Western Refining, Inc. (NYSE:WNR)
Bank of America Merrill Lynch Refining Conference Call
March 6, 2012 11:20 am ET
Jeff Stevens - President & CEO
And just to keep on the time, so it gives us great pleasure to welcome Western Refining. Jeff Stevens is their CEO. Please join me in welcoming Jeff to the podium. Thank you.
I appreciate everybody's coming out this morning. I'm Jeff Stevens, I am the CEO of Western Refining and I will just go ahead and just get started. This is just an overview of the assets that we currently own, we have two refineries, we have one in El Paso Texas, it’s approximately a 130,000 barrel a day refinery, runs primarily WTI and WTS.
We have refinery up the Four Corners in the Gallup, it’s approximately 23,000 barrels a day and along with that in this geographical area, we have wholesale assets and retail assets that support the movement of product out of our two refineries and we also have some logistic assets throughout this region that also support our product terminals, asphalt terminals and crude gathering systems and pipelines.
When you look at Western, we kind of get grouped in as a Midcontinent refiner because of the types of crudes that we run are similar. What distinguishes Western from a Midcontinent refinery is really where we market our products. We have two distinct markets, we obviously market products in El Paso, Albuquerque and Northern Mexico and those markets historically are priced more like a Gulf Coast pricing, but we also supply a significant amount of gas and diesel into the Tucson and Phoenix markets.
And particularly Phoenix which is unique spec, the specification it is more like the California gasoline prices, more on am LA spot type basis. So yes we are a refinery that has access to Permian Basin crude oil, but the way to think about it, it is 30 to 40% of our product is sold more on an LA spot basis and then that the balance is sold on Gulf Coast 3-to-1 basis.
Basically we have seen a shift over the last four or five years in the refining, refiners that fit close to their crude sources and have markets similar to what I was talking about with the Phoenix specifications. What we have seen is a shift in profitability from complexity size, a simple refiner who is in the right market that has the right crude oil access have been the last year and a half more profitable than refineries that have historically waterborne type crudes and higher complexities.
Obviously 2011 was a special year for refiners that had access to WTI and WTS crude. We saw historic margin realization, Western was no different. We had our call last week and we announced that $900 million plus of adjusted EBITDA which is obviously a record for us. When you look at 2011, we set out to do several things, but these are kind of some highlights. We had the fortunate ability because of Brent TI widened out as far as it did.
We had the ability to basically sell forward some of our product. We put on crack spread hedges for 2012, a little over 30% of our production, 16% for 2013 and 2014. This is something, I have been in this business for 25 years. We have never had this opportunity to sell forward product at the levels that we did and I think we were very opportunistic to take advantage of that. We also added some retail sites and (inaudible) sites to enhance our wholesale and retail business and we did these through low capital. These were basically lease arrangements and these really just support our two refineries and give us ratable homes for our refined product.
In December we announced that we sold the Yorktown facility along with a underutilized crude line to Plains All American and those proceeds helped us with our ultimate goal of getting our debt paid down and getting us where we needed to be from a balance sheet standpoint.
We also were opportunistic and redid our revolver, we increased the size for a $1 billion. Obviously we don't know where crude oil prices are coming, but we want to make sure that we have the right facility that allows us to operate the way we need to operate to maximize our profits.
We also reduced our interest rate, we extended the maturity and we also most importantly were able to modify our covenants that just give us significant more flexibility in running our business. We also in the year reduced some high debt that we had, some floating rates, approximately about $275 million in debt reduction. And obviously that helps us from an interest expense standpoint.
Like I said before, these are the crack spread hedges that we’ve got on. These are at a higher level than we have ever seen before and what this really does is if that Brent-TI or margins compress, this gives us some cushion on product that we've sold forward that just ensures the certain amount of profitability for us for the next couple of years. Just like I said when you look at this sheet and you look at the way margins go up and down, this gives us some stability in our profitability for the next couple of years.
I got to mention our wholesale business is unique to Western versus some of our competitors. It allows us to move about 60,000 barrels a day to about half of El Paso’s capacity is moved directly by our wholesale business. These are customers that are what we call end users and so we go directly to the mines in Arizona. We sell the farmer, we sell different other wholesale companies that allow us a certain amount of security and knowing we have a home for our barrels and ratable listing.
Our retail operation as I said we added over 50 stores this last year, all of those stores are primarily based in Southern Arizona in EL Paso, which means like I said before it’s a place everyday for our product to go. In fact our retail takes about 60% to 70% of our gasoline that we produce at Gallup, it goes directly to our retail. So we know everyday we've got that product sold and a home for it.
Like I mentioned before we sold the Yorktown asset, it was a refinery we idled back in 2009 and it just made more sense for it to turn into a products terminal. We've continued to keep our wholesale business there and continue to operate that today but it made sense from a balance sheet standpoint first to go ahead and move this asset out.
When you look at the capital structure it’s really an amazing story year-over-year. We don’t have it here but if I would have been presenting this last year, our total debt on a pro-forma basis EBITDA was a little over three times. So when you look at a one-time improvement, it’s a substantial improvement from what we saw and it’s really given the company flexibility to look at some capital project that I probably wouldn’t been able to look at. It gives the flexibility to do some things internally as far as paying down debt and we also instituted a dividend in the first quarter of this year.
We do have some capital projects this year, mainly around crude oil gathering taking advantage of what we are seeing in Permian basin as far as things out there. We will have the pretty much completed by the end of this year and what it consist of is, there are crude around our existing pipelines that we utilize to get crude in. This crude really brings two different things to El Paso, one is the higher quality crude that we are currently running to date. So it helps us with our yield, on our finished work and also because of the logistics and location of this crude we will be able to buy this at a discount for what we are paying for crude today. We believe this will add about 40,000 barrels of new crude over the next years to El Paso and we are just really excited about the opportunity.
This to me is just kind of the first wall hanging fruit in our area. We just got a lot of activity going on this Permian basin and it just makes sense for us to work with the crude oil producers and bring the crude into El Paso versus trying to get it in pipeline that are already full and get it up to cushion. So we are excited. This is kind of the first stage in this development but I think you will hear us talking over the next year or two years of other projects that we have significant returns to the Western.
Well also this year during the turnaround we are expanding Gallup. We are putting in some capital to go from basically a 10% increase in its capacity. We are also spending some money there will help in its reliability and its overall yield and Gallup’s been an excellent refinery for us from a profitability standpoint, but it is just going to continue to get stronger.
We announced also the that we are looking at an El Paso expansion with all of the activity in the Permian base and it makes sense for us to look at the ability to run more crude. This would be project that probably would happen during some turnarounds in 2013 and 2014. We believe that the return on this type of project would be very attractive return. we obviously have some hurdles, we will have to get some permit to do this and that probably will be the more challenging thing versus designing and doing the work and I think getting the permit is going to be one of our bigger challenges.
That’s really it as far as you know an update on where we been. We were very pleased with what we have been to accomplish in 2011 and we are excited about 2012. We put forth our plans to continue to improve our balance sheet, add some of these capital things and as we see market opportunities I think you will see us continue to be flexible and move around these opportunity and be very opportunistic…..
Jeff, thank you very much indeed. Again, folks if you have any questions please make yourself known and you will have a rolling microphone, if anyone would like to take advantage of it.
Jeff if I could kick-off, it’s truly more of a philosophical question on hedging and the history of balance sheet as you laid out. At the beginning of last year, although well in hedging thinking they were I guess being smart in the market and there was distillate of course, TI brand and so you have been a little more aggressive I guess this year and looking on hedges, how comfortable are you that you’re basically taking away the option and the stock to take advantage of future spend should TI went in this remaining outlay?
Well, in our case we took an approach where our hedges are a little different. There simply what we've done is we've locked in Gulf Coast crack-spread, so we have a counterparty that has sold it, or we sold them that crack spread, its tied to the TI and it’s tied to the Gulf Coast pricing and then we have customers on our end that we sell every month on a Gulf Coast basis.
So when you look at the basis risk of the hedges not performing, there is little to no risk of the not performing. I think that when you look at it and you look at the company and the strategy that we took with it, we kind of said, look we are going to do about 30% so we are going to still leave a sizeable amount of production out there that will be exposed to the marketplace.
But at the same time, when you look at the margins that we locked in at and you look at a historical base, the five year average prior to this on GAAP $7 or $8 and you lock in $14 to $15 just so it was $14 the highest that it’s ever been was $20 some odd for a year and we locked in $27 to $28. It just made sense for us to take advantage of that, because our ability to run TI or our access to TI and make sure that we preserve some of that margin.
And so that’s probably why we were more aggressive than the rest and we just wanted to make sure that if the TI brand spread came in and margins collapse with that, that we didn’t say, we didn’t take some opportunity to make sure we have those sales.
My second question really relates to, you are fairly uniquely positioned in terms of Mexico. There is a reasonable amount of statement right now; so whether the demand is really part of the books over the rest or it is someway a historical figure; what have seen in terms of export trends and what are you expectations for the full?
Well, you are right. I mean, we sit right on the border and how the pipeline that we have refinery that can serve not only we’re at, but there is another pipeline that goes all the way down to Chihuahua, Mexico. And what we have seen over the last two to three, four years is just continued growth from the Mexican demand and it’s really not, I don’t think it’s a story of they are using more fuel. I think that they are producing less fuel is what we’re seeing. And everything from our conversations with them, nothing is going to change that in the near-term; if anything, I think their appetite for more finished product is going to continue to grow, at least we are seeing that in our region.
Is that a pricing advantage or disadvantage in the Mexican market that was close about (inaudible) is that price maintenance or is that really consistent with the year?
Well, as far as our margins are concerned, we treated it just like any other customer. I mean as far as looking at highest value that we can get for our product, Mexico still does set fixed pricing for their consumers. So when we see the US go up like it has over the last 30-60 days, their price will stay the same. So it even puts more pressure on their demand, because you will see US people going up and certainly not the Mexico and coming back across the border.
Again, if there is any questions from the floor please make yourself on the line, but I really just have one final one, Jeff I don’t know if I can (inaudible), but in the context of the value, I think your logistics option, is there anything you can care to share with us in terms of where you are and ultimately what will be the (inaudible)?
Well, obviously, we get the question a lot to talk about you know, what are you thinking as far as your logistics asset because obviously, as a refiner, we don’t get the right valuation, the right multiple on that. And obviously, the sale of Yorktown change the size of our logistic asset, but we continue to look at them. We have some very good assets, like I mentioned, we have crude pipelines, we have crude gathering, crude tanks, product tanks, asphalt, lubricants, so we use that all meet what an MLP would be looking for in logistic assets.
So we continue to look at our options and, if we get the right offer for the right assets, that’s not something we will have to look out as the management team, but at this point, I think we’re just very pleased where we’ve gotten to be on the balance sheet and very fortunate that we don’t have to be in a hurry to do anything at this point.
Timeline for decision?
I think it will be something that we’ll evaluate over the next 12 to 24 months.
If there are no questions from the floor, Jeff, thank you very much indeed.
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