Frontier Oil Corp. Q1 2008 Earnings Call Transcript

Frontier Oil Corporation (FTO)

Q1 FY08 Earnings Call

May 06, 2008, 11:00 AM ET

Executives

Doug Aron - VP, Corporate Finance

James R. Gibbs - President & CEO

Paul Eisman - EVP - Refining & Marketing Operations

Michael C. Jennings - EVP – CFO

Analysts

Jeff Dietert - Simmons

Paul Cheng - Lehman Brothers

Chi Chow - Tristone Capital

Daniel Burke - Johnson Rice

Jacques Rousseau - Soleil-Back Bay Research

Kenneth Pounds - Nutmeg Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 Earnings

Conference Call hosted by Frontier Oil Corporation. At this time all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question and answer session and if you'd like to ask a question you may press star one on your touch-tone pad at any time. [Operator Instructions] As a reminder this call is being recorded. I would now like to introduce your host for today's conference, Vice President of corporate finance Mr. Doug Aron. You may begin, sir.

Doug Aron – Vice President, Corporate Finance

Thank you. Good morning and thanks to all of you for joining us this morning for our first quarter earnings call. Before we get started, I would like to 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 conference call may include forward-looking statements concerning the company. These may include statements of plans and objectives for future operations, statements of future economic performance 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.

I'd now like to turn our call over to our Chairman, President and CEO Jim Gibbs.

James R. Gibbs - President & Chief Executive Officer

Thank you and also I thank you for joining us today, our first quarter earnings call and yes, we did have earnings, wasn't easy. I know it breaks sort of a trend here. I'm glad it did. We had net income of $46 million or $0.44 a share in the first quarter and we can get into more detail if you want, but I just want to briefly tell you what I want to talk about and then you can ask questions.

We had earnings in spite of three events, one was poor… I guess no other way to phrase it than a poor gasoline market, which is really our largest product. You'll note in the press release that during the quarter it averaged $4 a gallon. That's the crack spread on WTI. Nobody uses WTI but because it's too expensive but that's a good marker. What it doesn't say is how it trended during the entire quarter. Probably told you at the last earnings call, as a matter of fact, I remember telling you that the gas crack on WTI was negative for most of December and it was negative for a lot of January. It wasn't until February and March that we got any type of relief on it at all. It has been an incredibly volatile.

The second thing… in fact, the earnings last quarter was a carryover from the coker fire we had back in December in Cheyenne. It carried over for 10 days into January and our loss opportunity and related expenses on that we guesstimate to be about $7 million or $0.04 a share. And the real biggie is in El Dorado where we had most of the plant down for the entire month of March. That was for our crude and vacuum turnaround and tie-in. You might recall the last time we turned around the [inaudible] in El Dorado was in first quarter of 2003 and we lost about 3.7 million for the entire company. That's what we reported.

Our best guess of lost opportunity is about $0.12 a share and direct expense about $0.02 a share for about $0.14 a share. Those are guesstimates but fairly wildly accurate. That's what affected us, I guess what I really want to talk about today as far as the earnings was the impact on balance sheet. We normally wouldn't probably go in this much detail, but I think it's become a big issue not so much for us but for a lot of our peers, so we just want to give you a little bit of satisfaction that that balance sheet is still good and strong and it is. We report gas for $154 million.

As you recall, we told you we were building inordinate amount of inventory in February and in order to have something to process and sell at El Dorado. At the end of the month we actually… end of the quarter, we actually had about $772 million worth of inventory and payables were about $442 million based on by and large those inventories. We had working capital investment of about… net working capital investment of about $330 million that's awfully large for a small company like ours. We don't get a lot of return on that particular form of capital investments. So we don't like to actually spend that money, but we have to stay in business.

We expect to turnaround as that inventory and receivable cycle goes through the… into the second quarter and our best guess is we should generate free cash in excess of $100 million. So we should have cash balance of somewhere around $250 million or more by June the 30th. We have lots of additional liquidity. We have a $200 million… $210 million revolving… revolver and we have nothing drawn on that and we have about $125 million worth of additional capacity to increase that revolver.

So we are very liquid, balance sheet is very solid. We consider that to be a real plus. We're going to keep it that way. We did buy back about $64 million worth of stock in the first quarter and we have remaining authorization of about $100 million.

Just to give you an idea of what has happened with this crude oil run-up how much does $10 increase in price of crude cost does [inaudible].

Unidentified Company Representative

We've got 6 million barrels of inventory. So gross 60, but after accounts payable and such the net effect is $30 million.

James R. Gibbs - President & Chief Executive Officer

$10 is $30 million worth of additional investment of working capital. So we don't… not particularly fond of crude going up $10 every two weeks. I want to talk about El Dorado for a while and I want to pat these guys on the back and just tell you what they've done. We have an incredible project team there. We just completed that turnaround and these times are really uncertain very, very difficult to operate in. You don't know what your costs are going to be. We had a budget for that turnaround for both capital and expense of $34 million. The actual was 34.6 million, so we had $600,000 overrun, $600,000. That's 1.8%. That's just round off. That's just noise. That's an incredible performance.

Not only was it on budget, but it was also on time, and they did an incredible job. At the same time, they were tying in the new vacuum unit. That's been going on for about the last 20 months. The budget on that was $143 million. The actual was $145 million, but that's an overrun of $2 million or 1.4%. That $2 million was not the result of the activities of the project group management including me decided that this was costing us about a million dollars a day and foregoing opportunities, so we decided to put 40 additional welders on there to see if we couldn't accelerate about three days. Well, we put the welders on, but we didn't accelerate by three days but that was our fault.

As far as I'm concerned, that project came on one time and on budget, and I don't think you'll see any projects in this business in the United States of America come up with that type of a performance. As far as the impact in return, I don't know what to tell you. The results are really undetermined right now. It's just too early to tell. We're optimizing earnings right now. We hadn’t really had a chance to test it to see what it will do. I think I can tell you safely that at today's upgrading margins and I'll give you an example of it in a second, think the actual results at the instantaneous, that is looking at it one day, one week, may be one month, may be as high as one and a half to two times what we promised you.

They would be, went through these projects and also what we told the Board of Directors. So I feel encouraged. I think they're going to be very good, probably more than what had anticipated. Not only are we going to have a whole lot better draw on the vacuum, but we're actually going to increase our capacity to run additional crude, but we don't know to what extent that is. We're running today about 116 or 117,000 barrels.

We've run as high as 126,000 barrels a day, and that's all… both of those are pretty heavy charges of heavy crude, about 25,000 barrels today, about as much as we can get our hands on the current… use more. I feel very comfortable that if we can reduce the slate a little bit we could easily go up to about 130,000 barrels of throughput capacity of the crude unit. We're not inhibited at the crude unit. We're inhibited down the stream where's we run into capacity constraint in the coker and then the sulfur handling the stream.

If we just go through the vacuum a second. What it does is it's put on lot of gas oil out of the resid and then it's pulling diesel out of the gas oil and currently they think it's pulling about 6,000 barrels a day of gas oil…pardon me, diesel out of their resids, so we're converting 6,000 barrels a day out of resid and the diesel and it can face margins, that's about $560,000 a day coming out of that particular unit from the diesel only.

We're also getting additional gasoline from that gas oil, but just on the diesel draw it about 560,000 bucks a day. So if you multiply that times 365, and that a couple hundred thousand bucks a day of gasoline, you're going to get pretty close to 750 to a million bucks a day from that new vacuum unit. But it's really not running to the extent that it possibly could because we could probably use more heavy crude if we could get our hands on it. This entire phase won't be flushed out until July because we're right in final stage of our coker revamp and expansion. What's happened with the coker is not too simple, think it's easy to understand but because we're pulling out more gas oil and diesel from the resid what we charged to the coker is a God awful lot more coke per barrel, so the capacity in terms of barrels has been reduced. The capacity in terms of coke has not been reduced.

So our throughput of barrels of resid has actually gone down. That's going to change in July when we do our coker revamp and change out our barrels and we're expecting to pick up 2 to 3,000 barrels per day of additional barrels charged to that unit. If we see the impact on crude running, if we're running the same slate that we are to date, that means we would get 13,000 to 20,000 barrels a day of additional capacity through the plant as a result of that particular coker upgrade.

That's 13 to 20,000 barrels of additional capacity. If we decided to heavy up and run more heavy barrels, that would give us somewhere between 52,000 to 8,000 barrels a day of additional heavy crude capacity. So I'm trying to say we like to run as much heavy crude as we possibly can. When the coker comes back up, we're going to increase the capacity between 5,000 and 20,000 barrels a day just for that coker expansion depending upon crude slate.

So far that coker expansion is on budget, should come within plus or minus 1% or 2%, probably minus in this particular case. One thing that vacuum unit has really done and particularly went when the coker revamp is completed has really expanded our capability to use a lot of additional crudes that we might normally have not used in quantities but now because of the expansion in the coker and expansion in the throughput capacity of the entire plant we're able to take advantage of a lot more additional crudes that we probably had run but now we can buy in volumes and particularly the Gulf Coast [inaudible].

As far as the other projects are concerned, which is the other major topic, so far they're all on schedule and on budget and this includes a list that you probably already know about. I won't bore you with them, but as of today they're all in pretty good shape. I don't have any problems with any of them. And I will tell you that unabashedly that Frontier has not, nor does it contemplate cutting any or deferring any capital expenditures on any of these projects. That's not to say we're not constantly reviewing the economics because we are, but we have not cut, nor do we contemplate cutting any of these capital projects, nor do we contemplate cutting our capital expenditures budget for this year.

What's the outlook? Well, the quarter is going to be very interesting because no one knows what gasoline is going to do. I think it's been very volatile, probably continue to be, so I think we may see some relief in May because we're going through the switch to summer grades and that typically always puts constraint in the supply/demand balances and reduces supply because you can't blend. We're beginning to see that a little bit, but hope we get some little bit more encouragement, hadn't been too encouraging to date. Diesel is a strong player, strong now. That cracks 25 to 30 bucks and we haven’t even gone in planning season yet so, there could be a potential blow-out here in May whenever people… the farmers actually get in the field. I don't know what's going to happen, but certainly has been a good performer.

The other strong actor is crude differentials and they're going our way. Diesel is going our way. Gasoline is uncertain. So I think with that particular outlook you go ahead and do what is best for you and our strategy is pretty simple. I think most of the people in our situation it's simple. You maximize diesel production. You take advantage of differentials, buying as much and running as much heavy crude and sour intermediates, the cheap crudes that you can possibly get until you fill up your coker and your sulfur string and then you look around and see what else you can run to make a little money.

That's what we're doing, so I imagine you can see effectively what we're doing is reduce some of our throughput in order to maximize and optimize profits. If you're a sweet crude producer, a user, pardon me, that's the only thing your plant can use, it's probably time to call a plant-wide holiday for a couple months because that's the only way I know to minimize your losses.

With that I'm going to say that I am through and we'll be more than happy to answer your questions. So if Charlie would let us start our quick Q&A period right now, we'll go ahead and do that.

Question and Answer

Operator

Thank you gentlemen. [Operator Instruction]. First we start with Jeff Dietert with Simmons.

Jeff Dietert - Simmons

Good morning. Jeff Dietert with Simmons. Can you hear me okay?

James R. Gibbs - President & Chief Executive Officer

Yes.

Jeff Dietert - Simmons

I think you answered my first broad question on capital projects that you don't plan to slow any or delay any of your projects. But I was wondering if you could talk specifically about the SEC expansion and how that project's economics are holding up, realizing you do get some throughput benefits some Canadian heavy benefit, but it doesn't look like there is a lot more gasoline needed at least in the current environment. Could you talk about that project specifically?

James R. Gibbs - President & Chief Executive Officer

Yeah, we need the capacity on the cap. Because we are getting right over the entire plant whenever we get this big pick up and the coker and vacuum complex and the crude unit complex. So we need it there process gasoline, we also send [inaudible]. And that's about 4,000 barrels a day, 4,000 or 5,000. When we get the effective capacity increased in the plant there in El Dorado that is [inaudible] we are going to restrict that. So we need... actually need that the Cat expansion to take more diesel, more probably more gas oil out of the crude and vacuum, more gas oil out of Shian [ph] also we are doing incredible yield improvement on that particular unit [inaudible]. So that's going to be a big expansion, that's going to be a big yield improver. So I think that that still has very simple rates return.

Jeff Dietert - Simmons

And secondly if I could, the FIFO impact has gotten exceptionally large this quarter relative to others with the higher prices. Could you talk a little bit about that FIFO impact, what's moving around, how much of that is product versus crude?

James R. Gibbs - President & Chief Executive Officer

Yeah, Jeff, the FIFO impact this quarter, crude prices rose only about 6,7 bucks through the course of the quarter from that being from December to March, which is a little bit surprising because I think we all have our radar screen its going up a $1 a day. But what really happened through the course of the quarter was what generated the FIFO result, crude traded down from about $97, $98 at the end of December down into the high 80's in January and February at which time we were adding barrels to our total system in anticipation of the El Dorado turn around. Those barrels have since liquidated and we ran... we saw crude and products prices depreciate $15 or so on a very large inventory build, which has since turned. So that there are moving parts in there that are related to the El Dorado turnaround that are may be not transparent. But other wise, the FIFO answer is pretty static in terms of our inventory levels stay at about six million barrels quarter-to-quarter excepting turnaround quarters and we will see the FIFO effect on that amount of inventory through time there is a lag of about between 20 and 30 days between purchase and sale as the inventory makes its way through our system.

Jeff Dietert - Simmons

Any inputs from the product side?

James R. Gibbs - President & Chief Executive Officer

Not a lot, spreads didn’t change meaningfully during the course of the quarter. Gasoline cracks were weak, diesel cracks were strong pretty much through out.

Jeff Dietert - Simmons

Fair, good thank you.

James R. Gibbs - President & Chief Executive Officer

Jeff on that, just go back, maybe I didn't make it real clear earlier. We track everything on five-year high and low, then we put a band around the high and the low and we graph all that out monthly. Our gasoline crack is brought then right at or below the bottom of that spread, in other words below low five year low, just about every month. [inaudible] the diesel crack is either been right at the high establishing a new high every month this year. And we don't anticipate too much change in the diesel we are hoping that gasoline will come up at least be above them, the five-year low. So we are very... we feel optimistic that we can make a lot of money just on the diesel crack and the differentials right now.

Jeff Dietert - Simmons

Historically there has been… typically when diesel traded stronger than gasoline it was only about few dollars a barrel with it trading significantly above gasoline are there things that you can do to increase diesel yield in this environment that maybe you haven't done historically?

James R. Gibbs - President & Chief Executive Officer

No, we do the same thing, we will change to cut volumes so we can make more gas oil out of the crude unit, but right we are also… pardon me, make more diesel out the crude unit. But you also do some things to you crude slate to take those crude above those crude to give you… have more diesel naturally in the crude oil. So we were doing that and I think the big thing we have done, again go back to that vacuum we are working about 6000 barrels of diesel out of the resid and we are charging to that vacuum in it right now.

Unidentified Company Representative

I'll just add to that, at El Dorado after we install [inaudible] we actually had days for the first time in our history when we produced more diesel out of the refineries than we produced gasoline. So we are pushing that everyday both exactly doing what Jim said, we are trying to optimize the units to optimize cut points, we are buying crudes that optimize diesel and then obviously we are running our units to maximize what we produce.

Jeff Dietert - Simmons

Very good, thanks guys.

Operator

Next we'll next go over to Mr. Paul Cheng from Lehman Brothers.

Paul Cheng - Lehman Brothers

Hi guys.

James R. Gibbs - President & Chief Executive Officer

Good morning, Paul.

Paul Cheng - Lehman Brothers

Good morning. Jim in the past that you are very kind that we will provide some maybe guidance for the second quarter throughput and unit cost and also that you talk about say what is the quarter-to-date and the current margin and [inaudible] for gasoline diesel and also that now you have the Cheyenne and Dorado, wondering if you can do that here?

James R. Gibbs - President & Chief Executive Officer

What we can do is we can give you an update on the cracks, its crack spreads and the dips, let us give you on a side bar, see where the throughput is because that's a hard one to come with right now. We don't really know when you just give you pretty much for while guess on that one.

Paul Cheng - Lehman Brothers

Sure.

Unidentified Company Representative

What we said Paul in our press release today was that we were going to run around at least our plan today is 143,500 barrels for the quarter in terms of total crude charge. We will keep our website updated monthly on that if that changes and part of that reduced number is because of the ten days of turnaround or so in April at El Dorado, that was with zero crude charge, I think you had four or five days getting up to full rate there.

Additionally I'm not sure that as Jim mentioned we've run El Dorado at a 126,000 barrels a day already, but economics today tell us that running at that rate today based on gasoline crack spreads doesn't make sense. So as he said, stay tuned we will keep our website updated. In terms of crack spreads quarter-to-date for the month of April gasoline as Jim described was not very good. We saw in Cheyenne, an average for the month of April of $4 and about $480 and El Dorado on gasoline contrasting that was diesel's incredible strength in Cheyenne at average right at $30 for the month in 2782 in El Dorado, month-to-date and there is only I guess six or seven days so far here in May, but more of the same on gasoline we've averaged a little better than $3 in Cheyenne and about $5.25 in El Dorado on gasoline, diesel, Cheyenne about almost $26 for the month and about $25 in El Dorado.

Paul Cheng - Lehman Brothers

And thus the April in El Dorado for diesel is 2780, you say?

Unidentified Company Representative

That's correct.

Paul Cheng - Lehman Brothers

Okay.

Unidentified Company Representative

And has its $30.

Paul Cheng - Lehman Brothers

And Jim how should we look at your share buyback program given a little bit more challenging market condition, why now... should we assume your share buyback will only conducted full free cash flow or that given you do not have a look at that may you follow up to, do you?

James R. Gibbs - President & Chief Executive Officer

Right now we are not about to borrow buyback shares. We haven't bought back any recently and the reason we don't is we can't get a hand on what crude oil is going. If crude oil goes up, we are going to fund that, okay? And we will do that by cash growing on our revolver. So even though we will probably generate $100 million in cash this quarter, we're probably going to hold our buybacks in billions until we can get a little bit better definition on what crude is going to do because crude is really sucking up working capital right now. And to the… we probably fund half of that net increase to payables, but it's just not a time... real good time to have a lot of courage and go back and buy up your shares until you get substantial liquidity base build up in your cash. So I would say for a while, we are not going to buyback any shares until we get that cash position go back after something that will come forward, because we don't want to do anything to damage the future here and the future is pretty close at hand, because we've got these capital expenditures all of which are going to... should generate some very, very attractive returns to this. We do want a buy back shares, we think right now it's a good time, but we are just a little bit reluctant to do it because we want to see what happens to crude oil prices and our liquidity.

Paul Cheng - Lehman Brothers

And in the past you said M&A market that may be become more opened up, have seen the asset price have come down sufficiently, did it come really an effective LIBOR for you or that... is it [inaudible] doesn't really want to lower the [inaudible] ?

James R. Gibbs - President & Chief Executive Officer

We haven't seen anything we wanted to buy, we have not been to any of the sales at all.

Paul Cheng - Lehman Brothers

Right. But I mean, do you say that the function of the asset quality or is the function of the price that's why you are not interest?

James R. Gibbs - President & Chief Executive Officer

Asset quality, I think the prices of refineries trading today, certain exceptions, are probably below the price that you will see for the transaction solely. If you really want to buy something, probably it's best to buy a company now as opposed to buying a particular asset, but we're not in that particular mode. We're very selective in what we want to buy, and we have an opportunity to buy an asset of the quality that we're willing to pursue. And that's not say there aren't good assets there, there is one real good asset for sale, but its totally dependent up Louisiana suite and gasoline and a little bit of jet fuel. And that's not our particular mode. We want crude flexibility; crude flexibility requires upgrading capacity in the form of Hydro Crackers, cokers, and a big sulfur train. And we are bumping against sulfur train right now, we are running so much [inaudible] crew, which isn't bad. We were selling sulfur at about $5 to $10 a ton a year ago. And now it's up to $400 a ton, so...

Paul Cheng - Lehman Brothers

Yeah, I heard there is a new profit center?

James R. Gibbs - President & Chief Executive Officer

It is. We are making about $3 million a month on sulfur and we are still lending gasoline, we make about $2 million or $3 million a month lending gasoline there in Denver. So its not... we don't have the opportunity to take advantage of... as of now, we are. I am sorry, that's created a type of situation we have in agriculture now, but we take advantage of that selling more diesel and selling a lot more sulfur. Sulfur goes into fertilizer.

Paul Cheng - Lehman Brothers

Right. Two final questions if I could. One, the first quarter effective tax rate 38% or so, you said a reasonable one going forward?

James R. Gibbs - President & Chief Executive Officer

I am sorry, can you repeat that one more...?

Paul Cheng - Lehman Brothers

The first quarter effective tax rate around 38%, is that a good one going forward?

James R. Gibbs - President & Chief Executive Officer

That should look more like a 36% going forward, we had a couple of items in the first quarter that we don't believe will reoccur, one permanent difference and one effective of Section 199 deduction just coming through a little later than we would expect through the rest of the year. So it should be a little lower than 38.

Paul Cheng - Lehman Brothers

Okay. And Jim, taking about acquisition, is that a kind of sealing, what is your a balance sheet limitation that you will be willing to push, is there something really attractive for you?

James R. Gibbs - President & Chief Executive Officer

I really don't know, Paul. We have a lot of flexibility, but I don't think we've really tested that yet. I think we could find that in very large acquisition, but contrary wise, we have… we hadn’t seen anything so far.

Unidentified Company Representative

Further Paul, the current markets limit that in a very big way... when [inaudible] five times EBITDA debt on that thing the current market would probably accommodate two times debt.

Paul Cheng - Lehman Brothers

Right.

Unidentified Company Representative

So, it's a very big difference in terms of the ability to rise financing in this current market.

James R. Gibbs - President & Chief Executive Officer

And also, remember if you are going to buy a plant now do you have the capital cost which you have been working capital cost to our plants gone to acquire about 6 million barrels crude year in transferred in storage, you are talking about crude and the intermediates of about 9 million barrels, so you are talking about lot of money?

Paul Cheng - Lehman Brothers

Sure.

James R. Gibbs - President & Chief Executive Officer

Its about 900 million bucks worth of working capital.

Paul Cheng - Lehman Brothers

Sure, fully ended that. Very good, thank you we will appreciate.

Operator

And next we will go to Chi Chow from Tristone Capital.

James R. Gibbs - President & Chief Executive Officer

Chi are you there?

Chi Chow - Tristone Capital

Jim, can you here me?

James R. Gibbs - President & Chief Executive Officer

Now we can Chi.

Chi Chow - Tristone Capital

Okay. Hey, Jim I think you probably gave us the answer for this on your comments, but can you summarize what your yield plate looks like at El Dorado coming out of the turnaround and expansion?

James R. Gibbs - President & Chief Executive Officer

We have an expert here on the line, Paul, what is that yield?

Paul Eisman – Executive Vice President - Refining & Marketing Operations

Jim, I’ve been looking at the absolute yield, basically it's our historical yield and Jim was talking about 6,000 barrels per day that moved from heavy products into diesel so if you take another… assuming rough numbers so there is 5% to 6% reduction in heavy products moving directly to diesel, I think that's what we seeing, otherwise I think it's pretty much unchanged.

Chi Chow - Tristone Capital

That's obviously significant move, looks like you are averaging historically around anywhere between 15,000 and 18,000 barrels a day kind of bottoms of that rate?

Unidentified Company Representative

We are running in higher rates today...what is happening Chi is...is that before the turnaround as Jim mentioned, the way we would optimize the plant would be the maximized diesel and live within our coker limits and so that would really limit our crude charges some where around 100,000 barrels per day depending how heavy we got actually less than that. We are running 116 today and living within our coker capacity so we precisely gotten out of this 16000 barrels per day of capacity that’s economic.

James R. Gibbs - President & Chief Executive Officer

And keep in mind that we thought this is probably going to happen I guess we didn't realize I give that backing is going to perform, its is really, really changing our yield and sending a lot of hard coke resist to our coking… coker right now. And just that 2000 or 3000 barrels of day of additional Coker capacity is going to increase our capability run on heavy crude, some 5,000 to 8000 barrels a day our total charge [inaudible] of 13000 to 20000 barrels per day. So, in June we are going to have a substantial increase in capacity and yields, real improvement.

Chi Chow - Tristone Capital

Over on Cheyenne, it looks like in first quarter you also have cut the bottoms production, quite a bit 3Q or 4Q last year, does that going to continue going forward?

James R. Gibbs - President & Chief Executive Officer

We always going to be even better because we haven’t lined out that coker yet its still aviation technology you still have quite a few strokes on that and we are giving them worked out as we go and there is couple of [inaudible] we haven't figured out it, but I think that we are getting a handle on that coker there and we’ve only been able to run about 13000 barrels, plus half a dozen days here in the late… since they started up that we are running about 12,000 to 13,000. I think once we get census branded unit as far as the operation of the unit. Once we get a little bit more familiar with the unit, get our operators more familiar, more comfortable with the unit and we can start charging that thing about 13,500 barrels a day. You will see even a better improvement in asphalt production. So I don't think that we are going to get much better yields as we go along in June, July, and August.

Chi Chow - Tristone Capital

All right. Great. I have one final question. Jim you mentioned the agricultural demand [inaudible]. Can you quantify how meaningful that is, I mean do have a feel for volume wise what we were talking about?

James R. Gibbs - President & Chief Executive Officer

I don't, Paul. Yeah, I am handling there, we just it is... has not kicked in. We are not selling any meaningful agricultural diesel right now because of the weather and when that kicks in, it's really going to... demand is really going to go up. For us it's going to be a more price in our built than ability to produce more.

Unidentified Company Representative

Yes Jim, I agree. I don't have numbers on that. I know that the weather has been cold and wet and so it's delay the planning, we were looking at some data recently that says the farmers about in terms of planning progress about 10% behind where they typically are for this time a year. 10% to 20% behind where they are typical this time year. So, we know the demand is out there, will come. And we are selling all the diesel we got it that we can make at a good price. So, the question is as Jim suggested what happened to the price with this increase demand and we just don't know where that is going to go.

Chi Chow - Tristone Capital

And thanks for the comment.

James R. Gibbs - President & Chief Executive Officer

You are welcome.

Operator

And next we move to Daniel Burke with Johnson Rice.

Daniel Burke - Johnson Rice

Good morning all.

James R. Gibbs - President & Chief Executive Officer

Good morning, Danny.

Unidentified Company Representative

Hi, Daniel.

Daniel Burke - Johnson Rice

Jim, just a quick question. You suggested not surprisingly the vacuum expansion project could be 1.5 to 2 times as profitable as you suggested. Wanted to make sure you had the right set of historical notes, was that ... are you referring back to the EBITDA contribution, I think you said that 50 million to 100 million annually depending on sort of the assumed diesel margins?

James R. Gibbs - President & Chief Executive Officer

Yes. If you take what I gave you, 560 on diesel and probably another 222,000 [ph] gasoline, we are running about $750,000 pick up per day, multiply that times 360, you are going to come up about 300 million and that's a little bit more than we told you that we thought we could get out of the vacuum, improve expansion and rebound.

Daniel Burke - Johnson Rice

I agree. Thanks. Next question. Did the impact of the El Dorado turnaround in the first quarter $0.14, was that the number Mike, I guess I have thought it might have slightly greater magnitude impact given the absolute reduction of volume and sales?

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

No. That is the number and I think the impact is sort of mitigated by just how low gasoline prices were during the month of March when that plant was down.

James R. Gibbs - President & Chief Executive Officer

And Mike, I will add to that, in terms of, we were able to run a lot of the plant at rates because we stored up gasoline... we stored up intermediate products for the much prior to that. So we try to keep the plant running to the maximum extent we could. So, when we look to evolve what the earnings could have been had we not had the turnaround, we had the back some of that out because we wouldn’t have done that. And so we did mitigate on the impact in the turnaround on earnings by storing up this intermediates, running this plant as hard as we could while we were down.

Daniel Burke - Johnson Rice

That was well timed then?

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

So, bought lot of the intermediates and run to the units so that we didn't take down [inaudible].

Daniel Burke - Johnson Rice

Okay.

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

And wait a minute... and the NAFTHA train platform we are in [inaudible].

Daniel Burke - Johnson Rice

Okay, thanks. That's useful. Just a couple more then. Operating costs looked pretty good in the quarter, but net gas is higher probably they were in your forecast... in your year-end, any way to get sort of an update on how you see refinery cash expense trending taking into account the new units and what you are seeing in the net gas side?

James R. Gibbs - President & Chief Executive Officer

I will answer that [inaudible]

Paul Eisman – Executive Vice President - Refining & Marketing Operations

Yeah, I mean, gas has gone up, and it has had a significant impact on our expenses. I mean in the first quarter, I looked at that this morning, our fuel costs at the two refineries was about $3 million up versus our plan just on natural gas and gas is $11 or something like that now. So you got to expect that to continue, I mean we are so... so that will impact. We're continuing to see increases in another areas. We're struggling honestly to deal with that. We've got commitments to control these expenses and look at that on a nearly daily basis. But clearly expense control… some of this is out of our hand in terms of natural gas some of it is within our control and we are working hard to control it. We look at our latest projections for operating cost for the year are 478 at El Dorado, 619 at Cheyenne, total for the company 555 is what we are projecting. So we are obviously working hard to try to minimize that though.

Daniel Burke - Johnson Rice

Fair enough. And just last question, Jim. As you look around, are you seeing the level of economic run cuts from the hydro skimming and cracking refiners around you, do you have a sense for that, that you would expect to see given the environment we found ourselves in?

James R. Gibbs - President & Chief Executive Officer

I think lot of that is natural, Danie, just like us... you are looking around, we are capable of it, you fill up your coker in and you sulfur plant. And you do that around showers [ph] and heavies. And that's going to reduce your throughput period. You can run the whole lot more sweet crude through these plants than you can, the showers and heavies because you are going to... you have to have coker passing, you have to sulfur plant capacity. So a lot of this has been just optimization of profits, rather than optimization of throughput. A lot of plants don't have that capability, because they are geared for light sweet crudes. So they don't have the capacity to run a lot of this stuff, I guess what they do is run what they can, and if that's the case than there are normal reduction in utilization should be pretty large. I haven't seen that to date, but anybody that's running a sweet crude plant probably don't have the flexibility to switch over to the shower crudes and the heavy crudes and take advantage of the differentials. So they are probably doing what they can, but if they are running big throughputs to these units, taking WTI four or five bucks for this that light sweet crude oil. They are not making any cash margin, I imagine its probably negative in many cases.

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

And Daniel, I'd add that we see the same utilization numbers that you do from EIA which are kind of low 80s and I'd say that really the reason that number has stayed probably as high as it has, given the gasoline margin has been the strength of diesel. And I think you probably continue to see it there unless diesel were to weaken, in which case you'd probably see that number coming even more.

Daniel Burke - Johnson Rice

Fair point. Thanks guys.

Operator

Next we'll hear from Jacques Rousseau from Bay Back Research.

Jacques Rousseau - Soleil-Back Bay Research

Good morning.

James R. Gibbs - President & Chief Executive Officer

Good morning, Jacques.

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

Hi, Jacques.

Jacques Rousseau - Soleil-Back Bay Research

Hey, just, most of my questions have been answered, but just a couple out that ends here. You had mentioned the total charges you forecast… or the crude charges you forecast for 2Q were about 143,000 barrels per day, what would be the total charge under that scenario?

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

The total charge including other intermediate stocks will be about 161,000 barrels per day.

Jacques Rousseau - Soleil-Back Bay Research

Great. And you talked about the margins that you are currently seeing, what about the differentials?

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

The differentials are going away, we had a meeting yesterday, monthly meeting and make sure this spot indication on the heavies, we are probably somewhere around $25 per barrel plus the showers using WTS as a marker is about 650 spot per day, so both of those are higher than they were a month ago.

Jacques Rousseau - Soleil-Back Bay Research

Great. And one last thing, in the beginning of the call you mentioned something about an opportunity loss at Cheyenne I thought you heard I didn't catch that?

James R. Gibbs - President & Chief Executive Officer

That was El Dorado.

Jacques Rousseau - Soleil-Back Bay Research

Okay, was there anything at Cheyenne?

James R. Gibbs - President & Chief Executive Officer

Yeah, there was, we have the coker out for about the first half of January and that tallied up to about the $6 million of opportunity loss at the plant.

Jacques Rousseau - Soleil-Back Bay Research

Great, thank you.

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

That’s about $0.04 a share.

Operator

Next we will go to Kenneth Pounds from Nutmeg Securities.

Kenneth Pounds - Nutmeg Securities

Great quarter under the circumstances.

James R. Gibbs - President & Chief Executive Officer

Thank you.

Kenneth Pounds - Nutmeg Securities

Couple of comments…

James R. Gibbs - President & Chief Executive Officer

We are happy with it.

Kenneth Pounds - Nutmeg Securities

Couple of comments that pick my interest, you just talked about higher natural gas cost, Blair [ph] actually said that they are going to a build wind farm next to [inaudible] you guy's have any interest in that or?

James R. Gibbs - President & Chief Executive Officer

No.

Kenneth Pounds - Nutmeg Securities

Not Mckeith [ph] but wind generation for your refinery I meant.

James R. Gibbs - President & Chief Executive Officer

No, I am not interested in that.

Kenneth Pounds - Nutmeg Securities

Okay. And one other thing.

James R. Gibbs - President & Chief Executive Officer

[inaudible]

Kenneth Pounds - Nutmeg Securities

You basically made a comment that it's not the prices of refinery to say, it's the quality of the assets and you mentioned cokers and so forth, if that prices really come down to rock bottom, it's sounds like some sellers are may be even getting kind of desperate now, is there a price where you become more interested or is the...all just asset focused?

James R. Gibbs - President & Chief Executive Officer

As you know, we had opportunities, but then we look at ourselves and say hey, is this what we really want and no, we don't, what we want is what we have and we want to improve on that and hope that… what that is, is very simple, we want flexibility, we wanted to be able of taking cheers. We want to make our crude supply happy and they are really happy about it now, because they got all kinds of opportunities to buy our things and steep discounts and run volumes of those particular opportunities, and most of the plants we have looked at simply do not give us that type of luxury unless we spend a lot of capital on those plants and a lot of capital means upgrades. Hydro crackers, cokers and a lot of sulphur trains and that's very, very expensive to replicate. The sulphur trains aren't that expensive, but the hydro crackers in the coking units are incredibly expensive.

Kenneth Pounds - Nutmeg Securities

Great, are you… you have mentioned that the guy's that are running light sweet are probably making a loss...have you seen any diminishing in the supply coming into the markets that you serve for gasoline?

James R. Gibbs - President & Chief Executive Officer

No. Let’s not to say they won't happen, there is always a seasonal reduction not a product coming into the Denver market, because Montana plants don't have much market in the winter so they ship down to… down south. To the extend that turns around, starting about this time a year when they get more gasoline demand and more diesel demand in their local markets. That would normally reduce the amount of barrels coming into the Denver area from the North, that's always very helpful. We think that we get a balance, about this time a year and the gasoline cracks, we just had not seen there is lot of inventory. It might happen, but I think the [inaudible] that would be very low.

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

Jim, just to support that, what we saw earlier in the year, if you look at the deal, the tax on inventories, which had gasoline well above the five-year highs, but we have actually seen that drops significantly over the last several weeks so that we're at like five-year high levels now. So, we are within the range at least now. So that is supportive of at least some improvement in margins going forward. On the other side of that you have seen inventories at the low-end of five-year inventory levels all year, which is an explanation why diesel crack spreads are where they are. So, we have seen some improvement in terms of gasoline inventories nation wide, but it's not enough to drive the margins to this point?

James R. Gibbs - President & Chief Executive Officer

I think most refiners are looking at gasoline as a by-product now. We have to make it in order to make diesel. So, as long as I make money on diesel, they will always make some gas, I make the gasoline in order to get the diesel, but that's got to find out end point to it.

Kenneth Pounds - Nutmeg Securities

Finally you mentioned that you are trying to get as much heavy crude as you can get, your hands on. So, is the potential to get more or is it difficult or how is that going?

James R. Gibbs - President & Chief Executive Officer

As we have the pipeline expansions into our market and they are coming, we will increase the capability of getting the crude into plant, but as of right now, we are pretty much hand storm here about the amount of transportation capacity we have into the [inaudible].

Kenneth Pounds - Nutmeg Securities

That's the bottleneck really?

James R. Gibbs - President & Chief Executive Officer

Yes.

Kenneth Pounds - Nutmeg Securities

There has been some talk of some of these pipelines, diversing, I guess that telling instead of heading to Canada coming… going the other direction I would ever so. Are there are some near-term improvements rather than just building new pipelines?

James R. Gibbs - President & Chief Executive Officer

One of the specific I would suggest an expansion of the line that was reverse to a couple of years ago. Then we do have some lines coming [inaudible]. I think they come in 2009.

Kenneth Pounds - Nutmeg Securities

Okay. Great well thank you very much.

Operator

And now I will turn it back it over to our host for closing remarks.

James R. Gibbs - President & Chief Executive Officer

Well we have no remarks. We are happy we've made some money and we are going to make a lot more in the second quarter. I think most of the issues around the tie ends and turnarounds are behind us and we've a lot of confidence that we're going to produce a lot better throughput numbers and a lot better yield numbers than we did in the first quarter. It was very... it's relieving to get through the first quarter because we had a lot of work to do and not only with tie ends, but also had a lot of work to do in lining out what we get tied in. So as we get better with the units and as we learn more about the units, I think we will feel more comfortable running more crude and selling more diesel, particularly [inaudible]. But we are doing what we can to make shareholders wealthier and you don't continue… we don't have any plans whatsoever to reduce our capital budgets to make you even more money 2009-2010.

We were optimistic that just sort of a down time in the business because of gasoline, but we are prompting from that and we are prompting the fact that we created hell lot of demand for fertilizer right now. So, we are encouraged we are happy, we are happy, we made money, we made more money, we are happy with those balance sheet, we are happy with cash position and we are going to be around long time and, I don’t about some of our peers, but we are going to be around long time and we are going to make you money for a long time.

That's all we got. That's what we are paid to do and if we don't... I am sure there will be some people out here on market looking for jobs. Come say as when you can. Bye.

Operator

That concludes this conference, we appreciate your participation, you may now disconnect.

Copyright policy: All transcripts on this site are copyright 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.

Comments

[jjason]

I would have to be an engineer to understand all the jargon. So this transcript is not worth slogging through.