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Frontier Oil Corp. (NYSE:FTO)

Q2 FY08 Earnings Call

August 7, 2008 12:00 PM ET

Executives

Kristine Boyd - Manager, IR

James R. Gibbs - President and CEO

Doug Aron - VP of Corporate Finance

Michael C. Jennings - EVP and CFO

Paul Eisman - EVP of Refining and Marketing Operations

Analysts

Jeff Dietert - Simmons

Chi Chow - Tristone

Jacques Rousseau - Back Bay Research

Paul Cheng - Lehman Brothers

Daniel Burke - Johnson Rice

Kenneth Pounds - Nutmeg Securities

Operator

Good day, ladies and gentlemen, and welcome to the Q2 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 (Operator Instructions). As a reminder this call is being recorded.

I would now like to introduce your host for today's conference, Kristine Boyd, Manager, Investor Relations. You may begin your conference.

Kristine Boyd - Manager, Investor Relations.

Thank you, Chris. Good morning and thanks to all of you who are joining us this morning for our second 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, 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 and Chief Executive Officer

Thank you Kristine. I'd like to take the opportunity to welcome you and also thank you for your attendance. I know you had a real busy day. I had three of four different conference call schedule regardless about how we are going to add to it. I am responsible for the rescheduling of our financial review and reporting. I have spent all the 10 years of my life in Texas, Gulf Coast and I have really learnt to respect tropical storms and hurricanes and as you know we had one last our doorstep. So won't let that little [inaudible] get on through Houston before we got back to the business of reporting to you accurate information. I apologize if that use of any inconvenience as a result that, that's my fault and I'm sorry for it.

One other thing I want to talk about before we get into the all the numbers, something we are all suffering through the entire industry and that's crude oil, absolute level of prices ready to change prices and volatility. This has really had a negative impact on our business and I think it's something everyone's going to live through but we want us you otherwise for being disingenuous. It has caused a lot of problems particularly in the second quarter and as carry over from the first quarter.

Things look like they are going to improve but it did impact everybody. It's not a good thing and hopefully we are getting a little relief from that. That's not what you want to hear, we want to talk about earnings and some other operations and important things going on in the company that we don't talk about in earnings releases.

I guess everyone has seen the earnings for the quarter. Our net income was $59.3 million or $0.57 per share sequentially that's a pretty and big improvement over the first quarter. It's up about 30%, I guess the distressing news its for the comparable period 2007, were up about 75%.

For the first six months we had net income of $105.3 million, $0.02 a share and that's down a little bit less about $0.65 and 65% from the same period in 2007. I guess we need to give you some type of [battle] to wrap them, reconciliation and fairness everyone report, each was $1… was $0.57 per share. We have an after-tax LIFO of gain is $0.99 after-tax hedging losses of $0.69 gain for… after-tax hedging loss of $0.69. So, that nearly about 30% for price changes. After adjustments we're looking it at about $0.25 per share, I think our consensus are $0.44 per share.

What was the problem, it laid on all our crude price but that is the real cover. From the end of the year to June 30, oil prices went up about 35%, that's WTI pushing. I am sure you are familiar with some of these numbers others you may not, that's was last night fall in this specific companies, because they made you deal with it better, indication of what's happening across the country and their specific markets. But, I just want to know there is a longer term of price elasticity of demand and we're getting to see it.

Through June, while this year the gasoline demand is of 3.3%. We only have regional numbers through April and sort of the surprising number to me is Colorado. It was dead solid flat from April of last year through April of this and even though it's a relatively small market, while only gasoline's demand was up 15%. Diesel has a much larger market in Wyoming, the gasoline but still its quite normal of 15%. And when we are talking about diesel that's the performer of year nationwide, through July diesel demands of about 2.3%.

In Colorado, through April it is up 1%, in Wyoming through April and start comparison to gasoline demand Wyoming diesel demand was up 5%. These type of economies in demand for motor fuels also produced a real dichotomy in our crack spreads and we will talk about that little later on. Another impact was that negative impact sort of turnarounds.

El Dorado Spring turnaround lasted into the first two weeks of April and the opportunity costs [inaudible] $4 million. But I really don't think, it's that important because when it came up as a result of the improved backing in only, it recovered that $4 million it made another $14 million. So it's hard to say that there was an opportunity cost you could argue that, if it happened prior April, 1. But we recovered all of that. We didn't have… didn't have to reschedule a turnaround at Cheyenne our DHDS essentially as catalyst died. We had a turnaround for that, which was for catalyst replacement scheduled for October.

We had to bring that forward, so not only we added, we also did reach in on… and a replacement for a catalyst and the reformer and net liabilities. Those are about 66 days a piece for a big regeneration and replacement on the reformer and about 14 days on the, a replacement of the catalyst of DHDS unfortunate time for the DHDS because that was one of our money making units. Opting on cost on that which is real, again it's only timing issue is about 4.5 million.

We had to this, we scheduled it for October. We have good markets when they get that for and I believe its ours plus some additional in [inaudible]. As I did affect throughputs and throughputs were affected normally by the turnarounds but economics as well.

We are making all of our money on diesel and crude differentials here in the first six months of the year. So the result with set strategy would call for us to use the cheapest crude that we get our hands on with the best diesel economics. None of that until fill up the [coker], diesel added per year and the sulfur plant and just left the rest of the units low or we can buy distressed intermediates and run up to the wealthy portion of the plant.

So as result of that, we are not wanting to close capacity. Production throughput for second quarter was by 161,380 barrels per day, that's crude and other charges. That's up dramatically from the first quarter year overhead that essentially planning about a turnaround El Dorado and our throughput seems to be about 126,000 barrels per day.

But during the… towards the second quarter of 2007, our throughput was about 163,991 barrels per day. So you know that we have a greater capacity now than we had during the second quarter of the year. We didn't approach but could actually, we actually think we could get through the plan. My best guess is when they have started 180,000 barrels, 50,000 at Cheyenne probably around 130,000 at El Dorado, so we ran 163,000… 161,000 [inaudible] around the 180 that's because of economics. There is no reason to run barrels, we are not making any money on it and that's certainly the case on most of the light crude that we had the opportunity to buy.

Well we had some notable success, we've had $1 billion monthly distilled [ph] records, that's thanks to our new crude and vacuum project. And I want you to know our shareholders are getting damn high return on that particular project and similarities at Cheyenne, we had monthly and daily records on our coker throughput. And that's thanks to our coker revamp. So we're quite optimistic that we are going both of those two projects are going to play higher [inaudible] returns to our shareholder. We are not talking about capital just talking about the status of our major capital programs and then maybe some other ones but what happened in 2008 second quarter, what threw it at during the quarter and at quarter end. We spent $71 million in cash with our CapEx program if you look at the strategic program you will recall that the five big projects. We are through with two of the five. And by the end of August, we'll be through with the third of the five major projects and the fifth one is going to be completed during the month of August is the coker revamp, it's a $60 million project, it's on or slightly under budget right now, a pretty good project for us. Coker shutdown, they're scheduled for the 11 or the 12 and it should be about 10 days, so if we'll back on before the end of the month and hopefully with no operational bugs. Those times were difficult to operate quite in those difficult unit refineries. So, you have to be very careful getting up to speed.

In '08 we also have a [inaudible] that's an $82 million project, so far that's on schedule and on budget. That project is stately finished and tied end on the fall of 2009. Also in El Dorado and also have the same schedule for all 2009 is a GAAP revamp and that's an $84 million project and currently that's on schedule and on budget although we're really reviewing that particular program right now and see what the economics are… see if we didn't make all of those, or make that entire revamp during the year 2009 and we're really looking at the vapor recovery and see if that's something that going to satisfy with returns. We may defer that and do that at the next turnaround. We may not. But as of right now we're looking at the economics… my guess is, we're probably only due about 30 million of the $84 million project and do the vapor recovery in that later on.

And also one that we haven't talked about but still note, at all the rate that we are putting in a Belco Scrubber, it's about $36 million project, that's EPA compliance and won't make us any money, but it is on schedule and on budget and the schedule for that again its part of 2009. So, all our capital programs are really in good shape. I think we've done what we told you. We would do and that's controlling, bringing them on plan and on budget, only exception there was our broker in Cheyenne, a very good record.

And we are watching our cash and speaking of cash, did you look at our source in that for the quarter. We had cash flow from ops about $73 million. We have change in working capital of $73 million. So our total in net cash from operation was about $146 million. As I mentioned earlier, our CapEx was about 71 so we had free cash of $75 million, put that in the bank, at the end of the quarter. We had cash of $221 million.

I told you, at the last earnings conference call for the first quarter, year-end cash balance was $297 million, I thought we are going to get back up to that $297, 000… $297 million and we probably will have, but we had an unexpected $40 per barrel increase in the price of crude and as a result of that, our inventory and receivables went up by $243 million just for the quarter. $243 million, so that sucked a lot of cash out of our basket. Though we did, in the quarter with $221 million and we are working on, very hard on all of our working capital because we don't like all our money into it… much money with that. I thought we are being very diligent keeping it down, loosing minimums and trying to be sure that we have adequate liquidity.

And speaking of liquidity, we are in real good shape and review the sort of the components of it. Our year-end cash… core in cash balances $221 million. We had a revolver that was $250 million. We increased that to $350 million and we've are increasing debt another $150 million, we've already got commitments and we're working on them, paperwork has to be done I think by the end of next week. So that will increase our total liquidity including cash and lines on the revolver to $721 million. We haven't drawn that revolver yet, it probably will go on it in the third quarter.

Everything is really manageable. We are spending a lot of money on capital. But it still gets exciting around two payment dates or crude payment dates in the U.S. and the crude payment date in Canada. You will see some enormous swings in cash position. So particularly in the third quarter you might have to draw on that couple of times. It's nothing that's still going to have some substantial amount of excess capacity. We use revolver for our LC support and then also cash bond.

Factory prices and volatility of those crude prices can really give you some dramatic swings in liquidity. So just [BK] is just insurer, is a insurance policy, we did increase it back up to $500 million, just to be sure we had lot of liquidity left in the company. Well, that gives us the outlook. All of what you are really waiting to hear, the outlook is better. And now the oil crude prices will definitely help us and the entire industry especially in the long term.

The immediate impact for us will be some inventory losses. But the most important impact over a long period of time is going to reduce the cost and price of our gasoline and its going to help demand. It already has improved our gasoline margins, which I will talk about in a second, but it's really going to allow us to bring a lot of cash out of our inventories and receivables and other working capital and we're reinvesting it in the place of what we had in which higher return. And this is really giving relief for everyone I think. We essentially made a dramatic change in since about the July 15 when the crack spread was 4 or $5, increase in that range up to about $10 or more during the second half of July.

And I'm here to tell you that as of right now so averaging more than $16 in August and its pretty close to 20 bucks. I'm not here to tell you that's permanent. I can't tell you all the reasons why, it's been really powerful all year long enabling that extended forecast that's been showing [inaudible]. It's good now I think we're probably going to be changing our good… slight in Cheyenne as a result of that. We've had not much improvement in El Dorado it has some, it's currently averaging about $6.37 from oil. We want more detail on anything of that, Doug Aron will be more than happy to provide it for you during the conference call. I'm not even talking about diesel, it still good, 25 to $35 you name it and you know its tougher on any given day that permanent was going to be that's still very healthy.

Something probably hadn't gone I know this month in response to the industry analyst but probably hadn't been mentioned despite the natural gas price plans are really beneficiary to big users and big user. And Rockies are… natural gas is up about $4 in Mcf and in mid counts [ph] about $3.50 per Mcf that means about 350,000 after tax per month for us. We'll multiply that times four and then the number of months we have will effect is to help us consider. In closing the markets have improved, oil price is down, all of our turn around activity with exception of couple of regions probably in December prior to your January they're done as of the end of August, so we should be running clear have no excuses. We're not having any big improvement in our operations and our cost structure. So, we are pretty optimistic. We think that second half year is probably going to be better in the first half of the year over -- at over long-term or still probably going to have some margin tightness in gasoline so there are somewhat permanently.

That's it for me. I am sure you are happy about that, what we'll do is open it up for the most important, almost one part of the business and that's planning at what's you have on your mind. So, Chris if had referred to your sleep, would you please open this up for our Q&A.

Question and Answer

Operator

Thank you. [Operator Instruction] And we'll go first to Jeff Dietert with Simmons.

Jeff Dietert - Simmons

Good morning.

James R. Gibbs - President and Chief Executive Officer

Good morning, Jeff.

Jeff Dietert - Simmons

I think everybody… to manage asphalt a little bit different and there is some regional differences. Could you talk about your margins 2Q and then July and maybe current look at asphalt margins?

James R. Gibbs - President and Chief Executive Officer

I don't want to answer your question, because I hate the business. I'll let Paul answer that.

Paul Eisman - Executive Vice President of Refining and Marketing Operations

We've seen a dramatic improvement in the asphalt business, a couple of reasons for it and that's, a lot of that's regional, we've had some big cokers come on line in the Rocky Mountain area. We've also expended our coking capacity which has provided us a significant benefit. Today, we're pretty close to be in self sufficient in terms of asphalt capacity and coking capacity and our basis for pricing asphalt in today's market is what it takes to pull it out of the coker. So as a result we've seen a significant improvement in asphalt pricing in our markets and we are pretty optimistic about that.

Jeff Dietert - Simmons

Could you quantify in that for us and help us how negative was it in the second quarter and where is it now?

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

We were in the range of $350 a ton, prior to these changes we are in the $600 a ton range right now.

James R. Gibbs - President and Chief Executive Officer

That means in heavy crude, we're probably only recovering $50 a barrel on that, its' about 50% of our cost. So it was a lousy business. And not only we are willing to make the stuff and sell it, is if we… if they'll match or be covered.

Jeff Dietert - Simmons

Very good. Could you talk, a number of refineries on the market? Could you talk about the attractiveness of refineries in the M&A market? And your view on, on if there is some value there?

James R. Gibbs - President and Chief Executive Officer

The others, no value, we've seen. We know what you are talking about this product and couple more that you don't know about, though we've seen nothing that we are interested.

Jeff Dietert - Simmons

Thanks for your comments.

James R. Gibbs - President and Chief Executive Officer

Thank you, Jeff.

Operator

And we will go next to Jacques Rousseau with Back Bay Research

James R. Gibbs - President and Chief Executive Officer

Jacques are you still there?

Operator

Sorry.

James R. Gibbs - President and Chief Executive Officer

That's okay.

Operator

[Operator Instructions] We will go to Chi Chow with Tristone.

Chi Chow - Tristone

Hey good morning.

James R. Gibbs - President and Chief Executive Officer

Hi, Chi.

Chi Chow - Tristone

Hey Jim. Thanks for your comments and appreciate your discussion on gasoline. My question is on diesel. Things like I hear recently that we see some weakness in diesel cracks. Do you think that's just a temporary nature and what are your thoughts on diesel, on the outlook for the diesel?

James R. Gibbs - President and Chief Executive Officer

While I hope it is to see only motor fuels are showing growth and there is worldwide storage of this stuff. So that's why its been so high here I think… I don't know. We are optimistic about it. It's been high for a long time. I wouldn't be a bit surprised for the crack spreads dropped down some teens but, it will stay in the area but, Jim anything in this, in the forecasting mode for motor fuels and crude oil is very, very dangerous.

Chi Chow - Tristone

Okay. And light heavy and sweet-sour differential certainly have been pretty volatile here lately. What are your thoughts on that and how is that impacting? You gave some hints, but how's that going to impact your crudes stake on.

James R. Gibbs - President and Chief Executive Officer

There, the differential has actually increased from first quarter to second quarter and got a little weak in June. They got below $20 for light heavies and $3 or $4 for sweet-sours. But here in the last… and buying for September they look like that the began to spread back out, not so much as sweet-sour crude but a lot heavy and count is going 20 plus and maybe it looks like it might go a little higher and 20 plus. So heavy debts are good, light sours or medium sours is not so good.

Chi Chow - Tristone

And with the El Dorado coker or expansion coming online, what you anticipate doing on crude mix or the changes in crude mix and product yields.

James R. Gibbs - President and Chief Executive Officer

Depends on the pricing and the differentials and the product pricing. We're adding is about 300,000 barrels a day of coke and right now that's big. We could have used it all of spring as a matter of fact. We had such good differentials. But we need that coke to capacity. One thing I think a lot of companies are running up against and we are beginning to bump too with sulfur train. Whereas we probably had a lot of excess capacity, most of our sulfur trains last couple of years. We are running much heavier crudes and much more sour crudes and so we are picking up a lot more sulfur to remove from all of our grades of crude oil and so, that's beginning to impact all of our sulfur train.

Chi Chow - Tristone

I've heard the sulfur prices are actually pretty strong?

James R. Gibbs - President and Chief Executive Officer

Yeah about 400 bucks, 500 bucks a ton.

Chi Chow - Tristone

Its high it's very high.

James R. Gibbs - President and Chief Executive Officer

And I think we're making $4 million amount on that and sulfur which use to give away for such a good deal.

Chi Chow - Tristone

Okay.

James R. Gibbs - President and Chief Executive Officer

But the bad news is we are making a lot more sulfur but we run out our sulfur capacity, so that's now an issue on most of heavy crude consumers.

Chi Chow - Tristone

Thanks and once final question do you have update on CapEx for '08 and '09?

James R. Gibbs - President and Chief Executive Officer

Mike probably has that.

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

Yeah Chi. We have drained in our '08 CapEx budget a bit by differing some projects and that's off late in response to the margin environment. We are looking now at a number of $260 million and $270 million for 2008 and that's coming off initial forecast of about 310, 315. 2009 we are still evaluating that capital budget as Jim talked previously we are looking hard at the vapor-recovery unit component of that cat cracker project. We are firmly committed to go find a project and to the cats scrubber. So there will be more than base level spending in 2009, but at this point we are not ready to share those numbers.

Chi Chow - Tristone

Okay. But do you think in '010 that really tail off once you got the projects?

James R. Gibbs - President and Chief Executive Officer

Oh Yeah. Tails off after the fall of 2009, big time.

Chi Chow - Tristone

Okay. All right. Thanks a lot.

James R. Gibbs - President and Chief Executive Officer

Sure.

Operator

And once again we will go to Once again we'll go to Jacques Rousseau with Back Bay Research.

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

Hey Jacques good to have you back.

Jacques Rousseau - Back Bay Research

All right. I'm here. Two questions for you following up on Chi's question. Regarding the Canadian differentials, do you foresee locking in anything similar to the Baytex agreements that used to have?

James R. Gibbs - President and Chief Executive Officer

Not, yet. We haven't since and didn't… given any type of opportunity that looks very beneficial to us this on. No, the answer is no.

Jacques Rousseau - Back Bay Research

Okay. And the second question if you could run through the normal crack spread breakout that you do in volume guidance that would be great?

James R. Gibbs - President and Chief Executive Officer

Doug Aron has been waiting for you.

Doug Aron - Vice President of Corporate Finance

Okay. First of all I'll do that. I have got that ready and then Paul maybe you'll give volumes for the third quarter and then the rest of the year in terms of our expected plan. First looking at August or July, I'm sorry, for each of the refineries. The month-to-date average on gasoline crack in Cheyenne was $7.85 which was really far superior as Jim alluded to than we saw in Mid-Continent which finished at about $0.80 for the month on gasoline.

Diesel, a very different story in Cheyenne, we saw a $32.35 for the month of July and $25.77 at El Dorado. So far the first six or seven days of August we've seen a gasoline crack spread in Cheyenne is about $17.80 and about $7 in the Mid-Continent and El Dorado. On Diesel we was looking at about $34 diesel crack and a $21 diesel crack in Cheyenne months to date. Paul.

Paul Eisman - Executive Vice President of Refining & Marketing Operations

Yeah. In terms of the volumes, just again to put in perspective in the second quarter. We ran just over 142,000 a crude in the two refineries, 161,000 barrels of total feedstock. We expect that to increase in the third quarter to 152,000 barrels per day of crude oil and 166,000 barrels of total feedstock.

That is not a capacity as Jim mentioned. We do have additional capacity and if these margins continue improve then those numbers could go up. Fourth quarter, right now we are projecting another increase to 157,000 of crude and 173,000 barrels per day of total feedstock.

Going back to the third quarter, typically you ask how that's broken out in terms of crude charge or total charge. 121,000 barrels per day of that is El Dorado and 46,000 is in China.

Jacques Rousseau - Back Bay Research

Thank you, very much.

Operator

And we will go next to Paul Cheng with Lehman Brothers.

Paul Cheng - Lehman Brothers

Hi, guys. A quick one, talking about the… good morning Jim. Can you show me, about that either Michael [ph] or Jim. What maybe the base there for to sustain the business now that maintenance capital or sustainable capital what if we call it, it may look like on a per year basis and especially thereafter all the major projects on the next year.

James R. Gibbs - President and Chief Executive Officer

The minus capital?

Paul Cheng - Lehman Brothers

Right.

James R. Gibbs - President and Chief Executive Officer

What number we…

Paul Cheng - Lehman Brothers

Including turnaround.

James R. Gibbs - President and Chief Executive Officer

On including turnaround?

Paul Cheng - Lehman Brothers

Yeah.

James R. Gibbs - President and Chief Executive Officer

Yeah that number

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

Well what we've been providing Jim is, is looking back to 2003, 2004 timeframe the business was drawn on about $30 million of annual maintenance capital and there is a significant inflation factor there that probably is anybody's guess. But if we doubled that number to a $60 million kind of number that maybe an indication. Paul, I am interested in your prospective. Do you have?

Paul Eisman - Executive Vice President of Refining and Marketing Operations

Mike, I think that's a pretty good number. I think, I was it's not an absolute number but in the 50 to $60 million range is what I would guess.

James R. Gibbs - President and Chief Executive Officer

That's not all the inclusive environment capital.

Paul Cheng - Lehman Brothers

Right. Yes that's why you're going to add that including turnaround and also the required in amount of spending.

James R. Gibbs - President and Chief Executive Officer

Right.

Paul Cheng - Lehman Brothers

Does that improve?

James R. Gibbs - President and Chief Executive Officer

Yes it does.

Paul Cheng - Lehman Brothers

It does. Okay.

James R. Gibbs - President and Chief Executive Officer

It doesn't include something after all that we hadn't hit yet but you know always have those desired effects.

Paul Cheng - Lehman Brothers

The government, so government…

James R. Gibbs - President and Chief Executive Officer

Lot of CPA [ph] is involved.

Paul Cheng - Lehman Brothers

The government have a way that to make you guys spend more money.

James R. Gibbs - President and Chief Executive Officer

That's right. And one thing they are going to make us spend money on is 7 pound gasoline nationwide probably that only comes around and spends more money.

Paul Cheng - Lehman Brothers

And do you know that since that by 2010 the diesel offset these or we need to, say go into also a much more tighter spec.

James R. Gibbs - President and Chief Executive Officer

Right.

Paul Cheng - Lehman Brothers

Have you guys not spending money on that yet?

James R. Gibbs - President and Chief Executive Officer

I don't think that we have to. We can do 100% company wise or recently did. That we always… we don't do it, just because there is market firm making lot of money out of it. We go 100%

Paul Cheng - Lehman Brothers

So, right now that you already have 100% on the alternate diesel rate.

James R. Gibbs - President and Chief Executive Officer

Yes, we do.

Paul Cheng - Lehman Brothers

So you do not produce any.

James R. Gibbs - President and Chief Executive Officer

No. there's from time to time we do that. It's not, it's just all around all there.

Paul Cheng - Lehman Brothers

Right. And my final one. Can you give us some rough idea that how the third quarter cash operating cost may look like in Cheyenne and for Dorado. I mean it should be down from the second quarter but when the cost guideline that you can provide?

James R. Gibbs - President and Chief Executive Officer

Yeah. We do expect them to… and are projecting them to be lower in the third quarter than they were in the second quarter. In the second quarter at El Dorado, our operating cost was right at $5 barrel. We are projecting that to decrease a little bit to 479 a barrel in the third quarter. Our Cheyenne's decrease is more significant from 707 in the second quarter to 561 in the third quarter. Combined refinery operating cost in third quarter will be just over right at $5 a barrel.

Paul Cheng - Lehman Brothers

And, Mike despite the natural gas price that jumped that much, are you still only looking for El Dorado drop from 5 to 4.77.

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

Excuse me?

Paul Cheng - Lehman Brothers

The natural price I mean that Jim that had mentioned that dropped quite substantially I thought El Dorado was actually you have to use it of with our natural gas?

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

It is. Our usage in Cheyenne is actually pretty low and El Dorado is bigger. To give you some idea of the impact of gas cost quarter-over-quarter for the company from second quarter '08 versus second quarter '07 it impacted us by about $4.6 million, so it's significant. Now we are not going to get all that back but we are going to get some of that back.

Paul Cheng - Lehman Brothers

Well that's my point why the El Dorado, the cash operating cost were only dropped only from 5 to 4.77 in from the second to third quarter, is natural gas is such a big component?

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

The total cash operating cost for El Dorado in the quarter were $51 million I think the impact of that cost was about $3 million but I'll had to the math but I mean there is a number of things going on that we try to project in terms of cost . Some of that sales too and you look at cost per barrel, we are not running their refinery pool out in the third quarter. There are a number of things that figured into that cost but overall we are projecting a slight reduction in operating expense.

James R. Gibbs - President and Chief Executive Officer

Okay. I'll tell you what Paul, we'll get you a real breakout and little bit reconciliation and those [ph] will attend to you.

Paul Cheng - Lehman Brothers

Okay. That would be great. Thank you.

James R. Gibbs - President and Chief Executive Officer

I don't think we have all the answers here with us.

Paul Cheng - Lehman Brothers

Okay, very good. Thank you.

James R. Gibbs - President and Chief Executive Officer

Okay.

Operator

We'll go next to Daniel Burke with Johnson Rice.

Daniel Burke - Johnson Rice

Good morning, guys.

James R. Gibbs - President and Chief Executive Officer

Good morning, Danny.

Daniel Burke - Johnson Rice

Jim you seem to that it pretty clearly here but I guess there has always been this too or there has been in the past the suggestion that beyond the five capital projects you described earlier there was more frontier could do. Is it fair to say at this point that beyond these five projects you are looking at running this thing is a free cash machine?

James R. Gibbs - President and Chief Executive Officer

Well that's what has designed to be now and for every more, but there are project that are under consideration on that and let not say we are not working on them. We are but… we have reduced the pace of activity as far as those particular projects. Yes, we do have other things that we plan on doing.

Daniel Burke - Johnson Rice

Okay. And then, does the strength at Cheyenne is pretty market, is there anything you could say… is anybody down in that region, its strength is striking… it's a bit stronger than I expected?

James R. Gibbs - President and Chief Executive Officer

We do have roughly in here… and Denver hasn't turned around right now

Paul Eisman - Executive Vice President of Refining and Marketing Operations

We had a -- Suncor was down at Denver, we've had wholly I think is coming down in Salt Lake. So we've had some outages in the region, but this -- this region is historically traded at a basis premium to the group and I am sure that's contributing to this.

James R. Gibbs - President and Chief Executive Officer

Dan I think the for us -- it's all life, it's about $0.15 over Denver. So there are some plants around just in Wyoming and wrong time to convert… gasoline over consolidated market. So, that may… probably does have some type of significant impact on us and its positive right now.

Paul Eisman - Executive Vice President of Refining and Marketing Operations

You know, the other thing to point Daniel that the same thing we saw works against just in the first quarter which was the Denver was really worst in the Gulf and work -- worst in the Mid-Continent and we really couldn't get product out of that market. We're seeing those benefits now by those that really can't get product into that market. So, we are happy to be on the other side of that point now.

Daniel Burke - Johnson Rice

Great. And then I guess a final one, just little bit surprised or maybe not surprised but have you sweetened the slate at all recognizing how narrow or the relative narrowness of the Canadian heavy differential you've seen over the last two months?

James R. Gibbs - President and Chief Executive Officer

Some extent we have because differential between Rocky Mountain crude and WTS rocked it about $15 or $16. So we're going to rise much of that as we can.

Paul Eisman - Executive Vice President of Refining and Marketing Operations

We ran 47% of heavy crude in the first quarter, if you remember. We had very large differentials for heavy crude in that quarter. We are very responsive to these market economics. So when this heavy light narrows differential comes in, you all tend move to other crude simply because they are not economic to bring into our refineries. So, in the second quarter, we ran as opposed to 47.5. In the first quarter we ran 35% and we project that with these margins or these differentials today to drop a little bit in the third quarter. It's about 32%.

James R. Gibbs - President and Chief Executive Officer

We earn lot more heavy pay than we grow normally runs because the differential between them. Degrades West Texas and into something non-economical right now $2 or $3.

Daniel Burke - Johnson Rice

Right. Okay guys, thanks.

James R. Gibbs - President and Chief Executive Officer

You are welcome.

Operator

[Operator Instructions]. We will go next to Kenneth Pounds with Nutmeg Securities.

Kenneth Pounds - Nutmeg Securities

Hello, gentleman. I have a question regarding the press release. You mentioned that, the new crude unit has allowed you to run much more, I can't see what it is there? But maybe if you could expand a little bit on the vacuum tower is helping you to run more heavy and what are the actual economic benefits of that are?

James R. Gibbs - President and Chief Executive Officer

Yes, I think, you need, be it well for operations and financials that one for you.

Paul Eisman - Executive Vice President of Refining and Marketing Operations

Well there is short-term benefit and there is a longer term benefit. In the short-term, we are limited by logistics today and how much heavy crude we can get into our refinery. Though, the benefit we are seeing immediate from this unit, is improved recovery of diesel fuel and gas oil out of asphalt. We've talked a lot in this call and other calls about pricing for asphalt and how that's been a big negative to the economics of the refinery and in fact how strong diesel has been. We've seen a decrease of 5% on crude in terms of residual production of the refinery that's gone into gasol and distillate and at much higher values. So, that's a yield benefit we gotten from that crude and vacuum unit expansion.

We've also received an expansion benefit from that. The old capacity refinery was in the range of 110 to 112. We've demonstrated without really pushing the unit that we can take that unit up to 126,000 barrels per day today. Now we are not doing that as Jim mentioned because of the economics of running the incremental crude, but we expect that to improve and we will be able to take advantage of that. Longer term that does give us the capability to run more heavy crude, as we can get it into the refinery in 2010, 2011 range, we expect new pipeline capacity to come online which then should allow us to provide additional heavy crude supplies into the El Dorado refinery, at which point we will be able to take advantage of the capability of that tower to run the heavier crude.

James R. Gibbs - President and Chief Executive Officer

Ken, I got another point on that too. I think future fire bonds of diesel relative to gasoline and thus at a point gasoline is go away. There's going to be… then it's not going to be nearly as dominant in motor fuel. And we've got El Dorado plant… not we, our operators over there and the people in the plant, they are the ones who make and few who work there. But we are producing almost 50% gasoline and 50% diesel. I think that's right and really not quite that ratio but that's sort of unheard of and with that type of operations that nobody really, for harder cracker and we make a lot of diesel when you book the plant run 50-50.

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

You know Jim that risk is piling on. This kind of harkens back as well to Daniel Burke's question about what we are going to do in the future and this project has set us up really nicely assuming that we have logistics to access heavy crude to run a whole lot more of it and add further coking capacity at El Dorado, so well that project is not sort of yet in our approval sites. It's certainly teed up by the crude back in expansion.

Kenneth Pounds - Nutmeg Securities

Okay. You reported gasoline yields 73,000 diesel or 54,000 I guess in the last quarter, right? Do you have that kind of I guess for the third quarter on that?

Paul Eisman - Executive Vice President of Refining and Marketing Operations

Remember we had a hydrotreater shutdown during the month and that impacted the diesel production for the company and what Jim was referring to was our yields at El Dorado and our plan for the third quarter at El Dorado shows 56,000 barrels of gasoline, 51,000 barrels of diesel. Well that's nearly 50-50.

Kenneth Pounds - Nutmeg Securities

Okay. And what extra diesel out of Cheyenne in the third quarter?

Paul Eisman - Executive Vice President of Refining and Marketing Operations

Okay. We are projecting the third quarter 18,000 barrels of gasoline and 15,000 barrels of diesel.

Kenneth Pounds - Nutmeg Securities

Okay, great. And thank you finally but then I guess a lot of talk about more natural gas coming on and the Rockies are lot more drilling in these various new fields and so forth. Are there some potential for you all to take advantage of some local disruptions or lower prices for natural gas in your region?

James R. Gibbs - President and Chief Executive Officer

Every time we can we will.

Kenneth Pounds - Nutmeg Securities

Okay.

James R. Gibbs - President and Chief Executive Officer

And that is, it comes and goes but everyone's small as discussed here and just we could really take at a cheap price. There is going to be some takeaway capacity coming on spring next year, so maybe limit our opportunistic purchases that it will always be there.

Kenneth Pounds - Nutmeg Securities

And it is also a lot more talked this quarter about pipelines to the Gulf or more pipelines from Canada heading through your region down into the Gulf or so forth, is there any potential for you all to get some Canadian and offer some of these new pipelines projects?

James R. Gibbs - President and Chief Executive Officer

No, they always is.

Kenneth Pounds - Nutmeg Securities

Yeah, answer the question.

James R. Gibbs - President and Chief Executive Officer

Yeah. We got really, it should a good supplier department, they are always run in diesel and some cheaper crude back into the plant. And they are quite productive and very good added even thought there is only about three or four of them so. One of those pipes will go into miles of our… I'll think upon that another rate or so, good opportunities can be rather coming or it just going be right in the middle of the pack.

Kenneth Pounds - Nutmeg Securities

Great. Thank you.

James R. Gibbs - President and Chief Executive Officer

You're welcome.

Operator

And it appears there are no further question at this time. James Gibbs I'd like to turn the conference over to you for any additional or closing remark.

James R. Gibbs - President and Chief Executive Officer

Chris we both are friends now you can call me Jim. Thank you for you're… sincerely thanks for listening. I know your ears are probably really tired after all of the earnings conference table. We always… we are happy to have you listen and we enjoy your participation and we'll do this again at the end of the third quarter. Do you have any questions just call up Kristine Boyd or Doug Aron and may be they can straighten that all errors, confusion we probably created in this conference. Bye-bye.

Operator

Once again this concludes today's conference. We do appreciate your participation. You may now disconnect.

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Source: Frontier Oil Corp. Q2 2008 Earnings Call Transcript
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