusted EBITDA in the second quarter was approximately $53 million.

As mentioned, the most significant impact to our earnings for the second quarter was the complete turnaround of the Big Spring refinery. This was a major event as the turnaround touched every single operating unit and utility system within the refinery. In addition, we completed several capital projects during this period. The most impactful of these was the revamp of our vacuum tower. This work was designed to increase our ability to fully utilize our equipment to recover diesel and increased crude charge by optimizing the operation.

Today, we are running at 73,000 barrels per day of crude charge, an increase from the 70,000 barrels per day we were processing prior to the project.

In addition, our ability to recover distillates at the refinery has increased by approximately 3,000 barrels per day. This distillate yield is well above the 2,000 barrels per day improvement that we were anticipating and will permit us to improve our margin capture going forward.

Finally, we also improved the energy efficiency of the refinery, which will save us about $1.5 million per year at current fuel gas prices. The project improves profitability at Big Spring by almost $22 million per year. We spent less than $30 million on the vacuum tower revamp, so the returns for the project are very good.

As is typical for a turnaround of this scope, there were challenges. We struggled with the weather, losing several ships to thunderstorms, including 1 tornado warning. Also the work to replace the cyclones in the FCC regenerator resulted in an extended outage. As a result, the duration of turnaround was extended by a few days.

We processed approximately 39,000 barrels per day of oil during the second quarter, which was lower than the 46,000 barrels per day that we had planned. Despite this, we are pleased with many aspects of the turnaround. The work was completed very safely. The plant was shut down, the work was completed, and the refinery restarted with only a few minor issues. The turnaround project was successfully completed, and the refinery is running very well since completion of the turnaround and the restart period.

The benefits of the vacuum tower revamp project are exceeding our expectations. I'm very proud of the people at Big Spring and the hard work they put into this to make it happen.

In our wholesale marketing business, branded sales remain strong despite lower production levels out of Big Spring as we purchased product to keep our branded customers supplied. Branded sales in the second quarter were actually 3.4% higher than the same quarter last year. On the other hand, unbranded sales in the second quarter were about half of what they were in the second quarter last year as a result of the turnaround.

In our retail marketing business, fuel sales were up 2.7% versus the second quarter of last year. Fuel margins at $0.194 per gallon are similar to the $0.202 per gallon margin that we reported in the second quarter last year.

Merchandise sales were flat versus the same quarter last year, with a merchandise margin during the second quarter this year of 30.7%.

The operations at the Krotz Springs refinery were excellent as we set monthly and quarterly throughput records at the facility. The throughput at Krotz Springs in the second quarter averaged almost 76,000 barrels per day and we operated at nearly 78,000 barrels per day in the month of June. Direct operating expenses were good at $3.70 per barrel in the quarter.

In California, our permit application to construct a crude oil rail unloading facility and potentially restart our Bakersfield refinery has completed the public comment period. We are pleased for the support that we received for the project thus far from many segments of the Bakersfield community, and looking forward -- and are looking forward to working with the community to address their comments.

Our asphalt marketing business continues to operate in a very weak market. Sales volume in the quarter was off 25% from the same quarter last year due in part to lower asphalt production resulting from the Big Spring turnaround. Margins were not that bad at $68 per ton, but additional sales volume is needed to cover the fixed cost associated with operating our terminals.

As we've said in the past, we believe we've reached a demand trough in this business and expect improvement going forward. In the interim, we are working hard to maximize sales of high-performance grade to support higher margins, finding ways to source lower cost feedstocks, and are looking at additional steps to further reduce our cost.

Net debt increased as expected in the quarter, primarily due to the Big Spring turnaround. In addition to the earnings impact of the turnaround, we purchased less crude during the period and, therefore, our crude payables were down, resulting in a decrease of cash in the cash balance at quarter-end. An important milestone that was recently completed was the redemption in full of the remaining principal balance of $35.6 million on our Krotz Springs senior secured notes due October of this year.

Looking forward to the remainder of the year, we're encouraged by what we see. We expect to operate the Big Spring refinery at 74,000 barrels per day of total charge in the third quarter and 75,000 barrels per day of total charge in the fourth quarter. Big Spring continues to benefit from weakness in the Midland-priced crude oils. In the month of July and August, we've seen discounts averaging in excess of $8 per barrel in Midland relative to WTI price at Cushing. September crude oil is also currently trading in this range. This discount also benefits our Krotz Springs refinery as we continue to shift 30,000 barrels per day of Midland-priced sweet crude to that refinery. We've seen a significant amount of volatility recently in the Brent to LLS differential, but LLS has generally been discounted with a $2 to $4 per barrel range. Most analysts expect this differential could widen later in the year, as more light crude makes its way to the Gulf Coast and the demand for crude oil slows due to seasonal maintenance work.

We expect the Krotz Springs to refinery -- Krotz Springs refinery to operate at 75,000 barrels per day of total charge in the third quarter and 76,000 barrels per day in the fourth.

Lastly, we are very pleased that the Board of Directors approved an increase in the regular dividend to $0.10 per share. This is a 67% increase from the $0.06 per share we paid over the last several quarters.

With the completion of the Big Spring turnaround and vacuum tower revamp project, continued good discount for Midland crude oil, improved operating and financial results from our Krotz Springs refinery, and an improved balance sheet, we feel that now is the time to increase the amount of cash we are returning to shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jeff Dietert with Simmons.

Jeffrey A. Dietert - Simmons & Company International, Research Division

I appreciate the outlook on runs at both Krotz Springs and Big Spring in the back half of the year. It looks you're situated to run well in what should be a favorable crude price environment. Question on Krotz Springs, I believe you have maintenance planned for the first quarter. Is that correct?

Paul Eisman

We're currently evaluating the timing of the turnaround. We do expect to have a turnaround sometime next year. We are evaluating when we might do that. It could potentially be in the first quarter, it could potentially be in the third quarter. We've not yet made that decision.

Jeffrey A. Dietert - Simmons & Company International, Research Division

I understand. And I'd be curious what your thoughts are on -- current thoughts or updated thoughts are on dropping down some interest of Krotz Springs into ALDW. I'm looking at ALDW trading down 3% today, and it doesn't appear the market understands that the Big Spring turnaround's over and that it's going to be running well in the back half of the year. And perhaps if you had a piece of Big Spring and Krotz Springs both in ALDW, it might smooth out some of the maintenance periods and cash flows there.

Paul Eisman

I mean, we're all, obviously, looking at that. I think it's important to know that, first of all, we're pleased with the operating and financial performance of the Krotz Springs refinery. I mean, you look at the profitability -- how the profitability has improved in that refinery over time and that's at a $2 to $4 differential for LLS to Brent. And if you look at the forward curve for that differential, it's expected to grow significantly over the next 2 years. So that bodes well for the profitability of the Krotz Springs refinery. So -- and obviously, from a risk management perspective, it's nice to have a couple of assets in a partnership rather than just 1. So there are a number of benefits to doing that. We've got to look through the analysis, and obviously, that's got to be done from an energy perspective and a proper price, but also from the perspective of the partnership. It's got to be done in a way that's accretive to distributions to sharehol -- to unitholders. So we've got a lot of work to do to evaluate that, but we are looking at that evaluation.

Operator

And next, we'll go to Mr. Ed Westlake with Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

I was going to ask you about whether you had interest in CITGO, but that was answered already this morning. So maybe let's focus on Krotz Springs. You've got this turnaround, I mean, any updates on improving Krotz Springs through that turnaround? And, by the way, I would vote 3Q.

Paul Eisman

On improvements during that turnaround? Yes, we are looking at doing project development on...

Edward Westlake - Crédit Suisse AG, Research Division

Or expansions, sorry.

Paul Eisman

Yes, on projects at Krotz Springs. We do think there's an opportunity and we've not approved it yet or decided to move forward, but preliminary work, that there's a pretty good project out there to do something similar to what we did at Big Spring. It doesn't really have the throughput increases that we saw in the Big Spring project, but the result is the significant increase in distillate productions and also improves the energy efficiency of that plant. So we're looking at that. And there's a couple of other projects we're looking at that are relatively minor. I don't expect, though, to come out of the turnaround at Krotz Springs with significantly increased throughput.

Edward Westlake - Crédit Suisse AG, Research Division

Okay, and then switching to the California regulatory process. And obviously, there's the Kern County review September 9. It's a 660-page EIR. So I was just wondering what of the significant impacts that it identifies, the NOx emissions, the -- obviously, the impact that potential rail spills could have either on the main line for BNSF or more locally. What do you think is the most difficult thing to overcome to get the rail deliveries into that Bakersfield refinery or anything else that I haven't mentioned?

Paul Eisman

Yes, as you mentioned, the EIR is pretty all-encompassing. It's a tremendously big document. It deals with all the issues that you talked about and a number of other issues. In terms of the comments we received, it was a mix. But it was -- the nature of the comments were not unexpected. We've, obviously, got to work through this process in terms of providing answers to the comments and we're in the middle of that right now. I hate to kind of judge the relative difficulty of any particular comment. We've just got to work through the process and move towards getting the answers that we think the community is owed. And so we're moving in that direction.

Edward Westlake - Crédit Suisse AG, Research Division

And then maybe on the timing. So September 9 is that hearing. I mean, how long after that -- how long do you think it would take to address any concerns? Or is it too early to even ask that question?

Paul Eisman

Well, I think the -- assuming that, that timing holds, I think at that point, you've addressed the concerns. And so -- and through the process, we come up to the extent that there are concerns, and we can mitigate those concerns. Obviously, there's a mitigation plan that's part of this. And then we would implement that.

Edward Westlake - Crédit Suisse AG, Research Division

So to be clear, that hearing, is that a decision hearing or it's a sort of an investigative hearing?

Paul Eisman

That -- my understanding is that's a decision.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then would you press release the decision, or would we have to wait until the third quarter call?

Paul Eisman

We haven't decided that yet. I mean, we've got to get through the process and then we'll decide how to deal with it.

Operator

Mr. Paul Cheng with Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

For the [indiscernible] do you guys have a [indiscernible] estimate what is your existing total logistic EBITDA? What's the [indiscernible] run rate at this point?

Shai Even

What is -- I'm sorry, Paul. What was the [indiscernible]. For the quarter, we really don't have the number available to us at this point.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Is that a number that, maybe that at some point over the next couple of quarters, you guys will decide to start to share?

Shai Even

I think that the most significant increase in logistics EBITDA will come potentially with the operation of the Bakersfield terminal. And at that time, we'll consider including that to highlight this number. Until then, we'll continue to monitor that.

Paul Eisman

Paul, we said in prior discussions that our goal was to come up with a logistics business that generated between $40 million and $60 million of EBITDA. So I mean, in terms of our goal, that's kind of it. And that obviously includes the Bakersfield terminal. But we've got a lot of work to do between now and sometime to get that done.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And then -- Shai, what is your [indiscernible] cost expectation in the second half?

Shai Even

The [indiscernible] cost expectation for -- we explained in the second half is -- for the whole year for Big Spring is about $8 million and for Krotz Springs is about $23 million.

Paul Y. Cheng - Barclays Capital, Research Division

Big Spring is $8 million, you said ...

Shai Even

Sorry -- Paul, I'm sorry. Big Spring is about $8 million for the whole year. And to date, we have the total cost of about $2 million. And for Krotz Springs, the cost for the whole year is $23 million.

Paul Y. Cheng - Barclays Capital, Research Division

So it's for the full year, it's $22 million for the Krotz Spring and Big Spring is $8 million, that's the current expectation? I'm sorry. I just want to be sure I get that number correct.

Shai Even

Okay. Those are consolidated Alon USA Energy. For 2014, the expectation is a cost of $31 million, in which $81 [ph] will be Big Spring.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And for -- maybe this is for Paul. For Krotz Springs, is there any opportunity to raise the Midland oil run from currently 30, 31 to a much higher number?

Paul Eisman

The Midland-priced barrels we delivered in the refinery -- I'm going to let Alan talk about that.

Alan P. Moret

I mean, through the system that we delivered, not a great possibility to increase that, but we looked at different ways to bring Texas barrels into Krotz Springs.

Paul Eisman

One of the things that's encouraging to us is there's increased logistical interest in finding ways to get West Texas crude into Southern Louisiana. And so obviously, we'll look at all those, and then we'll work through those to see if any of those makes sense.

Paul Y. Cheng - Barclays Capital, Research Division

All right. For Big Spring, do you have a rough estimate, not because you have this major turnaround and you're running at full capacity. What may be your loss possibilities in the quarter?

Paul Eisman

Yes. We've looked at that a little bit, and I'll give you a range. But we think that in terms of throughput and loss throughput, operating profitability, on an EBITDA basis, somewhere between $55 million and $65 million.

Paul Y. Cheng - Barclays Capital, Research Division

$55 million to $65 million. And if you don't have this, should we assume that you probably will be running more like in the 60,000 [ph] to 70,000 barrel per day?

Paul Eisman

I'm sorry, Paul. I didn't understand that question.

Paul Y. Cheng - Barclays Capital, Research Division

No, if we don't have the turnaround, and you're saying that you will expect your loss opportunity is $55 million to $65 million, is that based on the throughput level of 68,000 to 70,000 barrel per day in that situation?

Paul Eisman

Yes, I think it's in that range. 70,000 barrels of crude and maybe a little extra feedstock. So I'd say 70,000 barrels.

Paul Y. Cheng - Barclays Capital, Research Division

Okay, and then a final one. On the Big Spring, I think you talked about the potential project in the naphtha direct branding into the gasoline. If you think that you go ahead with that project, how that is going to impact in terms of your total charge, or this really have no impact and [indiscernible]?

Paul Eisman

It really won't -- yes, Paul, it really won't have an impact on total charge. What it will impact is our ability to maximize -- our ability to put WTI in our refinery. One of the limits we have in the refinery is our ability to reform the naphtha. So we're looking at ways to deal with that. We deal that with today by running a little more sour, a little bit less sweet. But we can de-bottleneck that by blending the naphtha directly into gasoline. We've got plenty of octane to do that. And when we do that, then that allows us to run more TI, if that's the optimal crude to run at the refinery.

Paul Y. Cheng - Barclays Capital, Research Division

Right. So can you tell us then, I mean, how much is the reduction on the WTS run that you will expect on that project? And whether that will have any corresponding impact also in your product yield?

Paul Eisman

I don't have that number today with me in terms of how much TI -- more TI we will run once we complete that project. So I just don't have that. Now, in terms of other product impacts, as we run less sour and more sweet, sour is heavier. So directionally, we'll make less asphalt, more light products, predominantly gasoline. When we look at the shift between sour and sweet, the major shift is between asphalt and gas.

Operator

[Operator Instructions] We'll next go to Roger Read with Wells Fargo.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Just a quick question. Given all the discount at WTI Midland, it's actually cheaper than WTS. What can you do at Big Spring in terms of running more of the sweet versus the sour? Is that an option? Are you already doing it maybe here in the months of July and August? Just sort of curious, market conditions you're able to take advantage of out there?

Paul Eisman

Yes, we -- first of all, our primary optimization point is getting the max amount of crude through the refinery. And so we're making -- I'd give you a range. $20 a barrel on each barrel we get through the refinery and there's maybe a $3 to $5 optimization around sweet to sour. So the primary driver is getting crude through the refinery first. And so we're doing that. And then, secondly, we're trying to maximize in today's market the amount of WTI we're running. And as we discussed just a second ago, one of the limits we have related to that is our ability to process the naphtha and that's the rationale for the naphtha blending project, which will improve that. I think going forward, we'll be looking at other projects to allow us to have more flexibility, run more sweet. I mean, we feel like that most of the increased production we're seeing in the Permian basin is sweet. And you have the pricing between sweet and sour today, you say that sweet crude is really a disadvantaged crude oil. We'd like to be able to take advantage of as much of that as possible, so we've already done work to maximize that. We've run the most sweet we've ever run in recent quarters. But I think that to get to the point where we could run 100% sweet, if the economics drive us that way, we'll have to make some investments in the refinery. I don't think those will be tremendously big investments, but I think we'll have to make some.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And in terms of the logistics of bringing the crudes in there, any real restrictions on whether you're ringing [ph] in light or sweet crude as you make these adjustments and investments in the actual operations?

Paul Eisman

Yes, our delivery systems in the refinery work equally well with the light crudes or with the sour crudes, Roger.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. So no problem getting what you need to get when you want to get it then?

Paul Eisman

That's right.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

Okay. And then back to the asphalt. Got to say, I was -- that was 1 part of the model where we were the most off. And I recognized the issues at Big Spring affecting sort of the production. But surprisingly, the pricing was a little bit weak or at least the sort of recognized pricing all in. Just curious, what else may be going on in the asphalt business. Or is it if you're just not available with volumes, you really couldn't take advantage of any sort of pricing? And then the final part of that question, just did the move in crude at the end of the quarter impact margins there?

Paul Eisman

Yes, so we're lucky today, we have Scott Rowe in here with us who's recently joined us to run our asphalt business. So I'm going to let him answer those questions.

Scott Rowe

The struggle has been Rocky Mountain. Asphalt has been very tight and the price has increased significantly in the second quarter. So we've got our hands full, given the retail price is up, in maintaining the volumes. That's probably the short history of the second quarter.

Roger D. Read - Wells Fargo Securities, LLC, Research Division

And as we think about the third quarter, reversal of those? Or is it going to be a persistent fact of the market?

Scott Rowe

So far, July, August volumes have been better. Prices have been higher. But our dependence on buying Rocky Mountain asphalt is significant, and staying ahead of the increasing wholesale prices have been a real challenge.

Operator

And, Mr. Eisman, there are no further questions at this time. Please continue.

Paul Eisman

Okay. Thanks, everybody, for your time and interest in the company, and we look forward to talking to you when we get our third quarter results. Thank you.

Operator

Ladies and gentlemen, that does conclude the Alon USA Energy Second Quarter Earnings Conference Call. You may now disconnect. Thank you.

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