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CVR Energy, Inc. (NYSE:CVI)

Q3 2012 Results Earnings Call

November 6, 2012 2:00 PM ET

Executives

Jay Finks - Director, Finance

Jack Lipinski - Chief Executive Officer

Susan Ball - Chief Financial Officer

Stan Riemann - Chief Operating Officer

Analysts

Jeff Dietert - Simmons

Chi Chow - Macquarie

Stephen Carter - Credit Suisse

Operator

Greetings. And welcome to the CVR Energy Third Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Finks, Director of Finance of CVR Energy, Inc. Thank you, Mr. Finks. You may begin.

Jay Finks

Thank you, Doug. Good afternoon. We very much appreciate you joining us this afternoon for our CVR Energy third quarter 2012 earnings call. With me are Jack Lipinski, our Chief Executive Officer; Susan Ball, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.

Prior to discussing our 2012 third quarter results, let me remind you that this conference call may contain forward-looking statements, as that term is defined under federal securities law. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements.

Without limiting the foregoing, the words, believes, anticipates, plans and expects and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission, and in our latest earnings release.

As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

With that said, I’ll turn the call back over to Jack Lipinski, our Chief Executive Officer. Jack?

Jack Lipinski

Thanks, Jay, and good afternoon, everyone. And thanks for joining our third quarter 2012 earnings call. First, I’ll provide a brief recap of third quarter financial results and then talk a little bit operations. Susan will then provide more detailed color around the numbers reported yesterday and I’ll finish with some closing remarks.

On October 1st we filed registration statement with the SEC that anticipates placing our refineries and logistic assets into a publicly traded MLP. As a result of this filing, I will not discuss any issues surrounding the potential IPO today.

For the third quarter consolidated net income was $208.9 million or $2.41 per diluted share. On an adjusted basis, adjusted net income was $260.2 million or $3 per fully diluted share.

Like prior quarters, we adjust net income for the impact of FIFO, major turnaround expenses, the impact of unrealized derivative gains or losses and other one-time expenses. Susan will discuss these more broadly in her remarks.

Some of the primary drivers of our earnings this quarter was strong crack spreads or access to price advantage crude, our high operating throughputs and strong business fundamentals that driver our fertilizer segment.

In the third quarter, the NYMEX 2-1-1 crack spread averaged $32.78 a barrel with the Brent-WTI spread averaging $17.58 over the quarter. During the quarter we realized strong product basis, the PADD II, Group 3 product basis was a positive $3.87 per barrel on a 2-1-1 basis, as compared to $1.25 in the same quarter last year.

As a result, our overall realized refining margin adjusted for FIFO remained strong at $33.44 a barrel, as compared to $27.55 a barrel in the same quarter last year.

Let me talk a little bit about our business segments and first I’ll start with petroleum. Within this segment, we ran more than 190,000 barrels a day of crude in the third quarter. We ran 124,600 barrels a day of Coffeyville and 67,900 barrels a day at Wynnewood.

On our last call I provided throughput estimates, I’m happy to report that actual crude throughput were above our both the high end of those estimates of Coffeyville and just below the top market Wynnewood.

Looking forward to the fourth quarter, we estimate total throughput for the plants be in the range of 148,000 to 158,000 barrels a day for the fourth quarter. We expect Coffeyville to run between 115,000 and 120,000 barrels a day and Wynnewood to run between 33,000 and 38,000 barrels a day. The decrease in Wynnewood crude throughput is a direct result of major turnaround that we’re in right now.

Like most mid-continent refiners, we continue to benefit from attractively priced crudes, our consumed crude oil discount to WTI for the third quarter was $4.38 a barrel, as compared to $2.57 a barrel in the third quarter 2011.

Our gathering system continues to perform admirably. We gathered 47,500 barrels a day in the quarter.

On August 31st we entered into an amended agreement with Vitol Incorporated. Vitol now provides crude oil intermediation for both plants that being Wynnewood and Coffeyville.

The term of this agreement was extended to December 31, 2014, and will automatically renew for successive on one-year terms unless either party provides notice of non-renewal at least a 180 days prior to expiration.

For the third quarter we had approximately $4.9 million barrels hedged, which was comprised of gasoline cracks, heating oil cracks and 2-1-1 hedges. We had $1.5 million barrels of gasoline cracks hedged at an average price of $16.79 per barrel, $1.4 million barrels of heating oil cracks hedged at an average price of $28.02 and $2 million barrels of 2-1-1 cracks hedged at $25.79 per barrel.

Our realized hedge losses for the quarter on these hedges were $53.2 million, as compared to the minimal gain a year ago.

I’d like to talk a little bit about our turnaround at Wynnewood. We began our turnaround in late September and originally estimated about 45 days to complete. We now estimate 50 to 55 days to complete. The delay was largely due to the loss of steam at the plant due to a boiler explosion, which occurred on September 28.

As you know, there were two totalities in this incident, and we’re working closely with OSHA to investigate this incident, and to make sure it does not happen again. And we continued to do our own investigations as well.

We expect overall around expenses to be somewhere between $100 million and $105 million. But we had estimate, we had given guidance of about a $100 million before, because of the delay in bringing the plants up. We are just experiencing some additional costs.

Let me talk a little bit about Nitrogen Fertilizer. You might have listen to the CVR Partners’ call earlier this morning where Byron Kelley provided comments. On October 26, CVR Partners declared a third quarter distribution of $49.6 per common unit. Please recall that CVR Energy owns approximately 70% of the common units of CVR Partners. Therefore, CVR energy receives a proportional amount of distributions from CVR Partners.

The third quarter adjusted EBITDA for Partners was $39 million, as compared to $43.4 million in the prior year. We also do a biannual turnaround at the fertilizer plant. We bought our plant down for schedule turnaround on October 3rd, for maintenance activities to maximize operational efficiency of the plant. And then in this year’s turnaround, we also installed critical equipment and clients related to our UAN plant expansion.

The UAN expansion continues and remains on target for a completion by the start of 2013. We continued to see good opportunities and demand for Nitrogen Fertilizer. The recent increases in corn prices, as this year’s drought conditions, that’s creating an environment that should support strong fertilized end product.

At this point, I’d like to turn the call over to Susan and talk about the financials. Susan?

Susan Ball

Thank you, Jack, and good afternoon, everyone. At the consolidated level, our net income was $208.9 million in the third quarter 2012, or $2.41 per diluted share versus $109.3 million, or a $1.25 per diluted share in the third quarter of last year.

Adjusted net income per share was $3, as compared to a $1.57 per diluted share last year. And as we’ve previously mentioned on calls, we do view the adjusted net income as a meaningful metric for analyzing our performance, as it eliminates the impact of unusual accounting impacts inherent in our business and other unique activities and events. It provides more transparency for a better comparison to market expectations.

In the third quarter, our adjustments in calculating adjusted net income or the FIFO inventory accounting, unrealized gains or losses on derivative, turnarounds on expenses, share-based compensation and integration expenses associated with our acquisition of the Wynnewood refinery.

Our first adjustment is related to the increase or decrease in our inventory values that are realized under the first-in, first out or FIFO inventory accounting method. In the third quarter 2012, we realized the favorable FIFO impact of $30.9 million adjusted for tax or $0.36 per share.

Secondly, we had an adjustment to net income on our unrealized derivative loss of $70.1 million, again after-tax or $0.81 per diluted share. We also adjusted for the turnaround expenses, net of tax of approximately $6.9 million or $0.08 per share.

Other adjustments include share-based compensation expense of $4.0 million, again adjusted for tax or $0.05 per share. And finally, an adjustment associated with the integration efforts of the Wynnewood refinery of $1.2 million after-tax or $0.01 per share.

The third quarter was a record quarter for our Petroleum segment, which did post the realized refining margin $33.44 per crude oil throughput barrel, which is adjusted for the favorable FIFO impact, as compared to $27.55 per barrel in the third quarter of 2011, which also was adjusted for an unfavorable FIFO impact.

Copying those refining margin adjusted for FIFO impact was $33.56 per barrel in the third quarter of 2012, as compared to $27.54 per barrel for the same period a year ago. Wynnewood adjusted refining margin was $33.07 per barrel in the third quarter of this year.

Direct operating expenses, excluding turnaround expenses, per barrel of crude oil throughput for the Petroleum segment was $4.39 in the third quarter of 2012, as compared to $4.48 in the prior year.

On a refinery-by-refinery basis, Coffeyville’s adjusted direct operating expense was $4.13 in the third quarter of 2012, as compared to $4.49 in the same period a year ago. Wynnewood’s direct operating expenses excluding the turnaround expense per barrel of crude oil throughput was $4.81 for the 2012 third quarter.

Turning to the fertilizers segment. As Jack previously mentioned, our fertilizer business in the third quarter reported adjusted EBITDA of $39 million and also announced distribution of $49.06 per common unit, payable on November 14 to unitholders of record on November 7th.

Capital expenditures for the third quarter of 2012 totaled $39.9 million versus $25.7 million for the same period in 2011. The majority of the increase year-over-year is related to the UAN expansion at our Nitrogen Fertilizer facility.

Our total 2012 capital spending forecast is estimated to be $250 million to $270 million, of which $160 million to $165 million is estimated for the Petroleum business and $90 million to $105 million is estimated for the fertilizer business.

We ended the third quarter with cash and cash equivalents of $988 million or $808 million excluding $180 million at the CVR Partners entity. Under our asset back credit facility, we have $373 million availability which excludes the $27 million of issued standby letters of credit.

On October 23rd, we closed on offering of $500 million, 6.5% senior secured notes due 2022. These are proceeds of offerings to refinance the outstanding first lien senior secured notes due 2015, which extended our debt maturity profile and lowered our weighted average interest rate.

We retired $323 million or 72.2% of the aggregate principal amount of our 2015 notes on October 23rd. The remaining aggregate principal amount of $124.1 million will be redeemed on November 23, 2012. We also continued to have a very strong balance sheet.

With that I will turn it over to Jack.

Jack Lipinski

Okay. Thank you, Susan. Just looking, little bit at the fourth quarter, we continued to see very strong NYMEX crack spreads, due in large part to the wide Brent WTI spread.

Seasonally, as you would expect in the group, we are starting to see weakening of our product basis. It’s not unexpected, it happens every year. But what we are seeing also is a widening of crude differentials. We’re seeing heavy Canadians trade out in high-20s to low-30s, low WTI, we are seeing Midland WTI trade currently a little over $6 under Cushing WTI and just recall we have 40,000 barrels a day capacity out of the Permian Basin for that reflected advantage to Wynnewood.

We have 25,000 barrels a day. It stays on the Keystone pipeline right now. We have another contract space of 10,000 barrels a day on Spearhead and 8,000 barrels a day of shipper status. So, we are seeing is widening differentials of Canadian grades. We are using that to our advantage.

A lot of -- we are really proud of our results for this quarter. These achievements cannot be attained without the help of our employees, their dedication and hard work and we want to congratulate them as well.

And, with that, Operator, I will turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jeff Dietert from Simmons. Please proceed with your question.

Jeff Dietert - Simmons

It’s Jeff Dietert with Simmons. Good afternoon.

Jack Lipinski

Hi, Jeff. How are you?

Jeff Dietert - Simmons

I am fine. Congratulations on your record quarter. As you mentioned, there are number of differentials that are borne out and I was curious if you could give us an update on just how much Canadian heavy you can use. I know you’ve got almost 43,000 barrels a day of pipeline capacity out of Canada. Can you use all that for Canadian heavy or is some of that Canadian heavy in some of the other Canadian crudes?

Jack Lipinski

What we generally do as we used the entirety of our Keystone 25,000 barrels a day capacity per Canadian heavy. And then what we do is we use our Spearhead capacity for light sours, LSB, light sours blend, Midale, you name any of the other grades that are out there. What we find is that about 25,000 barrels a day at Coffeyville gives us the right mix of heavy, gas, oil production to balance our cat cracker and everything else.

So, we typically target about 25. We could probably run a little more but what we find is we can actually run more barrels of the lighter sours that an economically on incremental basis to actually generate more money for us.

Jeff Dietert - Simmons

And you got the flexibility to take some of the light sours on to Wynnewood now, correct?

Jack Lipinski

That is correct. We balance our system rather than just running as we did just around Coffeyville. We take great teams to optimize our systems about which grades go where, what gathered crude goes where and blending everything up to optimize both plans. So yeah, one of the homeruns of Wynnewood was prior owners never really had direct access to Canadian crude, any Canadian that came in was purchased at Cushing.

So, a lot of the profit was taken out of it. We direct Canadian crude particularly something like an LSB or the light to Wynnewood directly. And we balance between the plants. We’ve actually moved these stocks back and forth between the plans. And both plants are running at very high utilization levels.

Jeff Dietert - Simmons

Got you. And I believe the transport rest on the basin pipeline from the Permian is about $0.50. So you are keeping the majority of the -- advantage when Midland blows out the way it is again 650 for WTI Midland, almost $7 for WTS and you are capturing the majority of that differentials. Is that correct?

Jack Lipinski

Well, some don’t forget this goes into Cushing and then back to the plant and the round number per is roughly a dollar all in something just add or below a dollar, all in delivered cost. And one other things about the way we operate our pipelines as we have a none of the Spearhead barrels or Keystone barrels comes to the plants directly, they go to Cushing.

And we maintain 4 million barrels of storage in Cushing. So even while, Wynnewood was down for turnaround, we continue to buy Permian Basin crude just historic, because we have capacity in our storage at Cushing.

Jeff Dietert - Simmons

Got you. Do you every think -- you make more money in quarter than you might annually from 2005 to 2010?

Jack Lipinski

Look, I’ve been in this business a lot of years. I can remember making $35 million from system back in the middle of 90s and that was a 5,000 traffic barrel system. So, I mean there is -- people talk about golden age being a couple of years ago. I am not sure if that’s anymore. I think we are in the golden age.

Jeff Dietert - Simmons

Thanks, Jack.

Jack Lipinski

Thank you.

Operator

(Operator Instructions) The next question comes from the line of Chi Chow from Macquarie. Please proceed with your question.

Chi Chow - Macquarie

Hi. Thanks. Good afternoon.

Jack Lipinski

Good afternoon. How are you?

Chi Chow - Macquarie

Good, Jack. So, you’ve got this nice problem of amounting pile of cash so any latest thoughts on the use of the cash balance going forward?

Jack Lipinski

No. Right now, I mean that’s obviously a subject to discussion with the Board at CVR Energy but our focus has been obviously to operate the company as best we can. We’ve been spending a fair better time as I mentioned filing our perspectives. Where -- and I am not going to comment about that. But our direction has been to get ourselves for the ready to the next level and I am certain at some point this will come up for the -- for discussion with the Board at CVR Energy.

Chi Chow - Macquarie

Right. I guess, have the Board talked about any sort of target deal that CVI level one on the dividend?

Jack Lipinski

No. Not yet. I mean this is -- again, we will be having Board meetings here shortly. I am not sure, if that will be a subject to discussion or not. But we do that fair bit of cash apparent.

Chi Chow - Macquarie

Yeah. You do. Okay. On the crude gathering system, what are the ultimate volume upside do you think on your system there?

Jack Lipinski

I mean we could probably -- we're worried about just shy of 50,000 barrels a day within reason, we could probably go up another 15,000 or 20,000 barrels a day before we start overreaching, unless we get to the point where we start building on our own logistic systems.

And that’s not out of the question. Don’t forget the Mississippi in line just fixed to the west of us. Everywhere we turn around there is more crude picking up. Wynnewood has the ability and we are actually started a new division down at Wynnewood, where truck and we’re putting in a new terminal down their maintenance facility.

So, we are spreading our hub even wider. But nice think about having the gather crude, it is there everyday. It generally looks like WTI and it delivers under WTI and cost towards -- it's a nice steady benefit. But the logistics part of that business could be poised for growth as we go forward, just look at all the mid-continent crude around us.

Chi Chow - Macquarie

Right. So again the discount to Cushing, could you mind us what that is on the gathered barrels and also -- so sorry, you’re talking about organic growth projects down on the logistic side?

Jack Lipinski

Going forward, that’s something we would be looking at. Okay. It’s obvious that there is a lot of crude production around us. We’re -- we could either take crude Cushing and we’ve sell it or we could it take it home. We’re ideally located right now this year because of increased cost. I believe, our delivered cost of crude is somewhere between $1.15 and $2 barrel under WTI.

We had a fair bit of pipeline maintenance that went against those numbers. NOA basically works as they’re suppose to price and then we take all our cost out of the gathering business and transportation business takes all their cost out of it, what’s left is still a discount at WTI as it delivers to the refinery and we consolidate that delivered cost of crude into our financials.

Chi Chow - Macquarie

Okay. Great. Thanks Jack. I appreciate it.

Jack Lipinski

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Stephen Carter from Credit Suisse. Please proceed with your question.

Stephen Carter - Credit Suisse

Good afternoon.

Jack Lipinski

Hey, how are you doing?

Stephen Carter - Credit Suisse

Good. Maybe first, can you talk about some of the Wynnewood projects that you foresee over the next year and what kind of yield you can get from some of those. That’s obviously you’ve talked a bunch about the slam dunk ones.

Jack Lipinski

Well, there is one project of significances and that is the Wynnewood refinery, as purchased had a hydrocracker onsite. But over the years, the prior owner chose not but capital end or the hydrogen capacity to run it as it’s original design as for conversion of hydrocracker.

We have a project that is estimated cost somewhat less than $50 million around numbers $45 million to $50 million. That we will begin working on next year. And that would include putting in hydrogen plant and converting some of the equipment back into its original configuration.

And that would end up with the yield shift of about roughly 2% to 3% out of gasoline and to desolate across the whole refinery plus incremental liquid volume yield, just because of volume slow from hydrocracking. It’s very good project. So if you pick off one, that’s it.

If you just look back at the Wynnewood acquisitions, it’s -- refining is a technical business. And what we did was the plant did not have a large staff of process engineers and technical staff. And we brought our folks down from Coffeyville in Houston and started looking at Wynnewood.

And if you go back to our original economics, when we bought it, not quite a year ago. We assume that it would run 63,000 barrels a day and that over two-year period, we would be able to get our rates up to about 66,500 if you noticed last quarter, we were 67,900. So we’ve already surpassed what we would take two years.

We’ve seen numerous small projects everywhere we turn around just by balancing two towers, we were able to increase our yield objective by almost 1,000 barrels a day and that was like a no-cost project.

So I mean we’re still deep into it. We obviously will have other projects, nothing major, nothing really big but the biggest one right now is probably this hydrocracking, which we’re going to get high behind shortly.

Stephen Carter - Credit Suisse

I don’t -- quite want to say it’s related but if I think about projects and just doing the math on the previous question on the crude gathering system, it’s couple bucks of barrel, 50,000, it’s probably -- its pretty good numbers. I don’t know it is $30 million and $40 million in cash flow that the gathering system has a standalone generates and so obviously some logistic asset onsite.

So what’s the latest thought in Q4 with a, maybe spinning out in separate MLP at the logistic business. And then separately as you had another question of course was about the cash and maybe using some of that cash to augment that business and making that more standalone.

Jack Lipinski

Well, your first question goes to our registration statement and I would refer everyone to what we’ve publicly filed with the SEC. And in the future, if we actually -- every thing goes according to oil, CVR energy will become a GPO core effectively and drop downs is always a possibility. And I ‘m not saying there are probability and I’m just t saying that some possible uses of cash.

Stephen Carter - Credit Suisse

And then finally maybe just a big picture one, you talk about the differentials out of Canada and out of the Bakken. What you’re seeing in terms of the pipeline supply and that I suppose what -- the talk is that they’re basically over full and differentials are here for a while as they are. So curious to what your outlook is?

Jack Lipinski

All right. Well, you can go and look at BENTEK which estimates $10 to $20. You can look at Goldman which says $8 for next year and $7 going forward. And that’s an increase where they were before and I’m just putting analyst. I hope nobody shoots me for putting their numbers. But if you look forward, on any rational basis, there is going to be an enormous amount of crude supply coming on. And you’re going to see us assertive as people put in logistics to take crude away.

You will see softening in the differentials and then the production will overtake it our overview is that long term we believe that WTI plant will probably be in the range of $7 to $12 a barrel. And there is a secondary market and that is basically, you have Cushing, WTI versus Brent. Then you have oilfield versus Cushing.

The ability to grow our gathering system into areas where crude is going to even be further discounted in WTI because of logistics and other reasons, that our location is prime for being able to take advantage of that.

Stephen Carter - Credit Suisse

The other side of that is out of Canada in some of the heavy crude oil in Canada, obviously it’s widened out of it too. So same general thesis there?

Jack Lipinski

Yeah. I mean, Canada is expected as grown and continues to grow and you’re starting to see a shift too. Don’t forget some of the large Chicago area refineries are converting from heavy Canadian to heavy Canadian, which is going to have more production on the lighter crudes. And at same time, you have Canadian crudes just an overall growth, couple of 100,000 barrels a day years pretty much what most people are expecting. So when you just look at the flow of crude, pretty much it’s also got to go by Cushing to get self.

Stephen Carter - Credit Suisse

Thanks.

Operator

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Jack Lipinski

Well, listen everyone again. Thank you for joining us. I appreciate you spending time with us and we look forward to seeing you here in the future as -- on future calls and thank you again. Appreciate it.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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