Western Refining Inc. (NYSE:WNR)
UBS Global Oil and Gas Conference Call
May 23, 2012 01:30 pm ET
Jeff Beyersdorfer - SVP & Treasurer
We will move on to our next presentation. Coming up next we have Jeff Beyersdorfer, Senior Vice President and Treasurer of Western Refining. Jeff, I will turn it over to you.
Alright thanks Craig. So I am going to walk around and interact with the crowd since we've got such a small crowd here. We just lost one. So sorry a [clicker] or will you? Thank you. Okay, three things I want to do today, just quickly describe the asset base and within embedded in those comments is going to be some comments around the Midland/Cushing differential because it is a new phenomena and I've got a couple of maps in here, I will describe that phenomena and talk about how it affects our operations. Secondly talk about some of the projects that we are doing this year, some of the initiatives we have going on and particularly the uses of cash and then finally I want to talk about the balance sheet because there have been some lingering issues with respect to the balance sheet over time and we work pretty hard on rectifying those and want to share with you some of those things we’ve done and some additional initiatives we have around the balance sheet.
Alright this is very hard to read. So, within your packets, if you could look at the map there and what I want to describe are the assets that we have and the phenomena going on in the Permian Basin. So we have two refineries in El Paso, Texas and Gallup New Mexico and they sit on the part of the Permian Basin, El Paso does. This outline, the white line is the Permian. The blue line is the Delaware Basin within the Permian, and then Gallup, it’s up here in the Four Corners area.
We also have some wholesale business and retail business that I will get into in a second, but did want to talk about the thing that we think makes us pretty unique in our neck of the woods and that we have an ability to buy this discounted crude and you’ve all been told and you’ve all been aware of the WTI-Brent discount. But buy this discounted crude and sell it into markets some of which has some West Coast pricing influence, which has typically been higher than other margin environments. So buying discounted crude and selling products into some premium markets because of the location of our facilities.
But what's going on here in the Permian is that you read about this new crude coming onboard and having a logistically tough time getting out of the market. There are a couple of pipeline solutions that will come on board over the next couple of months. There is the Basin pipeline which runs up from Midland to Cushing.
So here is Midland to Cushing, that’s a 450,000 barrel a day line. It's four today, but there are two new lines, one being expanded and one being reversed that will also solve this problem longer term between Midland and Cushing. There is a West Texas Gulf Line that runs from Colorado City to the Houston Ship Channel, it's 240,000 barrels a day expandable by a 120,000 barrels up to 360,000 and that will be done by the end of this year. And there is the reversal of the Longhorn Pipeline, that’s a product line today that will be reserved into a crude line and run from Crane back down to the Gulf Coast and deliver initially about a 100,000 barrels of crude out of that market.
But still nonetheless if you look at the production estimates anywhere from a million barrels to some analysts have it close to 2 million barrels a day coming up in the Permian, there still isn’t enough takeaway capacity out there to takeaway all that crude, so we think these discounts will still be sustainable for some period of time. So that’s on the crude market that’s what's going on here. I’ll talk about a project we have going on to take advantage of this crude market to make sure we get some of this crude to El Paso, the refinery in El Paso.
But longer term the whole world is going to look different in terms of domestic crude production and we're right in the heart of it with El Paso and Gallup been located where they are. On the product side, it’s the same situation with El Paso and Gallup kind of being the gateway to the west for product distribution. So, if you look at all these product lines, again I apologize it's hard to see up on the screen but in your presentation you can look and see they are all these product lines that flow from the east to the west and most of them pass through El Paso.
And you look at our biggest markets, some of our growth markets El Paso, Mexico mainly what is the Mexico Phoenix and Tucson are pretty good markets and you heard me say earlier some of these markets particularly Phoenix and Tucson have a west coast pricing influence. So we are getting some perhaps product premium pricing for some of the markets that we do serve. We also serve the Four Corners area, Albuquerque Flagstaff are some of the major markets that we serve.
So again we are buying crude at a discount that we think will be sustainable for a while and selling some products into some markets that give some higher premium pricing versus Mid-continent or the group of Chicago refiners. One last thing before I turn to the rest of our business this is a chart that does show product pricing for gasoline and diesel quarter by quarter over the last couple of quarters for three markets. Chicago, the Group which is a proxy for Midcon, the Mid-Continent and then Los Angeles.
And the Los Angeles ones in the gold you can see that both for gasoline and for diesel in most quarters you are seeing better product pricing versus the Group or versus Chicago. So again it goes back to the point I mentioned about having some products into these premium markets, but having our assets located in Texas and Gallup, New Mexico with access to this discounted crude. All this can be bundled up into a summary of refining margins for independent refiners on a per barrel basis and to show you that all this is public information. 2012 first quarter if you look at who is in the top tier, obviously the two gold bars are us, but look who else is in the top tier, all those refiners share characteristics of being inland based refiners, not coastal refiners and those refiners sitting on top of their crude source.
That's what's driving margins today is, if you are inland you serve some markets inland and you sit on top of your crude source, particularly a discounted crude source, sit on top of that crude source. Typically at least historically, you are going to show a pretty good margin environment.
Okay, the two other businesses we have that I will quickly describe and then again we think about these maybe differently than everybody else, our outlets for our refined product. We have a wholesale business where we sell all the way through to the end customer so the big mining companies who are mining in Arizona for copper and uranium down to the little landscaper in Phoenix where two (inaudible) that needs to fill his or her truck up two or three times a week to go about doing their jobs, all of those are our customers and we have various ways of giving products to those customers.
As an example, that little landscaper fills up his or her truck at our Firebird locations which are a series of unmanned fuel dispensing locations located in industrial sites that are accessible to the public and is basically an accounting system where we give them a credit card, they swipe it, they allocate fuel or pour fuel down and then we send them a bill.
We like that business, the margin’s pretty good, we are trying to grow that business. We get unlike most other refiners we sell all the way through to the end customer. We've got an infrastructure, sales people, credit collections to service that end customer. The other outlet for our product is our retail network. We've got about 210 stores throughout the four corners region in Arizona, New Mexico and again we think about this a little differently. It’s a home for our refined products.
It’s a home everyday for about 70% of Gallup’s gasoline production. Okay, the second thing I want to talk about is our initiatives for cash for 2012 and into ’13. Three things we'll take up the use of that cash.
Number one, first is debt reduction and when I talk about the balance sheet we can talk about how we plan on reducing debt. That's number one. We've got a target of about $175 million of debt reduction this year and as cash flow increases we might find ourselves raising that target.
Number two is capital expenditures. I will talk a little bit about these in a second very briefly, we have a budget this year of a $160 million. We see all kinds of opportunities for logistics build out in the Permian because of this increasing Permian production in the future. So we will have some uses for capital to build out those logistics projects.
And then finally, we will look at returning some cash to shareholders. We did implement a dividend earlier this year. We will revisit that level of the dividend and then also I want to talk about a potential share buyback that we are considering.
But we have a particular use in mind for those shares when I talk about the balance sheet. Our two quick capital projects, you heard me spend a lot of time on the Permian basin. We are not just the beneficiary of pure dumb luck of having these assets located in the Permian and I am just going to do nothing about it. We are out there actually talking to the producers, the E&P companies about entering into longer term contracts or delivering their crude from particularly the Bone Springs and Avalon shale plays into El Paso.
So, we’re currently now building some infrastructure pipelines, a truck rack, storage facilities, crude storage facilities in an area called Mason Station in the western part of Texas that will facilitate the delivery of some of this newer crude to El Paso.
So, we’re backing out some of the existing crude we’re buying today. Buying some of this new crude which is a better quality crude that we’re running today, buying it at a discount to the crude that we’re buying today.
Ultimately, this will allow about 40,000 barrels a day of this new crude to be run at El Paso, we’ll back out 40,000 barrels of the existing crude we’re running.
We see an opportunity as more crude comes to market to replicate this project in the future and perhaps spend some additional money on infrastructure, on logistics to facilitate the delivery of that crude from El Paso.
Longer term, we made noises. We made some suggestions that we would consider an expansion of El Paso by 25,000 barrels a day to take it further advantage of being able to run this crude.
Right now, it sits, we’re targeting to do that in 2014, concurrent with a turnaround of the facility. But that will result in about a 25,000 barrel a day expansion, taking El Paso from 125,000 to 150,000 barrels a day, again taking advantage of this crude phenomenon.
The other project we have this year is an expansion of our Gallup facility, modest 10% expansion, 2,000 barrels a day but again to run more of this discounted crude, it makes sense to us and it’s a pretty modest level of CapEx we’re spending about $6 million, which is a quick return.
I’ll skip the financials page. One other thing I wanted to talk about before I get to the balance sheet or the hedges that we continue to opportunistically put in place. So who knows we can have a debate about where those Brent TI spread goes longer term. Nobody knows but because these levels that we're seeing out in the future that the paper markets for gasoline and distillate crack spreads are allowing us.
We’re taking advantage and we are opportunistically looking at selling forward for several quarters in the future about up to a third of our production. So that’s what this chart shows for both gasoline and diesel, the black line is the historical by month, by day levels of gasoline cracks and diesels cracks since 1996. The red dots or where we’ve hedge forward where we’ve [saw] production forward so you can see the red dots so well above where historical levels have been and the green bars are our quarterly levels of volume of hedged barrels.
So in 2012, we’ve hedged about 30% of our production, 13 its a little under 20% and for 14 it’s a little under 10%, but our goal because we don’t know what’s going to happen to this margin environment is to hedge forward about 30% of our production through 14 and ensure that we’ve got some visibility in the cash flow in the future quarters regardless of what happens to this margin environment.
Okay, the final thing I want to talk about was the balance sheet and what we’re doing in terms of fixing the balance sheet reducing debt and setting it up for making sure we can survive during both good times and bad times. So excuse me, this is March 31st actual and then pro forma is pro forma for another debt repayment we made in April. So our gross debt today is about $700 million.
Where we'd like to take the balance sheet is gross debt of about $500 million, which represents about 1 to 1.5 times EBITDA through mid-cycle conditions. And we think that warrants a double B flat credit, which is where we want to get to. We're single B today. We'd like to get to a double B flat rating. And we think those levels are what will get us there.
How do we get from where we are today to $500 million? Well, a couple of things in terms of actual gross levels of reduction and then composition of the balance sheet. Our only pre-payable debt today at attractive economics is the term loan. And that's what we're chipping away at. So later this year, we'll continue to pay down debt on the term loan.
The couple of handcuffs we have, though, are the floating rates notes -- the senior secured notes, the 11.25 that don't become callable until June of next year. So we'd have to tender for them today but it's very expensive to do that. And the other thing we have are convertible notes that mature in 2014.
So I think when the 11.25 become callable, we'll probably call those next year and probably refinance those with one or two tranches of unsecured debt at hopefully less than 11.25% rates. Bankers tell us today in this robust, high-yield environment, that we can probably issue somewhere between 7% and 8% for 10-year money. So we'll get an interest savings there.
And then, the converts are fairly dilutive. They represent about 20 million shares, common shares. And one of the things we're thinking about, as I mentioned earlier, is perhaps a share repurchase program, buying in shares today, warehousing them, and then using those to satisfy the convert when it matures in 2014 to perhaps eliminate some of that dilution from having to issue new shares.
So ultimately, where we like to get is $500 million in debt, with high yield debt, one, two tranches, 10-year (inaudible) unsecured basis, and then continue to have this ABL facility out there. We think that's the right nature or the right composition of the capital structure for this asset base.
So I've talked about three things. I've talked about our asset base and how we're fortunate enough to be in the Permian, buying discounted WTI crudes, selling into some markets with premium pricing. Number two, I talked about some of the initiatives and what we're doing to take advantage of that.
Building some infrastructure, doing some expansion at Gallup, considering expanding at El Paso, that will be a use of cash, revisiting the dividend level, maybe a share repurchase program, and then fixing the balance sheet and getting it to a level that we think is manageable through thick and thin. Any questions? Yes sir.
So, the question -- I'll do this because I'm not sure they can here you. This is being webcast, so I'll repeat the question. What would the expansion at El Paso cost? We're in early engineering phase now, but most likely it'll be just a crude unit and perhaps a DHT expansion. So it'll be fairly reasonable. We think it's going to be under $100 million to do that 25,000 incremental expansion per day.
Yeah. So the question is profitability of running new Bone Springs and Avalon shale crude versus what's called common stream crude we're running today. So you've got the Brent WTI. You know about that. And you know about this recent Midland/Cushing differential. But Bone Springs and Avalon, we think, is probably worth another $1 a barrel or so to us, discounted off of load Midland due to the transportation economics for barrels to Midland versus sending barrels to El Paso.
So we think, in addition to the Brent TI, wherever it is today, $16, in addition to the Cushing/Midland, which is $3 or $4 today, there's perhaps another dollar in there discount for taking that crude to El Paso, the Bone Springs versus them taking it to Midland.
That project is scheduled for first quarter next year to be completed. So today, we're running at about 10,000. It's all delivered by truck. And once we get the pipelines in place, we'll be up to about 40,000 barrels a day. The goal -- because the production there is pretty prolific, at least the estimates are. The goal would be to utilize a fair bit of that crude in that area, and hopefully at some point in time, run all of our WTI requirements from this new shale crude.
Hey Jeff, I've got a question for you. You reinstituted your dividend in 1Q of about $0.04 per share, equates to fairly nominal yield, less than 1%. You said in the past that you'd like to make your dividend yield competitive with refiner peers, top of refiner peers, somewhere around 2.8%, 3%. That kind of implies you need to triple your dividend. Have you guys thought about what level of increase you'd consider?
Well, we initially put in the dividend to make sure we're on a par with our peer group, as we said, and have also opened up some pockets of investors that couldn't invest in non-dividend paying companies. As our cash flow forecast matures, Craig, and we think that it warrants, we probably will revisit the dividend level to see if it might make sense to revise the dividend level to be more competitive with our peer group.
Any sense on timing when that could occur?
Probably in the next year or so we'll revisit it.
So the question was the $160 million of CapEx for 2012. It does include maintenance and regulatory. So discretionary is about $65 million. And it does include the $6 million at Gallup for that expansion. And it includes about $10 million or $12 million in engineering work for the El Paso expansion. But it doesn't include any of that $100 million or less that I indicated, that we'd spend or might spend in 2014 on the expansion of El Paso.
Well again, it's kind of dictated about where the new crude comes on in line or produced. We're starting to see crude come closer to El Paso, the crude fields drilling closer to El Paso in El Paso County. And again, as that crude comes on line, it may make sense for us to build some logistics to tie up those producers so they can send crude to our refinery versus sending it to Cushing or to the Gulf Coast.
Okay, good. Thanks Craig for having us. We appreciate it.
Thanks for coming.
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