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Frontier Oil Corporation (FTO)

Q2 2007 Earnings Call

August 8, 2007, 11:00 AM ET

Executives

Doug Aron - VP of Corporate Finance

James R. Gibbs - Chairman, President and CEO

Unidentified Company Representative

Michael C. Jennings - EVP and CFO

Analysts

Jeffrey Dietert - Simmons & Company

Richard Voliva - Deutsche Bank

Daniel Vetter - JP Morgan Chase

Ann Kohler - Caris & Company

Paul Cheng - Lehman Brothers

Daniel Burke - Johnson Rice & Company

Kenneth Pounds - Nutmeg Securities

George Ratliffe

Chris Dodd - Lehman Brothers

Robert Miller - Bolivar Trust

Presentation

Operator

Good day, everyone, and welcome to today's Frontier Oil Corporation's Second Quarter 2007 Earnings Release Call. Please be aware, today's conference is being recorded.

For opening remarks and introductions, I would like to turn the call over to the Vice President of Corporate Finance, Mr. Doug Aron, please go ahead, sir.

Doug Aron - Vice President of Corporate Finance

Thank you. Good morning and thanks to all of you for joining us this morning for our record second quarter results.

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 call may include forward-looking statements concerning the Company. These may include statements of plans and objectives for future operations, statements of future economic performances 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.

It's now my pleasure to turn the call over to our Chairman, President and CEO, Jim Gibbs.

James R. Gibbs - Chairman, President and Chief Executive Officer

Thank you for joining us today. We are actually in Denver, Mike Jennings and I. And we will be here all day. We had some business to attend to. So we decided to just do it out of the Denver office. We have a good group of folks up here, that didn't mind putting up with us for an extra day.

I know you've probably seen or at least heard the results, so I'm not going to belabor them. There are a couple of items I would like to say, though. During the last earnings call, I think you may recall I put you on notice that Frontier had a 30-day plant-wide turnaround at its Cheyenne plant in May, but I also told you I didn't think you would notice it in our results.

I have to admit the results exceeded even my expectations. They were quite good.

And I also want to tell you that 750 of my colleagues work in Cheyenne and El Dorado and Denver and Houston worked awfully hard to produce these results. I'm very proud of these folks and I hope you are too. Just to tell you a little bit more about the quarter. We had a lot of records. I'm not going to go into all of them.

But there's one local record I would like to tell you about and it's related to that turnaround. Even though we had plant-wide turn around in Cheyenne, both of the plants had record second quarter earnings. Both of the plants had record quarterly earnings in the second quarter, even though we had the 30-day turnaround.

And also very interesting, even though it wasn't a record, product sales even exceeded the 2006 product sales on the same basis. So we had a very well-planned turnaround and very well executed as far as the operations were concerned. And we got really fortunate with some incredible crack spread.

But the numbers were quite good. You probably saw net income for the quarter was $244 million and that was $99 million better than 2006 second quarter. And I want to tell you, that was quite a hurdle. $146 million was a big number posted.

That was our all-time record quarter prior to this. And even though I thought we probably achieved a higher net income in the second quarter of this year, I think I was really surprised to see it $99 million over last year. I just tell you one more time, those numbers didn't come easy.

There was a lot of work involved. On a per share basis we had $2.23 and that was $0.94 higher than last year. And there was a FIFO effect of $0.18 and so our best guess of income per share on a LIFO basis would be about $2.05 and that's up $0.97 from last year.

Consensus was $1.64. We beat that by $0.41 and also I want to note that the highest of any of the securities analysts was $1.85, and so we beat that by $0.20 a share. That's all on a LIFO estimated basis.

So good quarter. Good earnings. But I think that cash flow is sort of most interesting thing to note here. We generated an enormous amount of cash in the quarter. It's become a habit. We don't want to break that habit, by the way. We had $269 million in net cash provided by operating activities.

Capital expenditures of $94 million. So our free cash flow was about $175 million. We used that free cash to purchase about $99 million worth of stock, paid dividends of $3 million and we had a tax benefit of $3million came back to us.

So our increase in cash is about $76 million, and our balance at the end of the quarter was $530 million. So I don't think we have any type of liquidity problems facing us in the near future. That was the quarter.

You are probably most interested in what 2006... 2007 third quarter looks like. And from my vantage point, it looks pretty good. I will caution you, don't expect another second quarter. Don't expect to see one of those any time soon. We had a real good July.

I think the rest of the quarter is going to be dependent upon crack spreads and crude differentials. Our gas and diesel crack has come down at both plants, but they are still at the high end of our five-year ranges.

When we calculate the highest and the lowest and figure out where each one of the crack spread falls and typically it's been falling on the high end of the range, well above the five-year average.

So that's encouraging, even though prices... the cracks have come down and cracks coming down is a normal pattern. Every July it's happened to us about every year for the last 10 years, so that's to be expected. It will recover in August and September.

That's the bad news, if it can be considered bad. But great cracks for us. Just not as high as they were in the second quarter. The differentials are expanding. That's the really good news, particularly the light heavy differentials going back to the $25 range and our spot department thinks that might expand even further.

But all in all, we are very optimistic about the quarter and the remainder of the year. We anticipate we are probably going to generate some additional free cash and that's always good, but we have a lot of capital expenditures coming around first quarter of next year, and we are still paying for few cap fees [ph] this year.

We will be very cautious, but we'll see what is going to happen. I know you probably have a lot of questions and we'd be more than happy to entertain them and try to give you a satisfactory answer.

I will ask Matt to see if he can moderate our Q&A session and see what you have on your mind. Thank you.

Question and Answer

Operator

[Operator Instructions]

We will pause for just a moment to assemble the queue. First question comes from Jeff Dietert from Simmons.

Jeffrey Dietert - Simmons & Company

You have a high-class problem generating all of this cash flow.

James R. Gibbs - Chairman, President and Chief Executive Officer

Yes, I don't know what they'll do with all that stuff.

Jeffrey Dietert - Simmons & Company

That's my primary question. With the $200 million that you've discussed already, I think even with conservative assumptions for the back half of the year, there's an incremental $200 million or so of free cash flow that's... after CapEx and dividends and everything else, you've got cash well over your debt levels.

What are the thoughts on an incremental share repurchase program and would you consider rebalancing the balance sheet to take on some incremental debt and buy back even more stock? What are your thoughts on those topics?

James R. Gibbs - Chairman, President and Chief Executive Officer

Well, we thought about all of them, quite frankly. And we still have some room left on our last authorization from our board to buy back some stock. Doug Aron has all the details on that, if you would like to know about it.

But we have had those discussions or similar discussions with our board at every one of the meetings and we've got a board meeting coming up here at the end of the August and we will have discussions with them about that.

I guess they will be interested to know what our forecast looks like, what our capital expenditure schedule looks like, what the spending looks like on all of those capital expenditures that we make commitments to and then pay. And I think we are probably going to be a little interested in what the capital markets have to tell us and what they are doing at the time.

In my view, it's not a real good time to be aggressive. I think the capital markets are giving us an opportunity because we are flushing out a bunch of potential acquisition-minded companies who won't be able to raise any funds now.

So if something comes up that we would be interested in, I think we are in a much better position than a lot of our peers that might be interested or other people that might be interested in buying assets. So I think our appetite has increased there.

We're not ready to go to the trough but I think we would be in a position I think to do something interesting, if a good asset came up. I think a lot of firms would not be able to do that.

I know it's sort of a wide ranging answer to your question, but I think the simple answer is, yes, it's a problem you'd like to deal with. We are trying to deal with it and hopefully we'll come up with a solution that is going to be beneficial to our shareholders.

Doug Aron - Vice President of Corporate Finance

Jeff, let me add to that, that we have spent $150 million since January 1st on share repurchase, plus approximately another $10 million on dividends. We have $50 million remaining on our current authorization, which was up to $200 million.

Our expectation is that we'll continue to work away at that. And we have a board meeting in August. And these are things, obviously, that we talk about with our board and things that we think about and talk about amongst ourselves every day.

So use of cash and return of cash to shareholders is one of the top things on our list. It doesn't mean that we are going to leverage the balance sheet tonight and remake it in a meaningful way.

I think that looking at the capital markets right now, the conclusion is the high yield market is effectively closed. And so we are going to be cautious about adding debt in this environment. But as Jim was saying, these catharses tend to create opportunities for well-positioned companies and we expect to be one of those.

Jeffrey Dietert - Simmons & Company

Secondarily on Cheyenne, just having run the plant with the expansions in place, are you seeing the feed stock improvements that you expected there?

James R. Gibbs - Chairman, President and Chief Executive Officer

We are getting improvements, yes. We haven't finished all the expansions and the revamps. We still have three in the process. We did do a... what do you call it... I can't talk. A crude yield program. That's been... that exceeded our expectations, actually.

Coker is running at about 10,500 barrels per day. When we get through with it, and that won't be until the fall, it will be running at 13,500, to 14,500. At that point in time, we can probably use a little bit more heavy crude and get some improvements out of processing that stuff as well.

Then we have one another one that's really not a yield prospect or project, it's something that allows us to shut down one aiming plant, have another aiming plant so we can continue running the plant when we have an aiming turnaround. It's just a backup that's required statutorily.

Jeffrey Dietert - Simmons & Company

Thanks for your comments.

James R. Gibbs - Chairman, President and Chief Executive Officer

You're welcome, Jeff.

Operator

Moving on, we'll hear from Richard Voliva with Deutsche Bank.

Richard Voliva - Deutsche Bank

Thanks. Hi. How are you doing, guys. I just wanted to follow up a little bit on the cash issue. So now you are more interested in acquisitions than you were before? Is there anything you're seeing out there? Prices still seem pretty high on assets.

James R. Gibbs - Chairman, President and Chief Executive Officer

I wouldn't say we are in heat yet but we are awfully interested in taking an opportunistic view towards looking at some of the properties that may come out. I will tell you I think there is more interest now than there was eight or ten weeks ago in possibly taking assets to the market and readjusting portfolios by a lot of the companies.

So if that's the case... I'm told that is the case, and we'll see what the evidence that that is the case. Yes, we are more interested. I think valuations are coming down. The number of potential buyers are coming down.

So I think for the patient company that's pretty well positioned, you might have an opportunity to make an acquisition to give you a stepwise increase in your earnings profile. We do not have anything that we are currently working on.

But just expectations and anticipation that we may have an opportunity here and if that is the case, yes, we're interested. We just have been out of the market because we did not like the valuations.

Richard Voliva - Deutsche Bank

Fair enough. Any kind of criteria you would use, whether it's geography, or size or --

James R. Gibbs - Chairman, President and Chief Executive Officer

Geography, configuration, size and return on investment.

Richard Voliva - Deutsche Bank

Okay.

James R. Gibbs - Chairman, President and Chief Executive Officer

Yes. Those are our criteria.

Richard Voliva - Deutsche Bank

Great. Thanks.

James R. Gibbs - Chairman, President and Chief Executive Officer

Oh, you're welcome.

Operator

Moving on, we will hear from Daniel Vetter with JP Morgan.

Daniel Vetter - JP Morgan Chase

Good morning, guys.

James R. Gibbs - Chairman, President and Chief Executive Officer

Hi, Daniel.

Daniel Vetter - JP Morgan Chase

I was hoping you would quantify the opportunity cost from the turnaround.

James R. Gibbs - Chairman, President and Chief Executive Officer

I have not. It's probably enormous. I don't know. It's just one of the things you have to do. You had to take the plants down. We had no option. Do you have any idea?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

I mean, Dan, frankly what we worked to do is we worked to mitigate the opportunity more so than to just recognize. Plant maintenance is a part of running a plant. And these refineries just simply have to be maintained.

This is part of safe and responsible operation. And frankly, we took the opposite approach and that is, and you see it in our earnings. We were to do the opposite and that is to mitigate the fact that these are... that this refinery was going to be down and that it was going to be an economic hit. I think, again, you see it in our earnings.

We worked with marketing, we worked with supply. And I think we did a pretty good job of making the best out of this situation and that is the fact that this maintenance was required.

Daniel Vetter - JP Morgan Chase

Okay. And secondly, can you give us some throughput guidance like you normally do? And see what your... tell us what the margins look like now at each of your refineries?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Yes, we... for the third quarter, we don't have any turnarounds or anything scheduled, so we expect to run 160,000 total crude oil in both refineries and when you add other feed stocks, the total charge of refineries will be somewhat in excess of $175,000 gross per day.

So it's a... the third quarter's one where we expect to run hard during the quarter, because everything is running during the entire period. In terms of margins, I think Jim made some earlier comments that we are at the top end of the five-year average in terms of the crack spreads.

They have obviously come down in the second quarter, but obviously, the other issue is from a geographic standpoint, the mid-continent and the Rocky Mountains are two of the most advantaged markets, and so our margins have maintained higher than a lot of these other markets.

So we are at the five-year high of margins on a historic basis.

Doug Aron - Vice President of Corporate Finance

Let me add a little color there as well, Dan. I think that as Paul alluded to what we saw in July, particularly in El Dorado was significantly better than what was seen on the Gulf Coast in the NYMEX, partly because of the flooding at the Coffeyville refinery in Kansas.

So our margins, and just going kind of across the board here. Gasoline starting in Cheyenne for the month averaged $26.05. That was compared to a Gulf Coast average of about $19.00. Gasoline in El Dorado actually averaged $27.00 for the month of July.

Moving on to diesel, we saw an average in Cheyenne for the month of July of about $26.00, and diesel in El Dorado was about $23.50. Again, those were $7.00 or $8.00 higher than Gulf Coast crack spreads. We are seeing the same phenomenon into August.

Our average through the first seven days, gasoline in Cheyenne was about $18.00, $15.00 on gasoline in El Dorado. Diesel in Cheyenne about $24.00 month-to-date and diesel in El Dorado about $20.00 month-to-date.

And that compares to a NYMEX crack spread today of about $9.00 in both gasoline and diesel. So you can see our margins, as we noted in our press release, remain very much amongst the best in the country.

Daniel Vetter - JP Morgan Chase

All right. Thank you.

James R. Gibbs - Chairman, President and Chief Executive Officer

I went back and checked the actual refinery margins, their profit, their P&L statement, and Cheyenne made $105 million in the first quarter. So, yes, we probably gave up some, but the staff there did a remarkable job to get us in a position to make what they could and they made an all-time record for the plant margins.

So they really did a good job. And folks in El Dorado did a great job. Ran their plant very, very well and providing a lot of product. So I have no complaints. I think the... I think they have done quite well.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

When you page through the 10-Q, you also see that Cheyenne's product sales for the quarter exceeded the crude charges by 11,000 barrels a day. That's compared to by 7,500 barrels a day in the third... in the second quarter of 2006.

So 3,500 barrels per day extra product sales really attributable to the people at the refinery and in the marketing organization, getting products stored, getting intermediate processed and out the door, converted to revenue in a very high margin environment. So we are very appreciative. We think they did a hell of a job.

Daniel Vetter - JP Morgan Chase

All right. Thank you.

Operator

Next up from Caris & Company we have Ann Kohler.

Ann Kohler - Caris & Company

Great. Good morning gentlemen. Could you just, in regards to the capital projects that you have at the refineries, are those at this point also... they certainly sound like they're on schedule, but are they also on budget?

James R. Gibbs - Chairman, President and Chief Executive Officer

In aggregate, yes. They are not... they are pretty well online but we have some exceptions within the aggregation. But as far as schedule, yes, they're pretty well on schedule. Matter of fact, they are right on schedule. As far as costs, all of them and all the... all the programs in El Dorado are on schedule and on cost. The ones in Cheyenne, I think we have had a couple of cost overruns.

Ann Kohler - Caris & Company

Are those significant or --

James R. Gibbs - Chairman, President and Chief Executive Officer

One of them is pretty large. I think we'll report today when we file our 10-K that our corporate project is... non-anticipated costs was about $99 million. That's up from $91 million that we had in the Q last time, but we are not... I'm not so sure all of those numbers are accurate, just between you and me.

Ann Kohler - Caris & Company

Great. Thank you.

James R. Gibbs - Chairman, President and Chief Executive Officer

You're welcome. I'm talking about the Coker numbers.

Operator

And from Lehman Brothers we will hear from Paul Cheng.

Paul Cheng - Lehman Brothers

Hey, good morning, gentlemen.

James R. Gibbs - Chairman, President and Chief Executive Officer

Good morning, Paul.

Paul Cheng - Lehman Brothers

Jim, you mentioned about the sales and inventory from Cheyenne, can you quantify that, what is the benefit from the quarter from that, from a P&L standpoint?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Well, Paul, it's going to be effectively the average crack spread for the quarter less... less about $5.00 of operating cost. So I guess if you take that --

Paul Cheng - Lehman Brothers

And mine is $300,000, the inventory sales?

James R. Gibbs - Chairman, President and Chief Executive Officer

Total inventory sales?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

That's approximately light product that we stored. It's accurate in terms of how much light product we were able to store in anticipation... gasoline and diesel prior to the turnaround. That's correct.

Paul Cheng - Lehman Brothers

So we should take about, say, 300 so... okay. We can compute that.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Average gasoline crack spread in Cheyenne for the quarter was $37.75. OpEx is around $5.00.

Paul Cheng - Lehman Brothers

So... so we get roughly about $10 million in profit from that?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

There you go.

Paul Cheng - Lehman Brothers

Perfect. And Mike, you mentioned that third quarter you have no turnaround. And how about the fourth quarter and the first half of next year.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

In the fourth quarter of this year, the only thing we have going that's significant is an Appalachia unit turnaround at El Dorado. Next year, we will have a significant around year in El Dorado, starting about March, and we will turn around several of the units. And then... and I think that's about it. Cheyenne won't have anything.

Paul Cheng - Lehman Brothers

Right. And how is that impact on your throughput on your production going into [inaudible] because of those turnaround?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

In the third... in the fourth quarter?

Paul Cheng - Lehman Brothers

In the fourth quarter and first half of next year.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

In the fourth quarter, I mean, we are projecting charge rates of about 155,000 barrels per day crude, 172,000 of total feed to the plant. We are working our budgets for next year. You know, obviously, there's significant turnarounds. We don't have the numbers quantified at this point, but there are significant turnarounds.

Yes, part of this, as Billy is alluding to. One of the things we will be doing next year... they'll be on line... is a significant vacuum unit, crude unit expansion and revamp at El Dorado, and upon completion of that, we will be able to run more crude at El Dorado. So if you look at an annualized basis, I'm not sure that you will see much impact.

Paul Cheng - Lehman Brothers

But the first half, all of that will be in the first half, right?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Yes, that's right.

Paul Cheng - Lehman Brothers

And Jim, I note that... don't know whether this is still too early. Can you give us an update for the 2007 capital program and 2008... 2007 has not changed all the major capital program on an aggregate sum is on budget. How about in 2008?

James R. Gibbs - Chairman, President and Chief Executive Officer

For 2008 we are all on budget. As a matter of fact, some of them are under budget. But we are pretty much on budget and they are on schedule, as far as I know today. That might change next week. I think we have capital meetings at each one of the plants next week, so that may change.

But as of today, the El Dorado projects, which is essentially all the 2008 capital program, are on schedule and on budget or under.

Paul Cheng - Lehman Brothers

Yes. And along that line, Jim, how about in terms of the industry-wide cost pressure. Have you guys seen some moderation on debt over there is patrolling [ph] in terms of the cost pressure or is it still rising?

James R. Gibbs - Chairman, President and Chief Executive Officer

Again, I think I said last time that the... that the first derivative is positive and the second derivative is negative. It's still there. It's still going up but not at the same rate. It's just going up very steadily. And that's probably going to be the state of affairs for a couple of years. But it... it's a fight to keep these projects on schedule and on budget.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

We've had... just to make a point on schedule, we have seen delivery times really stretch out for equipment now. So planning for these capital projects become more important.

We try to plan these turnarounds to minimize down time but the amount of advanced planning you have to do given these lead times for delivery of equipment is just... it's changed. And it's made it more difficult.

Paul Cheng - Lehman Brothers

I see. Well, congratulations on a job well done.

James R. Gibbs - Chairman, President and Chief Executive Officer

Oh, thank you, Paul.

Operator

Next question comes from Daniel Burke of Johnson Rice.

Daniel Burke - Johnson Rice & Company

Good morning, guys.

James R. Gibbs - Chairman, President and Chief Executive Officer

Good morning, Daniel.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Good morning, Daniel.

Daniel Burke - Johnson Rice & Company

Real nice performance at Cheyenne. A couple of questions there. Away from the inventory barrel effect, the purchase product sales at Cheyenne, did you generate better than historical margins on some of those resale barrels?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Well, our marketing department does really good job of buying barrels and reselling them. We have several things that helped us there. And we may have some numbers. So we have -- we did some reblending in north Denver that helps us. And... I don't have a number specifically, but our marketing guys do a really good job on their purchasing and reselling barrels.

You know... planning for these turnarounds, accumulating these barrels took a number of months, if you look at the crack spread and the prices in that period, we were accumulating this product in a rising market.

So we obviously benefited from that. I don't think we averaged all that out to determine what the economic impact was to Cheyenne during the period, but we obviously gained during the quarter from buying in a rising market.

Daniel Burke - Johnson Rice & Company

And just to stay with Cheyenne for one more, the operating cost experience there also seemed pretty good. Maybe more an observation than a question, but as low as we have seen going back to I think 2005. Anything particular going on in the numbers there. Is the operating cost experience in Q2, is that sustainable through the second half of year?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

I do have to fess up on one thing. Second quarter 2006, if you recall, we commented last year, did include a one-time accrual for a... a $5 million accrual for the cleanup of a wastewater problem that we had. So I will say that. That was a $5 million.

But our second quarter expenses in 2007 on an absolute basis, it's difficult to comment on a per barrel basis because our barrels were down a little bit in the second quarter, but on an absolute basis, our expenses were down $6 million.

So we did achieve, in addition to the $5 million, a $1 million improvement in expenses. So we are working very hard on our costs at both refineries, Cheyenne specifically. So we certainly are targeting on a sales basis to get our costs down to around a $5.00 basis.

And our guys at both refineries are very focused on that. Costs were up at El Dorado a bit, but we certainly have explainers for that. We have a tax issue going on with the county over there in El Dorado and an environmental cost, but we are working those issues very hard as well.

Daniel Burke - Johnson Rice & Company

Okay.

Doug Aron - Vice President of Corporate Finance

Dan, let me give you some numbers on the purchase product profitability. It's really sort of a small refinery unto itself. And it does very well, particularly in the second quarter.

Second quarter, 12,000 barrels of purchased product a day on average, $9.65 margin on average. First quarter, 7,000 barrels a day, $2.94. So putting some numbers to what Billy was talking about, the marketing and the refining guys get together to do very nicely on that activity.

Daniel Burke - Johnson Rice & Company

That's really useful. And then if I could ask one on El Dorado's crude supply. With the shift in TI towards back production [ph], are you all shifting more towards heavy crudes coming down spearhead currently.

James R. Gibbs - Chairman, President and Chief Executive Officer

Yes, we are running heavier with crudes.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

What we are seeing is you have the dislocation in the WTI, WTS market that made that basically the lowest cost crude in the world and that has to some degree corrected itself and so what we are seeing is the other crude is becoming more competitive as a result.

Even Gulf Coast crudes are becoming more competitive to WTI, WTS, but certainly what we are seeing is differentials for the heavy crudes are widening out at this point and our view of the market is we expect that to continue into the winter.

So as a result, we would expect that we will run more heavy crude at El Dorado in the next few months.

Daniel Burke - Johnson Rice & Company

And one last quick one. Do you all sell any sulfur credits in the second quarter?

James R. Gibbs - Chairman, President and Chief Executive Officer

Yes, we did.

Daniel Burke - Johnson Rice & Company

What was the impact there?

Unidentified Company Representative

We recognized $4.8 million in other revenues related to sulfur credit sales.

Daniel Burke - Johnson Rice & Company

Okay. Thanks.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

35,000 credits. We have a little more than that left. You will see that in footnote 8 in the Q.

Daniel Burke - Johnson Rice & Company

Great. I appreciate all the color. Thank you.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

You're welcome.

James R. Gibbs - Chairman, President and Chief Executive Officer

Do we have any more questions?

Operator

We have three questions in the queue. We will go to Kenneth Pounds with Nutmeg Securities.

Kenneth Pounds - Nutmeg Securities

Hi gentlemen. Excellent quarter. The cost control is just amazing. You guys deserve all the credit in the world for. Some of the other --

James R. Gibbs - Chairman, President and Chief Executive Officer

There's a lot of pain and suffering in that, I tell you. It does not come easy.

Kenneth Pounds - Nutmeg Securities

Right. Some of the other calls from the refinery companies this quarter talked about trying to get Canadian crude down to the gulf. Everyone is upgrading to try to get Canadian crude.

Everyone wants it. Is there a potential for... for more competition to get that or do you believe that production from up there will keep pace with everyone? And you did just mention differentials widening out, which sort of led to my question.

James R. Gibbs - Chairman, President and Chief Executive Officer

I think over time, the Canadian crude's going to get to the Gulf. They want it to go there and they will find some way to do it. But it's not in... big volumes not in the foreseeable future. We have some new Cokers coming up... in the Rocky area, I think we have two... two 20,000 barrels a day Cokers. So that will be some competition for us.

Directly and relatively immediately, it should be fourth quarter I think for both of those, maybe first quarter next year. But as far as Canadian crude going down to the Gulf, it will happen. It will take sometime but they have a lot of crude coming on.

So I think in my planning horizon, we are going to see pretty large differentials during the entire period of time. $25, $35, like we have seen in the last two years from time to time. Probably that's going to moderate that spike. But I still think we are looking at $10 to $20 for that crude for a long time.

Kenneth Pounds - Nutmeg Securities

All right. Okay. I was interested to hear your... the talk about acquisitions and maybe to reiterate, your basic feeling is there's basically less buyers now because of changes in the capital markets and then maybe more opportunities for you?

James R. Gibbs - Chairman, President and Chief Executive Officer

Absolutely, that's a good summary. Fewer buyers and I think we will see some plants possibly on the market, as people begin to reconcile and rationalize their portfolio of assets.

Kenneth Pounds - Nutmeg Securities

Great, well, excellent job. Maybe we will see some more realistic estimates from you guys... or from other people going forward about you guys.

James R. Gibbs - Chairman, President and Chief Executive Officer

We gave our best shot at it. We're just not very good forecasters.

Kenneth Pounds - Nutmeg Securities

You guys are good forecasters. Thank you.

James R. Gibbs - Chairman, President and Chief Executive Officer

You're welcome.

Operator

Moving on, we will hear from George Ratliffe, private investor.

George Ratliffe

Yes. In the last two conference calls you mentioned a tightness in the supply of outside engineering. Has that gotten better.

James R. Gibbs - Chairman, President and Chief Executive Officer

Absolutely not.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

It's not any better.

James R. Gibbs - Chairman, President and Chief Executive Officer

We are just getting the garbage out of these companies. Everybody else is too. I can't tell you how much additional expense they have caused us needlessly, just because of their work. No, it's not any better.

George Ratliffe

Okay. Thanks.

James R. Gibbs - Chairman, President and Chief Executive Officer

You're welcome, George.

Operator

[Operator Instructions]

Moving on, we will hear from Chris Dodd [ph] with Lehman Brothers.

Chris Dodd - Lehman Brothers

I know you discussed that you are looking at a range of opportunities for this cash. Included within that range, are you looking at possibly calling the bonds at any point or are you looking at acquisitions, is that pretty remote at this point?

James R. Gibbs - Chairman, President and Chief Executive Officer

Probably remote, but, I have to admit that we have started looking at in the last couple of weeks because bond prices have gotten very interesting. I'm sort of interested in it for my personal account, as a matter of fact.

They are selling at fairly steep discounts, sort of gotten our attention, although that's something that we haven't really discussed directly with our board of directors.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Chris, those Bones trade at 95 or so and the call is at 103 so that doesn't feel like a very good deal to us, though the bonds in terms of an open market purchase yielding almost 8% feel like a real good deal.

The high yield markets in a real state of flux and that's part of the comment around acquisition competitors. The likelihood of a financial sponsor being able to raise high yield capital to buy a refinery right now appears remote.

But these bonds, their primary limitation really is some covenants on restricted payments to shareholders and as long as they've got a 6 5/8 coupon, we probably like that debt. If it matures in 2011.

Chris Dodd - Lehman Brothers

Okay. Do you know what the RP capacity is right now? Do you have that number?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Yes. It's just in excess of $300 million.

Chris Dodd - Lehman Brothers

Okay. Thank you.

James R. Gibbs - Chairman, President and Chief Executive Officer

You're welcome.

Operator

We have one more question in the queue at this time. [Operator Instructions]

We will now hear from Robert Miller [ph] with Bolivar Trust.

Robert Miller - Bolivar Trust

Good report guys. We watched the stock go up and down. We were buyers earlier in the week when it was, like, too good a deal. Two questions for you. What percentage of your runs of your crude supplies come from Canada? Want to answer that and then I will get to the next one?

James R. Gibbs - Chairman, President and Chief Executive Officer

Let me answer. Before you get to that, I would like to make a comment on a good deal. One of our directors reminded me the other day that our shares are now selling for 15 times quarterly earnings. Most oil service companies sell in excess of that on yearly earnings. I think we have a much better business plan than most of those guys. So pretty good deal.

Robert Miller - Bolivar Trust

You always have to smile when the investment firms downgrade after you have been going down for 20%.

James R. Gibbs - Chairman, President and Chief Executive Officer

I don't know. Don't understand it sometimes. Okay. The question is, what percent of our crude is now sourced out of Canada?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

It's definitely... it's different at our two refineries from... at Cheyenne certainly do run a heavier slate. We can run from 50 to 70% heavy Canadian on a regular basis. And we do so. El Dorado down... coming down spearhead line, when Canadian heavy gets very attractive, we get up to 30% Canadian heavy.

Robert Miller - Bolivar Trust

Is Suncore one of your suppliers?

James R. Gibbs - Chairman, President and Chief Executive Officer

I don't think so.

Robert Miller - Bolivar Trust

And the next question, if I and my 5,000 cousins wanted to buy gasoline in your marketing area to help you out, what stations would we go to?

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Well, gasoline is... Well, gasoline is a fungible product. We ship mostly into the fungible pipelines. I don't know where to direct you to tell you that you are getting gasoline molecules out of our Frontier refineries. It would be difficult for me to answer that question.

James R. Gibbs - Chairman, President and Chief Executive Officer

On any given day, any of our customers can buy from a number of locations. It's a very competitive market.\

Michael C. Jennings - Executive Vice President and Chief Financial Officer

Absolutely.

James R. Gibbs - Chairman, President and Chief Executive Officer

But we are able to able to obviously move our products into these markets. And so they are out there. I just can't tell you exactly where.

Robert Miller - Bolivar Trust

You don't have any regular marketing arrangements with a branded merchandiser.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

We have a lot of marketing arrangements with a lot of different companies but they are not always exclusive. Again, we have to be competitive in markets. And our customers always have the right to go to other suppliers if we're not competitive.

Robert Miller - Bolivar Trust

Okay. Is there any talk on your end of the industry about possible large production increases in the central Nevada in oil?

James R. Gibbs - Chairman, President and Chief Executive Officer

Oh, oil.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

You know, I've not really heard of anything. The Nevada market is not a big market for us in terms of supply. We tend to focus on the Rocky Mountains and east of that, and into Canada. There's just not much Nevada crude really gets into our market. It really tends to focus on the Salt Lake City refineries.

Robert Miller - Bolivar Trust

There's a lot of drilling going on up in the mountains in Nevada on the eastern anticline. So... but no scuttlebutt on your end?

James R. Gibbs - Chairman, President and Chief Executive Officer

We were approached by some folks over there. Paul is right. The crude does tend to wind up in the Salt Lake City market.

Robert Miller - Bolivar Trust

Is that Foreland refinery still available up in Nevada.

Michael C. Jennings - Executive Vice President and Chief Financial Officer

I'm not familiar with it.

James R. Gibbs - Chairman, President and Chief Executive Officer

I'm not either.

Robert Miller - Bolivar Trust

That's the smallest one in the states. Okay. Thank you very much.

James R. Gibbs - Chairman, President and Chief Executive Officer

Thank you, Rob.

Operator

And at this time, we have no further questions.

James R. Gibbs - Chairman, President and Chief Executive Officer

Well, good. I hope we answered everybody's questions and thanks for participating. We hope to see you about the same time, same station in 90 days.

Operator

And once again, this does conclude today's call. Thank you for joining us, and have a great day.

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Source: Frontier Oil Q2 2007 Earnings Call Transcript
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