CVR Refining, LP (NYSE:CVRR) Q1 2013 Earnings Call May 2, 2013 10:00 AM ET
Jay Finks - Director of Finance
Jack Lipinski - President and CEO
Susan Ball - CFO
Ed Westwick - Credit Suisse
Jeff Dietert - Simmons
Mohit Bhardwaj - Citigroup
Greetings and welcome to the CVR Refining, LP First Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. A brief 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, CVR Refining Director of Finance. Thank you, Mr. Finks. You may now begin.
Thank you, Jenna. Good morning. We very much appreciate you joining us this morning for CVR Refining first quarter 2013 earnings call. With me are John Lipinski, our Chief Executive Officer; Susan Ball, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.
Prior to discussing our 2013 first quarter results, let me remind you this conference call may contain forward-looking statements, as that term is defined under Federal Securities Laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements, without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.
You’re cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and 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 2013 first quarter earnings release that we filed with the SEC this morning before the open of the market.
With that said, I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?
Thanks, Jay, good morning everyone, and thanks for joining our conference call. As I always do, I’ll provide a brief recap of our financial results followed by our operating results and then Susan will provide more detail around the numbers reported this morning and then I’ll finish with some closing remarks.
The first quarter was great start to 201. As you know on January 23; we closed on our initial public offering of CVR Refining, LP. For the quarter, we set new operating records for crude throughput and our logistic business we set records on crude gathering for the quarter.
On a post IPO basis, our first quarter’s distribution is a $1.58 per common unit and this exceeds the previously announced post IPO distribution outlook of a $1.10 to $1.35 for common unit. The first quarter’s distribution will be paid on May 17 to unit holders on record as of May 10.
On a full quarter basis, the calculated distribution would have been a $1.76 per unit and this exceeds the IPO full quarter distribution outlook of a $1.21 which was made at that time. Again that was if the unit holders of (inaudible) LP were to get the results from the entire quarter but as you know there is stop period having closed on January 23rd.
The 2013 first quarter consolidated adjusted EBITDA was $309.9 million and that compares to $143 million in the first quarter of 2012. Susan again will give the more detail on the bridge between adjusted EBITDA and the cash available for distribution.
Some of the primary drivers of our earnings were strong crack spreads, our continuing access to price-advantaged crudes, and record high operating throughputs.
In the first quarter 2013, NYMEX 2-1-1 Crack Spread averaged $32.33 per barrel and that compares to $27.53 per barrel in the first quarter of 2012. The Brent WTI spread averaged $17.02 over the quarter and that compared to $15.34 for the same period a year ago.
In the first quarter, we realized strong seasonal product basis as compare to the year ago. PADD II Group 3 product basis was a negative $2.74 a barrel on a 2-1-1 basis as compared to a negative $4.21 in the same period last year and just remember it is pretty typical for us to have a strongly negative basis in the first and fourth quarter as typically early in the first and late in the fourth quarter.
Our overall realized refining margin adjusted for FIFO was $26.44 per barrel as compared to $18.62 per barrel for the same quarter last year. The real highlight of the quarter was our operating throughputs. In the first quarter, we ran 194,816 barrels of crude daily that’s barrels per day, 123,600 at Coffeyville and 71,200 at Wynnewood.
Our consolidated actual results or throughout were at the high-end of what we spoke about in our last quarterly call when I had estimated that the plants would run between 190,000 and 195,000 barrels a day. Like most mid-continent refiners, we continue to benefit from attractively priced crudes. Our purchased crude oil discount to WTI for the first quarter was $4.99 a barrel as compared to $1.45 a barrel in the same quarter in 2012. Some of the first quarter’s crude differential averages might be important to note. The WTI, WCS Western Canadian Select differential was $23.77 discount to WTI. The sweet sour spread WTI versus WTS was $4.88 and light sour blend Canadian crude versus WTI was $5.89.
As I mentioned our gathering system continues to grow and surpass prior records we gathered over 50,400 barrels a day for the quarter which is a new quarterly record and in January we set a new single month record of just over 52,200 barrels a day at this point I will turn the call back over to Susan and let her give you more detail on our reported results. Susan?
Thank you Jack and good morning as Jack previously mentioned CVR posted strong quarterly results net income was 275.4 million in the first quarter of 2013 as compared to a net loss of 37.4 million in the first quarter of last year adjusted EBITDA for the quarter was 309.9 million first as 143 million in the first quarter of 2012 available cash for distribution for the full first quarter was approximately 260 million. With 234.1 million available cash for the period post the IPO.
Let me now walk you through calculations of the adjusted EBITDA and available cash. In the first quarter of 2013 the more significant adjustments to net income in calculating adjusted EBITDA were a loss on extinguishment of debt of 26.1 million and unrealized gains on derivatives of 32.5 million. Other adjustments we include are the impact of our FIFO accounting which was a 4.7 million favorable impact and share-based compensation which was 3.5 million. Adjusted EBITDA is reduced by certain annual reserves that are pro rata on a quarterly basis to derive the available cash for distribution. These annual reserves are set aside for cash needed for debt service of approximately 40 million, 125 million is set aside for maintenance and environmental capital expenditures and 35 million is reserved for future major scheduled turnaround expenses.
These annual reserves are established on an annual basis and are adjusted as I mentioned on a quarterly basis per rated. As Jack mentioned crude throughputs were at record levels with a combined rate for both refineries at a 194,816 barrels per day in the first quarter as compared to 146,658 barrels per day a year ago, Coffeyville processed approximately 123,600 barrels per day of crude in the first quarter as compared to 88,400 barrels per day in the same period last year. Wynnewood processed approximately 71,200 barrels per day of crude in the first quarter at 2013 as compared to 58,300 barrels per day in the same period last year.
In the first quarter of 2013 our Coffeyville refinery reported a refining margin adjusted for a FIFO impact of 290.7 million in the first quarter 2013, as compared to 144.3 million a year ago. Our Wynnewood refinery reported a refining margin adjusted for FIFO impact of a 172.1 million as compared to 103.8 million in the first quarter of 2012. On a consolidated per barrel basis a refining margin of $26.44 per crude oil throughput barrel which is adjusted for the favorable FIFO impact as compared to $18.62 per barrel in the first quarter of 2012, which was adjusted for the FIFO impact.
At the plant level Coffeyville's refining margin adjusted for FIFO impact was $26.12 per barrel in the first quarter of 2013 as compared to $17.94 per barrel for the same period a year ago. Wynnewood's refining margin adjusted for FIFO impact was $26.87 per barrel in the first quarter of 2013, as compared to $19.57 per barrel for the same period a year ago. Direct operating expenses excluding turnaround expenses per barrel of crude oil throughput with $4.91 in the first quarter of 2013, as compared to $5.38 in the prior year. On a refinery by refinery basis Coffeyville's direct operating expenses excluding turnaround expenses per barrel of crude throughput was $4.69 in the first quarter of 2013 as compared to $5.44 in 2012. Wynnewood's direct operating expenses excluding turnaround expenses per barrel of crude oil throughput was $5.29 for the first quarter of 2013, as compared to $5.26 in the prior period.
We ended the quarter with cash and cash equivalents of 525.1 million under our 400 million ABL facility we had 27 million issued standby letters of credit and no short term borrowings with availability of 372 million.
Our total long term debt outstanding was 552 million which is comprised of our 500 million, 6.5% unsecured notes and 52 million of capital leases. In connection with the IPO of CVR Refining we did reserve a 160 million of IPO for future, environmental maintenance capital projects.
As in now from April 3rd, capital cost associated with Tier III sulfur regulations which are estimated to be less than 20 million were also reserved at the time of the IPO and included in the 160 million.
First quarter 2013 capital expenditures totaled approximately 44.6 million. Of the total capital expenditures in the first quarter 42.9 million did relate to maintenance and environmental capital and 1.7 million was associated with growth capital.
As a reminder, growth capital does not impact our available cash as we have about 150 million in our company revolver that's is provided by appearance CVR energy. With our liquidity and debt levels we are positioned toward our current business and our future growth.
With that, Jack I will turn the call back to you.
Thank you, Susan. And let me just spend a few minutes talking about second quarter and our outlook going forward. Just operating issue on Sunday, we have to shut down our track record at the (inaudible) with refinery due to a malfunction. It’s not serious, we’re in the unit working on already and we expect the downtime not to exceed or hopefully not to exceed about 16 days total oil to oil. Again, the repairs and all are significant but we did have to take the unit down so we are at slightly reduced crude rates at the facility.
As we’ve always done at CVR Energy, I’m going to do the same thing at CVR Refining and that’s pretty much give our review where we will be operationally and as you can note our plans have been running exceedingly well and lot of that has to do with the turn around that we took last year and the benefits we’re seeing, we’re seeing significantly improved liquid deals up to clear Wynnewood where we did some work on our hydrocracker and have gone mid to our operated hydro rates. All of this is part of our hydrocracker project going forward which will continue to improve our yields there. But the throughputs have been steady and they’ve been reliable at both locations. So for the quarter we’re estimating that our total throughputs including the impacts of the outage here at Wynnewood to be in the range of 183 to 193 barrels a day for the second quarter.
And you could read that is somewhere between 118 and 123,000 barrels a day at Coffeyville and somewhere between 65 and 70,000 barrels a day at Wynnewood. And the thing to note is that Wynnewood's rated capacity is 70,000 barrels a day. So even with this outage we’re going to be pretty close to our nameplate.
Also everybody is seeing current market conditions the narrowing Brent WTI spread, crack spreads are coming a bit and we expect to be at the low end of our previously announced full year distribution outlook of 550 to 650 units. Offsetting some of the headwinds that we’ve seen are again are strong operational performance, significantly increased liquid deals, lower operating cost.
We’re seeing seasonally low crude differentials but as we would expect there - we start wide a little, WTI is out to $90 today versus $15 even two weeks ago, so we’re starting to see that trend move back.
And more importantly, it doesn’t surprise us that the Brent and WTI spread came in and if you listen to prior earnings calls we always thought this would be somewhat was saw to. As new pipeline come on the differential would narrow as crude production continues to grow it will widen and it will be pipeline chasing crude production, I mean latest estimates I’ve seen showed than the (inaudible) onshore production to increase somewhere about 800,000 barrels a day year-over-year.
And so we’re starting to see the impacts of that and again that’s not particular surprising but the other thing too is, as the crack spreads have fallen, our group basis has gone from a negative number to today both gasoline and distillate being positive to the (inaudible). So buffering a little bit the fallen crack spreads is the fact that our group basis is improving.
So with that said, we don’t find that surprising. we think that it's appropriate to low our guidance or outlook to the lower end of this range but it’s almost we are at variable distribution MLP and we do live in a (inaudible) business and these number can move overnight one way or another rather significantly, so I would suggest that you take what we give you for operational performance and take your own view of the markets as we go forward but we are very proud of our operating results and had a great first quarter and with that I’d like to turn it back to Jay for questions.
Operator, at this time we are ready for questions.
Thank you. (Operator Instructions). Our first question comes from the line of Ed Westwick with Credit Suisse; go ahead with your question please.
Ed Westwick - Credit Suisse
Congratulations on the EBITDA which seems to be quite strong. Just, I guess you covered TI brands and this being now we are worth through the rest of the year and those will move around everyone have a view but just on perhaps wins exposures been one of the themes, so may be if you can touch on where you are on that, in terms of may be an expectation cost for the year.
We are not prepared to go into great detail but Ed I will tell you that in our lowered outlook our expectations of wins cost are baked in to those numbers.
Ed Westwick - Credit Suisse
And then talking about logistics within the stream of EBITDA may be any updates on where you got to in terms of thinking about that?
No Ed as a matter of fact, we have said at the IPO in times past, we need to get to the point where we have somewhere between 40 million to 50 million of EBITDA to make it a viable system. we are doing it, we are growing this organically, we are actually looking at potential other projects that might enhance that but right now we would think that we are somewhere in the 30 million to 35 million EBITDA range and it’s a very competitive market but there is more and more production coming on and there is a fair bit of I would say wind in our sails that we will be able to continue to grow the system and actually may be even be able to do a few projects that would get us over that home.
Ed Westwick - Credit Suisse
And then just a question on dips, obviously a lot of the pipes in the Midland refineries caused some of the disruption have normalized; obviously we are starting to see some pipes being built down to the gulf. I mean any thoughts or changes of views on your long term thoughts about the Midland discount or premium versus Cushing.
We always expected and again it’s a cyclical thing. Right now if you look at the Midland TI to WTI Cushing, they are almost parity. The tariff is high $2 to mid-$3 to get from Midland to the Gulf Coast. I would think overtime as production ramps back up, Midland will widen back out to the tariff it takes to get to the Gulf Coast versus the tariff it takes to get to Cushing so if you look at the tariff to Cushing I believe the number is like about $0.65 give or take it might also a little bit on them and if the tariff is $3.50 for the highest cost shipper to get to the Gulf in a truly normalized world you would expect that the Midland tends to be somewhere in the $3 range. But again the whole thing here is that when a new pipeline comes on it is more takeaway capacity than a particular area will generally produce.
But the shale oil production numbers are just astounding. I mean, I have seen numbers as high as a million barrels a day year over year for onshore. I think I just quoted 800,000 which is another outlook but with those kind of volumes it is going to be distortive, production comes on the pipeline comes on more production comes on another pipeline comes on. And I guess the real key here long term is that keystone gets built. I believe that will and when that does I think we will see a lot of crude in the Gulf Coast and there is also another issue that's coming up for the Gulf Coast refiners and you can see some of our peers having to spend significant capital to handle the ultra-light crudes that either are finding in the Eagle Ford and other areas. I mean a lot of the new crude that is coming on isn't real in my view, crude. Its condensate or crude mixed with condensate very, very light.
So at some point the Gulf Coast refiners will almost have to convert themselves back away from the coking plants that they built themselves, the B2B processing light plants which then exacerbates the gasoline problem I mean I am answering the questions, answering the problems of the world but ultimately if a lot light crude gets to the Gulf Coast what is going to happen to all the gasoline.
Our next question comes from the line of Jeff Dietert with Simmons. Go ahead with your question please.
Jeff Dietert - Simmons
You provided an update on your hedging position on slide six and I assume these are 211 hedges but I was going to ask if you could give us an update on your hedging strategy and I think these hedges were as of March 31st and whether or not you have any incremental hedges between then and now.
Okay, if you take a look at our hedging, in 2014 it's all distillate crack. Okay if you look at 2013 it's not quite a 211, it's more heavily weighted to distillate, but there is still a fair bit of gasoline in these numbers, so if you were to just take a look of quarters 2, 3 and 4, we have little over 18 million barrels hedged at roughly $27 a barrel. So our hedges are in the money now.
Jeff Dietert - Simmons
Did you put additional hedges on during the month of April?
We put some on, but they weren't hitting, I don't know if we actually did or not, I know we were looking, but if we did there weren't a lot, there would have been 14. But we're basically sitting there looking out and we think this is the low part of the cycle again. It's going to cycle through the year and if you look year over year crack spreads move $10 or $12 up and down.
Jeff Dietert - Simmons
So you're seeing the impact of the Permian pipeline's long horned, Permian express, West Texas Gulf, fill in line pack and supporting WTI Midland pricing, and that's a bit sluggish, new capacity and it'll take a little time for production grow to absorb that capacity but it'll happen and spreads a widen back out, is that what I'm hearing.
That's exactly our view. Our view is that a pipeline of command and it immediately puts you into a situation where you have more takeaway capacity because I don't think anybody purposely built a pipeline that would not be large enough. And then it'll take a little while for production to catch up on. One of the interesting things that has worked in our favor though, with this line coming on it's allowed us to get more crude into Wynnewood. Wynnewood where we're increasing our logistics capability there by gathered barrels, but we approached rates of near 80,000 barrels a day by (inaudible) and for us that's good for operating folks, because when we bought the facility we thought it would operate about 53,000 barrels a day and then if we did our job we'd get it up to 67 or 68 and we've approached 80,000 barrels a day.
Jeff Dietert - Simmons
You mentioned that Western Canadian, Select Canadian, heavy debt so, widening back out a bit, could you talk about the major factors influencing that discount over the rest of the second quarter and I guess through the summer.
Well, we thought they were overdone to begin with when they dropped to about $15. A long term historical value for WCF as a percentage of WTI is somewhere in the range about 75%, give or take. Years ago you could do deal with 70% but when the debt dropped to $15 off and crude was in the high 90s, you’re looking at an 85% or above the 80% ratio of selected WTI, so we thought it was overdone and simply correcting. And with the $90 crude we would expect $20, $22 differential.
(Operator Instructions). Our next question comes from the line of Faisel Khan with Citigroup. Go ahead with your question please.
Mohit Bhardwaj - Citigroup
This is actually Mohit Bhardwaj for Faisel. Jack, I’ve got question on Wynnewood, can you update us on those status of hydrocracker over there?
Yes. What we did is, when we came out of turnaround we announced that we had a project at the IPO to add a hydrogen plant and do some additional work at our hydrocracker and we actually did some of that work during our turnaround, we didn’t advertised a lot of it, we were able to put some equipment in change the catalyst and basically get our operating rate up from about 16,000 to 18,000 barrels a day. And we’ve seen a significant benefit from that liquid volume expansion as well as distillate yield. And the second piece of that will be done over the probably next, I don’t know the schedule might be about 18 months with the hydrogen plant and then be able to take full advantage of the hydrocracker.
But we’ve gotten, I am assuming we’ve probably gotten 25% or 30% of the original economics maybe a little bit just by what we are able to accomplish.
There are no further questions at this time I would like to turn the floor back over to Jay Finks for closing comments.
And again, we’d like to thank everyone for joining us today for our first quarter’s earnings call with that said thank you very much.
Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.
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