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CVR Energy, Inc. (NYSE:CVI)

Q1 2012 Results Earnings Call

May 02, 2012 11:00 AM ET

Executives

Jack Lipinski – Chief Executive Officer

Frank Pici – Chief Financial Officer

Stan Riemann – Chief Operating Officer

Analysts

Operator

Greetings and welcome to the CVR Energy First Quarter 2011 Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ed Morgan, Executive Vice President, Investor Relations. Thank you Mr. Morgan, you may begin.

Ed Morgan

Thank you, Rob, and good morning everyone. We very much appreciate you joining us this morning for our CVR Energy first quarter 2012 earnings call. With me this morning are Jack Lipinski, our Chief Executive Officer; Frank Pici, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.

Although we will not reference slides during our call this afternoon, there are slides filed with the SEC, which also summarize our first quarter results. These slides along with other financial disclosure and reconciliations for non-GAAP financial measures should assist in analyzing our results and can also be found on our website at cvrenergy.com under the Investor Relations tab.

Prior to discussing our 2012 first quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined on the Federal Securities laws. For this purpose any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, expects, plans, and other similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publically update any forward-looking statements whether as a result of new information, future events or otherwise.

This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included with our 2012 first quarter earnings release that we filed with the SEC yesterday after the close of the market.

In addition to the Safe Harbor statement provided, let me additionally add that due to the sensitive nature of the open tender filed by entities affiliated with Carl Icahn, we will not be accepting any questions today after the completion of our prepared remarks. If you'd like further information around the open tender, I encourage you to read our solicitation recommendation statement filed with the SEC on April 23.

You may also contact myself or Jay Finks, at CVR Investor Relations with any questions as well. With that said I'll turn the call over to Jack Lipinski, our Chief Executive Officer, Jack.

Jack Lipinski

Thank you, Ed. And good morning everyone and thanks for joining us on our first quarter 2012 earnings call. First, I'll provide a brief recap of the first quarter financial results and related operational impact followed by my thoughts around matters affecting the refining industry. Frank will then provide more detailed color around and numbers reported yesterday and I'll finish with some closing remarks.

Before I begin – we appreciate everyone joining us today and before I get into the financial results, I want to speak to our transaction agreement with Carl Icahn that was announced on April 19th. As you know, we signed an agreement with Mr. Icahn that would permit him to complete an amended tender offer for $30 per share in cash plus a contingent cash payment right, if he obtains a majority of the shares.

His tender offer is set to close at 11:59 eastern time on May 4th. CVR Energy's Board of Directors as you know, is not recommending that shareholders tender [and to] Mr. Icahn's offer, because the Board continues to believe that the company's long-term value exceeds $30 a share.

However, it was our goal in negotiating the agreement to give shareholders the option of realizing near-term value if they so choose and to protect shareholders that do not initially support the offer of tender. If through the first tender, Mr. Icahn receives greater than 50% of shareholders' support, shareholders not tendering in the first offering will be provided a second tender period ensuring that they do not end up as minority shareholders in the company, unless they so choose.

Turning to our earnings for the first quarter, consolidated net income was $25 million loss or $0.25 loss per fully diluted share, primarily due to unrealized hedge losses in the quarter of $128.1 million pretax or $0.89 per share on an after-tax basis.

On an adjusted basis, adjusted net income was positive $67.1 million or $0.76 per fully diluted share. By prior quarters, we adjust net income for the effect of FIFO. Major turnaround expenses, and the impact of unrealized revenues gains or losses. Parenthetically, a realized loss of the first quarter associated with crack spread hedges was $19.1 million or $11.5 million after-tax.

I'll let Frank discuss more broadly other adjustments to net income in his remarks. Some of the primary drivers of our adjusted earnings are both strong crack spreads and our access and ability to run price to manage crude along with the strong business fundamentals that drive our fertilizer segment.

In the first quarter, the NYMEX 2-1-1 crack spread averaged $27.53 barrel. With the Brent-WTI differential widening to $18.54 barrel at the end of the first quarter. It averaged $15.34 over the entirety of the [quarter].

As a result, our overall realized refining margin adjusted for FIFO remains strong at $18.52 per barrel as compared to just under $18 a barrel in the same quarter of last year.

I'll speak a little bit more now about our individual business segments. Petroleum of course is our largest segment. Within this segment, we ran just over 146,000 barrels a day of crude in the first quarter, little over 88,000 barrels a day at Coffeyville and 58,000 barrels in Wynnewood. Actual throughputs realized for those facilities were just above the mid range of the estimates I provided on our last call.

Also and I've discussed on our last call in the first quarter was our ability to process crude – sorry the ability for us to process crude was primarily impacted by product pipeline shifting limitations, resulting from high finished product inventories in Group 3. Because of these restrictions, we used the opportunity to perform some opportunistic maintenance of those facilities. Our pipeline product restrictions have improved today and we find the Magellan system (Inaudible) in balance.

Looking ahead to the second quarter, we're currently running 117,000 barrels a day in Coffeyville and the high 60,000 barrel a day range in Wynnewood. We have no significant maintenance activities planned in the second quarter and estimate that true throughputs for both plants could be in a range of 179,000 to 188,000 barrels a day in the current quarter, expect 113,000 to 118,000 barrels a day at Coffeyville and 66,000 to 70,000 barrels a day at Wynnewood.

Like most Midcontinent refiners, we continue to benefit from the Brent/TI relationship. After narrowing in the fourth quarter that spread increased to as much as $19.86 in March and is currently at $13.68. We expect continued growth in shale oil production will positively impact the Brent/WTI spreads.

The impending reversal and expansion in the Seaway to the Gulf Coast will now provide a Cushing exit strategy for much of the domestic light sweet barrels refined in the Midcontinent. Based on our estimates and demand on the Gulf Coast for heavy sour crudes, we expect the majority of Seaway's initial 150,000 barrels a day of capacity followed by the additional capacity expansion of 250,000 in early '13 will be used to transport primarily Canadian heavy sour crude stranded in Cush.

As recently as last week we've observed the number of peers nominating higher volumes of Canadian crudes [outer parts of states] for what we believe will be shipped on the Reverse Seaway pipeline. We also see additional crude supply cost benefits as a result of the location of our refining assets.

At the Wynnewood facility, we expect to run in the second quarter approximately 40,000 barrels a day of WTI source of Midland, which is traded at a discount to Cushing/WTI as high as almost $9 a barrel and as low as $3 a barrel more recently. Today, it is $6 a barrel under WTI. There is a little bit of volatility in that pricing, but it is certainly a firm discount to Cushing/WTI and that's why we are sourcing it for Wynnewood.

The remaining crude slate for Wynnewood are barrels directly gathered or sourced from Cushing, which in addition to WTI consists of light sour crudes apart domestically and from Canada. Canadian light sour blend is trading at $5 under WTI. It very much looks like a West Texas sour, but in the first quarter traded as wide as $28 under WTI and averaged $16 under WTI in the quarter.

All in, we are forecasting a consumed crude differential for Wynnewood in the second quarter significantly in excess of $3 below WTI, which is a substantial improvement from our forecast announced when we purchased the plant last December.

In Coffeyville, we will continue to run 25,000 barrels a day of heavy Canadian, such as Cold Lake or Western Canadian Select, then source the next 38,000 to 40,000 barrels a day from our gathering operations until the remainder of our slates with crudes acquired through Cushing which is connected by directly to Coffeyville by pipeline.

With all the growth in our gathering systems and the addition of Wynnewood, we expect to gather over 45,000 barrels a day in the second quarter, which represents a year-to-date increase of over 10%.

Before I leave the petroleum section of my remarks, let me give a brief status update on the success of completing the second and final phase or turnaround of Coffeyville. Due to the restrictions on the Magellan Pipeline in February, we started our turnaround nearly two weeks earlier than anticipated and completed the turnaround two days ahead of schedule and under budget.

As is typical with our turnaround, we ran more light sweet barrels in the first quarter and reduced crude processing as a result of the unit outages. Looking forward, our Coffeyville facility will not require a maintenance turnaround until late 2015. The Wynnewood facility is scheduled to begin its turnaround in the fourth quarter of this year. This turnaround is still estimated to last 40 to 45 days.

Turning to the nitrogen fertilizer business, let me recap the highlights from the CVR Partners call held this morning. Last week CVR Partners declared a first quarter distribution at $0.523 per common unit, which brings our 12-month cumulative distributions to $2.09 versus our IPO guidance of $1.92. Please recall that we own approximately 70% of the common units. Therefore, CVR Energy receives a proportional amount of distributions from CVR Partners.

We continue to see good opportunities and demand for nitrogen fertilizer with the recently announced expectation by the USDA for 95.9 million acres of corn plantings this year. While we haven't provided any market guidance on our current order book, I can tell you that spot pricing for UAN has increased over the last 30 to 40 days, and we've seen UAN prices in the high $300 range to the low $400 range per ton on a net back basis. The higher pricing is clearly indicative of the strong planting season.

In light of recent events, our previously announced intent to sell down our ownership in CVR Partners is currently on hold, as is the payment of the previously announced regular and special dividends.

Now let me turn the call over to Frank to talk about the financials in more detail, and then I will have some closing remarks. Frank?

Frank Pici

Thanks, Jack. Good morning, everyone. First off, I would like to point out that both in the filing we made this morning and on our website you will see a slide deck that gives you more color on our first quarter, results and there is a number of charts and graphs and tables that will help you to understand things a little better. And as a reminder to that too, as we promised in the last quarter we've also given you more detail around our new acquisition – newly acquired Wynnewood refinery. So we now have both for our petroleum segment combined results page and we've got a Coffeyville and Wynnewood separated out for you.

With respect to the earnings as Jack said, we reported net loss of $25.2 million or $0.29 per diluted share versus for the first quarter of last year $45.8 million profit or $52 million of profit per diluted share.

When you take and adjust that, as we do and I will go through some of the major adjustments with you on an adjusted basis, our adjusted earnings per share was $0.76 per diluted share versus $0.56 in the first quarter of '11. If you look at the major adjustments, Jack alluded to some of them, our FIFO adjustment as always when we make. In this case, we reduced adjusted net income $0.13 a share for the FIFO benefit that we have in the numbers.

We've also made adjustments for our unrealized hedging loss. In this case, on an after-tax basis, it was almost $78 million or $0.90 a share and we also adjusted for the turnaround expense of about $12.7 million after tax or $0.15 a share. In addition the other major item probably was on the share-based comp and other accruals that we made and some accruals we made related to the proxy matter. Those things on a combined basis were about $11 million – a little over $11 million after tax or $0.13 per share. So those were the major items and if you go to the, either the press release or the slide deck you'll see the full slate of adjustments laid on in detail.

Looking at the operating results and both plans that Jack mentioned were part of those results for the quarter, especially given the throughput limitations we had and the turnaround that we completed during the quarter from a refining margin point of view we reported a strong $18.62 per barrel refining margin, that's adjusted for FIFO and with respect to the why you'll see the two refineries laid out in the detail with respect to the first full quarter of reporting at Wynnewood we had a – actually we reported a higher refining margin there of $19.57 a barrel than we did at Coffeyville. But that was an impact – growth impacted really by the turnaround at Coffeyville. But it was strong performance in either event.

And as I said the slides will lay out that for you much better detail. Turning to operating expenses we had consolidated operating expenses to both plans of $6.95 a barrel in the first quarter of '12 versus $5.10 a barrel, first quarter of '11. That was driven by the combination of the turnaround expenses and the lower throughputs we talked about previously.

If you exclude the Coffeyville turnaround expense, not adjusting for the volume that would have been achieved if – have not had the turnaround that expense would have been $5.37 a barrel, versus $4.76 in the first quarter. So it starts to equalize much closer if you take out the impact of the turnaround.

We still expect our guidance for 2012 excluding the turnaround to be around $4.80 per barrel for throughput.

Well I'm on the operating expense, so I will mention a few things on the turnaround. We – as I mentioned expensed over just over $20 million in the first quarter to complete the turnaround in Coffeyville. The turnaround has caused – in addition to causing some fluctuations in working capital, it's caused a build in our – we have some excess inventory coming in the first quarter as a result of the first phase of the turnaround which we completed in the fourth quarter of 2011. So we started with an excess inventory of about $1.8 million barrels of crude intermediates and finished products. But during the first quarter we worked off a good portion of that about lowering that inventory by about $700,000 barrels, and we'd expect those inventory levels to continue to normalize during the second quarter.

Looking at SG&A expenses for a minute. Our consolidated SG&A cost of $45.3 million were up from $33.4 million in the first quarter of '11. The primary differences there – there was actually a lower share-based comp expense but there – but that was more than offset by a several things, we had integration cost related to the Wynnewood acquisition. We also had our first quarter of SG&A related to running the Wynnewood facility on normal basis. And the other thing we had was additional expense accruals related to the integration expenses and on our proxy matters that we've talked about.

A minute on hedging, that was the most – the thing that caused the most volatility in the results for the quarter. We did have a significant hedging loss of – a total of a $128.1 million unrealized and $19.1 realized. If you look at the realized amount and you compare it on a, what its impact on refining margin would have been, but we don't report it as part of refining margin, it's below that line, but on a per barrel throughput basis that $19.1 million would have been about a $1.45 less realized margin. In the first quarter of '11 that same comparison would have yielded $2.11 less margin. So the impact was actually less on a per barrel basis in this quarter than it was a year ago

In the crack spread environment we'll continue – we'd expect to continue to hedge some of our – our crack spreads and continue to put new positions on, we'd look at – we're doing more hedging on in the near term in the out months to – due to backwardation.

Looking at the rest of the year as we stand today, we were hedged at NYMEX 2-1-1. It's just over $24 a barrel for the rest of this year on 12.5 million barrels. And that's about 25% of our nameplate throughputs. If you look into 2013, that same crack is hedged at about $23.80 per barrel on about 5.2 million barrels. So we still have a significant hedging position to realize.

Looking for a minute at capital spending, and I look at that just on the petroleum segment then we'll talk a little more about CVR Partners. In the Petroleum segment and in corporate we had $35.2 million of capital spending in the first quarter of this year. $25 million is sustaining maintenance capital and $10.2 million related to discretionary projects. The majority of which was related to the Cushing tank farm which we completed in the first quarter.

Looking into the rest of the year for capital spending we'd expect to see somewhere in the order for the full year over $175 million to $185 million of capital spending in the petroleum segment with $80 million to $85 million of that in the – the cost of the refinery including over $65 million related to the sustaining maintenance projects. Another $65 million to $70 million at Wynnewood, we've including some capital we've identified for growth projects including adding a new hydrogen plant alongside building new tanks at the loading rack, plus a small project to allow expansion to gather barrels at refinery.

In addition we've got almost $10 million in the plant to further expand our recently completed Cushing tank farm adding additional fluid storage. And we've got an additional – about $5 million at the corporate level for various projects there.

Turning to CVR Partners as Jack mentioned the Partnership continue to perform well in the first quarter with strong adjusted EBITDA $38 million versus prior quarter of almost $26 million. That was really almost all related to product pricing year-over-year. And really most of this was covered in the earlier call this morning but as a result of the strong operating cash flow generated in the first quarter, Partners announced 52.3 cents distribution as Jack mentioned that brought the distribution for its first 12 months really since April of 2011 to be $2.09 which did exceed expectations that we had set earlier. And the in addition to that the partnership set an – enhanced distribution guidance for 2012, raising guidance from $1.50 to $1.75, to $1.65 to $1.85 and that's really a function of the improving outlook and improving price expectations as to go through the remainder of the year.

Just to note on the Partnership's capital spending in the first quarter it spent $22.3 million including 1.1 on maintenance related CapEx and $21 million, a little over $21 million related to growth projects which included the UAN expansion project tariff. And for the full year of forecasting CapEx for all of 2012 is in the $95 million to $100 million range majority will be complete – will be in the completion of the UAN expansion, that's expected to be operational by early 2013.

So, with that, I think I've covered the majority of the items on the financial side and I'll turn it back to you, Jack.

Jack Lipinski

All right, thank you, Frank. Listen we're really proud of our first quarter financial results given the product shipping restrictions and the Coffeyville turnaround, which contributed to overall all the throughput. As I discussed earlier, we see strong market fundamentals which will support stronger earnings and cash flow in the second quarter. And we believe the markets provide us a competitive advantage through 2013 as well.

All these achievements would not have been attainable without the dedication and hard work of all our employees throughout our CVR family of companies. I'd like to thank all our employees for believing in our strategies and sharing my vision for the benefit of our company's shareholders.

And I thank each of you for joining our call today and please make sure to direct any of your follow-up questions to either Ed Morgan or Jay Finks our Investor Relations group, and again thank you all for joining us. Truly appreciate it, thank you. Bye, bye.

Question-and-Answer Session

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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