Western Refining, Inc. (NYSE:WNR)
Barclays Capital 2012 High Yield Bond and Syndicated Loan Conference
March 12, 2012 2:30 PM EST
Mark Smith – President, Refining & Marketing
Matt Yoder – Senior Vice President of Retail Operations and Administration
Mark Smith – President, Refining & Marketing
Okay. I’m Mark Smith. I am the President of Refining and Marketing for Western Refining. With me today is Matt Yoder. Matt is our Senior VP of Retail and Administration, Western. And I’d like to thank you for your interest in Western Refining.
I want to talk about our Assets first in El Paso. We have a refinery, 120,000 barrels a day capacity. It runs a crude play of about 80% WTI crude, 20% West Texas out. We enjoy the inland pricing of WTI crude and up again in North West of Mexico, the Gallup refinery, we run 23,000 barrels a day. That refinery four corners sweet crude which is again WTI based. We have a complimentary set of logistics assets, including crude pipeline, our terminal – asphalt terminal. We have a retail business with 210 towers in the South West and a wholesale division that operates in both the South West and in the East Coast. About 70,000 barrels a day of products is sold in the South West. About half of our product production goes to our wholesale division. And then about 30,000 barrels a day get marketed in the East coast and that is kind of the customer base that we service when we had a refinery on the East coast, the Yorktown facility.
On the next slide is a map showing kind of the Permian and its location relative to our El Paso refinery. There’s an awful lot of drilling activity that is going on in the Permian basin and a lot of it is right on the main line that feeds our El Paso plant. So we see some good advantage there in terms of the quality of crude that are being produced and also logistics advantage in those crude. So we like in particular the Bone Springs and Avalon crudes that are being produced in that region. We see a good yield quality in our refinery. So we see significant economics in bringing those crudes to our refinery.
Next slide please. El Paso is a hub of a number of pipelines eating the South West and in particular from El Paso, we can push products north up into the Albuquerque market, South in New Orleans, Mexico and West in Tucson and to the Phoenix markets. And one of the things that we think Western has as an advantage relative to others refiners and I think something that separates us from mid-con refiners is the markets that we sell into. We see a significant West Coast influence on our pricing. We sell a premium product at premium prices relative to the Gulf Coast and we do like that West Coast influence. So that we think our markets are a strategic advantage for us and something that separates us from a mid-con refinery.
Looking at our operating margins and kind of the ranking. If you look at this chart up here, where we ranked in 2007 on operating margin, which is close margin less direct OpEx and how we ranked out kind of in 2007 was kind of a middle of the pack among independent refineries. If you look at where we are today, in fact for the last two years we ranked number two and three in this ranking that Macquarie does. So we’ve done a lot of improvements. It’s not just crude, it’s not just the product. We think we are good, reliable operators, refinery. I think it shows up in the numbers. So we are very proud of where we are at and our positioning relative to the competition in the independent states.
Next slide. Our wholesale operation, as I had mentioned we do about 70,000 barrels a day of product in the South West, about 80% of what we put in our own product and deliver for our customers. We do have Cardlock stations, a total of about 67 Cardlock stations in the South West that help to reach out to a diverse customer base with our wholesale business. We operate in Arizona, California, Colorado, Maryland, Nevada, New Mexico, Texas and Virginia. We market about 30,000 barrels a day of products on the East Coast and the midland region and most of the customers we have when we operated the Yorktown refinery and again that’s a business that we are looking to grow and optimize over time.
Our retail operation. We have 210 retail operations retail stores in Arizona, Colorado, New Mexico and Texas. We’ve drawn our footprint there substantially in the last year from about 150 outlets at the beginning of the year to 210. And we like our retail operations in a marketplace where you hear a lot of concerns about demand there is a ready home for our product and so we do like the retail presence. Our Gallup refinery, our majority of the gasoline produced in our Gallup refinery ends up in one of our own retail stations. So we certainly we’d like to have like that feature, we’d like the ability to move that refined product in those zones.
Looking in 2010 and kind of some of our accomplishments in 2010. We initiated crack spread hedging. We extensively hedged to 2011 and then in 2012 we were about 32% hedged on the product that we produced, 16% in 2013 and about 5% to 6% in 2014. So we’ve been fairly aggressive with what we target, more crack spread hedging. Our target is about one-third of our product that we’d like to be hedged with and we’ll continue on the path we can see a good opportunity and good value in the crack that we’re in place. So we are going to continue to march down that path.
As I mentioned, we added 59 retail sites and 10 Cardlock locations during 2011 and again we’d like the ability to place our product there and the retail acquisitions we do are primarily leased so they were relatively low capital cost. We think we are a good retail operator and it’s a good complementary business. We sold our Yorktown facility and 82 miles of our New Mexico pipeline to Plains All America. We closed that transaction at the end of December and we sold those facilities for $220 million and again that’s a great terminal facility. We continue to do business there. And in 2011 as well we refinanced our revolver term loans, reduced our interest rates and got away from some financial maintenance covenants that we had. So we like the flexibility offered in by this refinancing. And at December, we redeemed our floating rate notes of approximately $275 million of notes and we reduced our annual interest cost associated with those notes by about $30 million.
Next slide. Now kind of looking at the rationale for our crack spread hedging. On the left side you see the gasoline historic margin and kind of the future WNR is hedged in at. On the right side, the distillate margins. The gold line is kind of western hedge booked and the green line indicates some of the future curve, the current future curve and all the black to the left is all kind of historic. So frankly, we haven’t seen opportunities in the past where the margins are still elevated for so long, particularly on the distillate crack. If you look at it, these are three years we are seeing very strong distillate crack and if you look back at the history, our business is the commodity business and the margins tend to go up and down and we do see a lot of volatility in the margins. So what we’re seeing is the ability to hedge forward, take out a lot of that volatility on the hedge feed. And again we shoot for being 30% hedged. So if you think about one-third hedged, two-thirds un-hedged, if you are wrong and you had dipped on the level below where the markets loses up, you are still two-thirds better off. And so again we take some risks off the table for us and so we feel pretty good about the hedge that we’ve put on. We are going to continue to go down that path.
And then looking in 2012, some of the initiatives we have. We approved and paid a dividend in the first quarter, $0.04 per share dividend and just a recognition of our financial health in 2011. So we instituted the dividend there first quarter. We are in target debt reduction of $100 million to $125 million in 2012 and so far we’ve paid down $30 million of debt bargain in first quarter back in March 1st. We paid $30 million on our term loan.
And our capital expenditure forecast for the year. We increased – we put in discretionary capital in. We’ve been heavy regulatory capital spenders for the last few years. But we are looking at a couple of discretionary projects which I will describe in the next couple of slides. But the expansion on our capital program is just a recognition of the increased free cash flow we saw in 2011.
So looking next at a couple of projects. The logistics project – El Paso crude logistic. As I mentioned, we liked the Bone Springs and Avalon crude we see that these are very high quality crudes. They – when they come into the refinery, have a high gainful yield and the resulting yield structures that we like. They’re closed door refinery. So we have a logistics advantage. So we are building a pipeline and tankers into our proceeding facility there in Mason, Texas to bring these crudes in. The Gallup system will tie to the Kinder Morgan 28 (inaudible) refinery in El Paso. So we think it’s a great project. We think we’ll be gathering up to 40,000 barrels a day of this high quality crudes and bringing them into El Paso and we think we will be operational there in 2013.
We are doing a turnaround in our Gallup refinery. We’ll be doing that in September of this year and it will be a full phase turnaround. We are going to do a modest expansion there, about 10% of the capacity, 23,000, up to 25,000 barrels a day. Investments, about $6 million and again it’s just a matter of a lot of small projects evolving, like in (inaudible) is adding complex sort of thing. So we think it would be very good value in this. Gallup has one of the largest closed margins in the industry. So it doesn’t take a lot of barrels added to have a good economic impact.
So then looking at El Paso, we’re doing a crude expansion in El Paso that we’re in the design phase today. We’ve got to do some amount of design work before we get heavily into the permitting process and from that we’re looking to execute in ’13 and ’14 kind of this project in two different phases, two different turnarounds that we do have planned. So a total capacity increase there of about 25,000, taking El Paso from 128,000 to over 150,000 barrels a day. We’re very excited about that, very excited about pursuing the crude opportunities around El Paso.
Looking at our summary financial. If you look at the indicator margin, the US Gulf Coast 3-2-1, kind of in the upper right hand corner. 2011 was just a fantastic year for us. If you look at the indicator margin on the Gulf, in 2010 $8.76, compared to full year 2011 $24.48. So we saw a threefold increase in the indicative margin and we do sell a lot of products on the Gulf Coast basis. So we sell at a premium to the Gulf Coast, but the indicator margin obviously is kind of the trend that we follow there.
Looking at the impact on our gross margin, our gross margin 2010, 2011 nearly doubled from $809 million in 2010 to $1.539 billion in 2011. So a very significant increase there and then following down at the bottom line on adjusted EBITDA, $288 million in 2010 versus $966 in 2011. So almost a fourfold increase there. One thing I would call out, in the $966 million adjusted EBITDA, the unrealized hedge gain of $182 million that by accounting rules we have to include in our adjusted EBITDA. If you watch that out, when apples and apples between 2010 and 2011, it would be more like 780, 784, something like that relative to 288 for 2010. So a threefold increase in adjusted EBITDA. So again just a fantastic year for us.
Next slide, on capital structure. We ended the year in 2011 with $391 million. Our gross debt was $804 million. One of the statistics we’re quite proud of, we started the year with net debt of around $1 billion. We ended the year with net debt of around $400 million. So we reduced our net debt by 60% over 2011. So our focus has been on reducing the debt and frankly 2011 was just a heck of a year for us and it took us a long way down that path. So credit metric associated with that level of debt reduction, year-on-year we’re showing terrific improvement on credit metric.
And then looking at the midterm, we’re going to continue to focus on how we can best take advantage of the crude opportunity that’s kind of in our backyard with the Permian and any additional opportunities around our Gallup refinery. We’re going to continue to look at logistics, assets and other assets that are kind of in our footprint of operation. We’re going to continue to focus on our costs, our operating costs and our working capital costs, continue to manage those, be diligent at this point about what we do. Continue to work on our balance sheet, maximize liquidity. Our focus is on getting our debt paid down and again with the margins where they’re at we see that happening relatively quickly.
So next slide. With that, I’ll take any questions you guys have.
You’ve answered the Gallup facility provides most of the supplies (inaudible) change _ (inaudible) circles. When you look at the increase that you placed 2011, in terms of number of years that should increase (inaudible). Is there still room for substantial growth (inaudible) stores relative to how much supply balance you can produce?
Yeah. Matt, do you want to take that question? I think, Matt runs our retail so he can probably give you the…
So the question was, is there more room to grow retail especially with Gulf production? And the answer is yes, selectively. And our growth recently in the last year really wasn’t a strategic plan by market or by area. It was really opportunistic. Specs became available, but we certainly obviously are looking at those areas and if we can we would and as well the connection to El Paso refinery where we have now a presence in El Paso and Tucson. So we can certainly look at this opportunity around the logistics and refining method. In fact, the stores that we added in the year are really supplied out of El Paso. Those 60 stores are primarily El Paso and Tucson. So they really were – I think what we said was the majority of the gas out of Gallup is at one of our – that was kind of the original pipeline that’s going to carry it. We fill the gas up full point.
At what stage was the deliveries (inaudible) to I suppose a lot of the outlets and (inaudible) is that still out there? Is this something you’re looking at strategically as to evaluate substantial (inaudible).
Yes. There’s large folks out there who have – especially some of the majors have looked at their retail businesses and there isn’t a big presence in El Paso where we currently have stores in Texas. We don’t have anything in East Texas or any supply logistics there. So not something we would look at on the Eastern side of the state. But as others might have packages of opportunity we would certainly look at them. And they range anywhere from Exxon Mobil, very large obviously looking at their retail assets to smaller folks who maybe just have a small package of stores and they’re looking to get out of the business or to just collect the lease payment instead of run their retail operations. So there’s a whole gambit of opportunities out there.
Maybe just a big picture of the supply demand picture over there in the areas you operate and gas price is high. We see a lot of companies do expansions in terms of their capacity. So will there be a scenario that because of everybody jumps into that given the high crack spread, they may have overcome that capacity again in the refining they can carry as we did before?
I think we’re being very disciplined in our approach on the expansion within Gallup. It’s a modest expansion. It’s only a 10% expansion, 2,000 barrels a day of incremental product to that market. We don’t believe that’s going to be a represent of a building in that market. In El Paso, our expansion will produce about 60% to 70% diesel fuel and there’s good demand for diesel. So we feel very good about that expansion as well since it’s more diesel centered than gasoline.
And what about the existing capacity utilization ratio for your two pans? I assume they’re pretty high, that’s why you’re doing it.
And I think you’ll see that in inland refiners relative to coastal refiners that the overall industry utilization may be at 82%, but the inland guys are all running full out, all the coastal areas are running flat. So we see – yes, we continue to see our utilization that’s four ways.
Okay. And just on the pipeline you own, Gallup, is that the one you just use exclusive for south or do anybody else using that at all?
Well, we have a 420 mile pipeline from Jal, New Mexico up to Bisad [ph]. We recently sold eight miles of that pipeline on the southern end to Plains All America. So they own that and they’ll be operating that. We’ll still use the northern section of that line as we see opportunities to bring supply up. But currently there’s a very good balance between the Gallup refinery and the local production. So those two numbers are about the same. We tend to buy up the local production in that market and it balances well with our refinery capacity.
And is one third hedging your target hedging ratio as that? Are you guys – will you think of going above that or below that or it’s something you guys just…
I think that the one third will be the maximum that we would look to hedge.
Okay. And maybe last question here. You reducing that debt from nine to four, if the crack spreads remained as high for another year, what are we looking at in terms of capital and structure?
Well, obliviously as far as our bottoms go, the economics are not really good to buy those out today. So what we’ll continue to do is just look at our balance sheet and on the short term we’ll probably bring the cash in, whole cash.
Okay. Thank you.
Aside from that, we are paying a dividend. We’re reducing the debt on a term loan. That’s our target there. The 100 to 125 in a year and we are running discretionary advisors as well (inaudible).
Right. Okay, that’s good for me.
Your shareholders, you’ve talked about this with your shareholders (inaudible) capital structure now (inaudible) following the last question on where your debt (inaudible) heading (inaudible) levels and a very low element (inaudible) not a very stellar rated EBITDA number based on (inaudible). But at some point you (inaudible) the point completely extrapolate out beginning of 2012 where you look particularly on the leverage. So could you talk about how you might otherwise look to return money to shareholders or is that something you’ve considered yet?
I think we’re going to disappoint them. We’re going to look to pay down our debt. Our long term target for debt is probably $400 million in that range and again we’ll continue to look at opportunities. Obviously we have been trying around how fast we can pay debts and move on based on when it’s economically (inaudible). So we’re having a lot of additional discussions on exactly that. But long term debt will be at $400 million. Any other questions? Okay. Well, thank you for your interest in Western Refining.
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: firstname.lastname@example.org. Thank you!