Calumet Inc (CLMT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Calumet Specialty Products Partners Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Derick Daniel, Director of Communications. Please proceed, sir.

Thank you, Operator. Good afternoon, and welcome to the Calumet Specialty Products Partners investors call to discuss our 2011 -- our Second Quarter 2011 Financial Results. During this call, Calumet Specialty Products Partners LP will be referred to as the Partnership or Calumet.

Also participating in this call will be Bill Grube, our CEO and Vice Chairman, Jennifer Straumins, our President and COO, and Pat Murray, our CFO. Following the presentation, we will hold the line open for a question and answer session.

During the course of this call, we will make various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management as well as assumptions made by them. And in each case, based on the information currently available to them.

Although our management believes the expectations reflected in such forward-looking statements are reasonable, neither the Partnership, its general partner, nor our management can provide any assurances that such expectations will prove to be correct.

Please refer to the Partnership's press release that was issued this morning, as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made during this call.

Our production levels improved in the second quarter of 2011 compared to the second quarter of 2010. However, our production was limited by a 3-week shutdown of the Exxon Mobile crude oil pipeline, which serves our Shreveport refinery during a portion of May and June. This was caused by the recent Mississippi River flooding. We continue to focus on increased run rates to meet higher demand for our specialty products, and to better benefit from improved fuel products crack spreads.

On June 24, 2011, we entered into an amended and restated senior secured revolving credit agreement, which increased the maximum availability under our revolver from $375 million to $550 million, as well as amended its covenants and terms. On July 22, 2011, we declared a quarterly cash distribution of $0.495 per unit on the quarter ended, June 30, 2011 on all outstanding units. This distribution will be paid on August 12, 2011 to unit holders of record as of the close of business on August 2, 2011. The distribution represents a $0.02 per unit increase from the first quarter of 2011.

As previously announced, on July 25, 2011, Calumet signed a definitive asset purchase agreement to acquire the Superior Wisconsin Refinery and associated operating assets and inventories of Murphy Oil Corporation for a total consideration of approximately $214 million plus the marketing value of the hydrocarbon inventories at closing, and the reimbursement of certain capital expenditures to be incurred at the Superior refinery, during the period from the execution date of the purchase agreement to the closing, subject to customary purchase price adjustments.

The estimated market value of the hydrocarbon inventories were approximately $260 million on June 30, 2011, and the estimated capital expenditures to be reimbursed are $4 million. The Superior refinery produces and market gasoline, distillate, asphalt and specialty petroleum products.

The assets to be acquired include the Superior Wisconsin Refinery and associated inventories. The Superior refinery's wholesale marketing business and related assets, and Murphy Oil's SPUR-branded gasoline wholesale business and related assets. Calumet expects the acquisition to close by the end of the third quarter 2011.

I will now turn the call over the Pat Murray, for a review of our financial results.

Thank you, Derick. Net loss for the second quarter of 2011 was $7.7 million compared to $0.9 million for the same period in 2010. These results include $15.1 million in debt extinguishment costs, of which $14.4 million were non-cash, and $3.1 million of non-cash unrealized derivative losses for the quarter ended June 30, 2011 as compared to $8 million of non-cash unrealized derivative losses in 2010.

We believe the non-GAAP measures of EBITDA, adjusted EBITDA and distributable cash flow are important financial performance measures for the Partnership. EBITDA and adjusted EBITDA as defined by our debt instruments were $32.7 million and $40.8 million respectively for the second quarter of 2011, as compared to $21.6 million and $32.1 million respectively for the same quarter last year.

The Partnership's distributable cash flow for the second quarter of 2011 was $25.4 million as compared to $7.2 million for the same period in 2010. The increase in adjusted EBITDA quarter-over-quarter was due primarily to $7.9 million of insurance recoveries, related to a settled claim with insurers for the failure of an environmental operating unit at our Shreveport refinery in the first quarter of 2010, partially offset by increased transportation expense.

We encourage investors to review the section of the earnings press release found on our website entitled, Non-GAAP Financial Measures, and the attached tables for discussion and definition of EBITDA, adjusted EBITDA and distributable cash flow of financial measures and reconciliation of these non-GAAP measures to the comparable GAAP measures.

Gross profit by segment for the second quarter for Specialty Products and fuel products was a profit of $58.3 million and a loss of $7.7 million respectively, compared to gross profit of $46.4 million and $3.2 million respectively for the same period in 2010.

The increase in Specialty Products segment gross profit of $11.9 million quarter-over-quarter was due primarily to a 12.8% increase in sales volume, and a 25.5% increase in the average selling price per barrel, partially offset by a 37.6% increase in the average cost of crude oil per barrel and higher operating cost primarily repairs and maintenance.

The decrease in fuel product segment gross profit of $11 million quarter-over-quarter was due primarily to increased realized losses on derivatives of $27.1 million in our fuel products hedging program, a 39% increase in the cost of crude oil per barrel, and increased production of byproducts, partially offset by a 14% increase in sales volume and a 45.8% increase in selling prices per barrel, excluding the impact of realized hedging losses.

Our Shreveport refinery run rates being below expectations resulted in our diesel and jet fuel sales volumes being approximately 100% hedged at approximately $12 per barrel during the second quarter of 2011. This prevented us from fully realizing the benefit of increased market prices for fuel products. Additionally, byproduct production increased quarter-over-quarter, due primarily to an increase in the mix of sour crude oil run rates at the Shreveport refinery.

Selling, general and administration expenses increased $2.1 million to $10.5 million in the three months ended June 30, 2011 from $8.3 million in the same period last year. This increase is due primarily to increased crude incentive compensation costs of $1.6 million in 2011 compared to last year.

Transportation expense increased $2.7 million to $22.7 million in the second quarter, from $20 million in the same period last year. This increase is due primarily to increased sales volumes of lubricating oils, solvents and waxes, as well as higher freight costs.

Insurance recoveries were $7.9 million for the quarter. The gain was related to a settled claim with insurers related to a failure of an environmental operating unit at the Shreveport refinery during the first quarter of last year. Debt extinguishment costs were $15.1 million during the quarter ended June 30, 2011. The debt extinguishment costs related to the extinguishment of our term loan, with proceeds from the issuance of our senior unsecured notes in April of 2011.

As of June 30, 2011, total capitalization consisted of Partner's capital in the amount of $358.4 million, and outstanding debt of $429.4 million, comprised of $400 million of [nine-and-three-eighth] percent senior notes due 2019, borrowings of $28.1 million under our revolving credit facility and a long-term capital lease obligation of $1.3 million.

The $39.8 million decrease in Partner's capital from December 31, 2010 was due primarily to a net loss of $3.5 million, $36.3 million of distributions to partners and a $95.7 million increase in other comprehensive loss, primarily due to a decrease in the fair market value of our derivative instruments partially offset by the settlement of derivative instruments designated as cash flow hedges, all partially offset by proceeds from the margin 2011 public equity offering of $94.3 million.

On June 30, 2011 we had availability of $194.7 million under our revolving credit facility based on a $402.2 million borrowing base, $179.5 million in outstanding standby letters of credit and outstanding borrowings of $28.1 million. We believe that we'll continue to have sufficient cash flow from operations and borrowing availability under our revolving credit facility to meet our financial commitments, minimum quarterly distributions to our unitholders, debt service obligations, contingencies and anticipated capital expenditures.

And now, I'll turn the call over the Jennifer Straumins.

Thank you, Pat. We were very pleased with our performance in the second quarter. We had record production rates at all of our facilities. Our facilities all continue to operate very well, and our demand for our products remains very strong. We've begun integration of the Superior refinery acquisition, and are very excited about the synergies that we have with that facility and the opportunities at the site.

This concludes our remarks, and we'd now be happy to answer any questions.

(Operator Instructions)

And your first question comes from the line of Mr. Atwood Rowe, representing Raymond James. Please proceed.

Good afternoon. My first question is around the Superior refinery acquisition. We see that the EBITDA for the Superior for 2011 was around $56 million. And with crack spreads, the 2/1/1 crack spread higher for 2011 versus 2010, do you think the run rate of around $60 million EBITDA for 2011 and into 2012 is achievable?

We think that that's -- we think that even higher rates are achievable.

Even higher?

Yes.

Okay. All right.

You know the $56 million includes a substantial number for corporate SG&A and that's one of the synergies that we have with this acquisition. We're absorbing all accounting HR type of functions that would have existed in El Dorado and not at the facility. We'll absorb those into our current system and don't anticipate adding hardly any headcount here in Indianapolis.

Okay, great. Thanks. And next question is surrounding the Shreveport. It was currently running around 25 million barrels per day of feedstock that was benchmarked at WTI, and that number was projected to grow to approximately 33 million barrels per day -

About 1,000 barrels per day.

Or 1,000 barrels, excuse me. Where is it now up to this point?

It's at that 33,000 level today.

33,000. Okay, all right.

And it could go another 4,000 maybe. We completed during the second quarter a project to run WTI crude at that facility and we're running about 6,000 barrels a day at WTI right now, and have a little bit more work to do to be able to run up to 10,000. And we -- that project should be done at the end of September. So during the fourth quarter we anticipate running 10,000 barrels a day of WTI.

Okay. And last question as it related to just debottlenecking initiatives to improving utilization. Are you still targeting around $10 million for 2011? And can you share your thoughts on what is -- what you project for the second half of '11?

We've spent -- we've spent a little more than $10 million so far this year on debottlenecking and gross CapEx. Those projects have all more or less wrapped up at this point in time and don't have anything else really slated aside from completing this WTI project for the rest of the year from a growth CapEx standpoint.

With the Superior acquisition being announced, we'll now save all of our excess cash flow or growth CapEx budget, until we can get into Superior to see what opportunities are up there and what some of those costs would be. So we -- like I said, we've spent a little bit more than $10 million this year because our earnings were so good. We went ahead and did some projects that have very short payback periods and those are complete in operation.

All right. Thank you.

Thank you.

And your next question comes from the line of Gary Stromberg representing Barclays Capital. Please proceed.

Hi, good afternoon. What was the realized hedge loss in the quarter?

Realized hedge loss on Fuel Product segment was $27.1 million.

Oh, okay, so the number in the release is the actual loss for the period?

Right.

Okay. And then the $138 million derivative liability at June 30, what's the rough pace that that will roll off? I know you have derivatives through 2013 --

Right, we have derivatives of -- out to 2013. It's roughly equivalent, if you look at our positions out we've got roughly about the same number of barrels hedged in 2012 as we had in 2011. So it's a fairly ratable pace. And then of course, the 2013, the average crack spread there is much higher, it's about $10 higher. So there wouldn't be a significant amount of the liability associated with that at this point.

Okay. And then on the new revolver, the LCs jumped pretty significantly, $85 million to $180 million over the course of the quarter. Where do you see that in the next couple of quarters? And, with $195 million of borrowing capacity, is that enough for the Murphy acquisition, or do you think you have to expand that revolver even more?

Well, the expansion of the letters of credit part of that was related to when we put the bonds in place. We issued some standby LCs to counterparties to support - continue to support the crack spread hedging program. Part of it is also just increased price of crude and higher run rates. I think the revolver today has an expanded accordion feature in it. We moved from $375 million to $550 million just based on the current business.

We put an uncommitted accordion in the revolving credit facility in anticipation that we might need to utilize that for a potential acquisition. So we intend to work through the financing needs of the Partnership as we proceed to the closing and I think with the working capital requirements of a Murphy acquisition, it's likely that we'll look at that accordion.

The borrowing base today is $400 million on our current business. And I think we disclosed what the estimate inventories are at the Superior refinery at [630] of being $260 million. So yes, I think a borrowing base, if you add those two numbers together, certainly exceeds where we would be today.

But the main thing for us is making sure that whatever the working capital requirements end up being, that we have enough of commitments to cover what that borrowing rates would be. And so we feel that the sizing, not only of the existing revolver today, but also the uncommitted accordion, what flexibility that may provide should be ample to cover the entire business even with the Superior acquisition.

Okay, what's the size of the accordion?

$300 million.

Additional?

Additional.

And you haven't changed the maturity of Jan '13?

No.

Okay, all right. Go ahead, thank you.

Now, to be clear, it goes out -- it's a five-year -- it goes out to 2016, the revolver.

Right.

Yes. It was amended and restated. So we go out until -- we signed up on June 24, so it will go out to 2016.

Got it. All right, thank you.

And your next question comes from the line of Kelly Krenger representing Bank of America-Merrill Lynch. Please proceed.

Hi, good afternoon. Just a few questions. In the release you noted that as a result of the downtime at that Exxon pipeline that that caused -- it sounded like a little bit of a disruption at your Shreveport refinery. I was just going to see if you could give us a little more color around that?

Sure. We think that our -- if we'd been able to bring in sour crude like we had been, our run rate at Shreveport would have been about 6,000 barrels a day higher than it was on average for the quarter.

Okay. Do you have a -- like a what you think the cash flow impact of that is, or the EBITDA impact of that is?

I'd guess about $4 million.

$4 million, okay. And then what's -- where's Shreveport running today?

Shreveport's running between 48,000 and 52,000 barrels a day today.

Okay. And was the month of -- let me get my -- month of July, was that a pretty clean month from the standpoint of having the Exxon pipeline volumes kind of back on line, and the refinery running as -- kind of running as expected?

Yes, July was a very clean month for the Company.

Okay. And then on the Superior assets, do you have -- I know you gave a 2010 EBITDA number. Do you have kind of an [LTM] June 30 number for that?

We don't at this point in time. We will when we -- we'll publish the financials when we receive those.

Okay.

That will be towards the end of August.

And what's a good benchmark crack to use for that asset?

They run -- a Gulf Coast type of crack spread.

Okay. Okay, and can you -- I think you went over earlier -- or one of the earlier questions was about how much WTI you're running at Shreveport. And I know that you have the -- sounds like 6,000 of a 10,000 barrel a day project that's done. So right now -- am I doing the math right when you said at 33,000 barrels a day are priced off WTI? Is that including the 6,000?

It is.

And so, you'll go from 33,000 to 37,000 at the end of September with that incremental 4,000?

Well, we'll -- the barrels that we back out are WTI priced barrels, but they've got a kicker to them. So they're at -- they're more expensive than WTI.

Okay.

It's a [Cerce] type of a barrel.

Okay. So, you'll have 33,000 barrels a day that's priced close to that -

Right, and then we'll keep the [17] of the sour barrels that we bring up the Exxon pipeline.

Okay. And what kind of difference are those relative to WTI?

Are which ones, the --

The sour barrels.

-- the sour barrels? They're priced more off of Brent.

Okay. Okay, thank you.

Thank you.

And your next question comes from the line of Eric Alofs representing Appaloosa. Please proceed.

Hi, how you doing?

Hi.

I just wanted to get a better picture, could you help us understand how much EBITDA would have been generated in the quarter if no hedging had taken place?

Well, if no hedging had taken place, one proxy for the Delta would be our realized derivative losses, which would have been in the Fuel Product segment was $27 million. I guess I'd point out that -- in periods where crack spreads are as wide as they are, the focus of course for us is to run as many barrels as we can and we mentioned the limitations caused by the Exxon Mobile pipeline shut down for three weeks.

But in terms of the program itself being self-sufficient in terms of generating cash to pay for those losses, we certainly as long as we're covering those hedges, we're okay. I mean, I think that running additional barrels gives you more exposure to the market crack spreads, and that's what we're doing now and as Jennifer mentioned we're running the Shreveport refinery in this 48,000 to 52,000 barrel a day range starting in July.

So, we would expect at this point that we'll have more exposure to the market crack in this quarter.

Okay. So you would add in both the $27 million that you had previously noted for the realized hedging loss and then another [$4 million] for the outage?

That's right.

Is there anything else that we might add back?

Not to adjusted EBITDA, but there was a pretty large debt extinguishment cost that flowed through to that income.

Okay, great. Thank you.

Thank you.

(Operator Instructions)

And your next question comes from the line of Peter Madsen representing Drakkar Capital. Please proceed.

Hello, I think maybe a follow-on question just generally on hedging and maybe some clarification. It looks like you ran, and this is in relation to the fuel products division, you know it looks like you're running 28,000 or so barrels per day in the fuel products sector.

And just based on what I looked at in terms of the recent 10-Q, the -- and I may not have all this right, so I just I'm looking for some clarification. But the amount of barrels per day that seem to be hedged were at least as of the last Q were more -- looked more like 20,000 contracts.

So I guess, can you just kind of clarify -- because I know that on previous calls the discussions have generally been around that virtually all of the fuel products production is basically subject to hedges. So, I'm trying to get a feel for the apparent discrepancy between what seems to be hedged and then the amount of barrels that are flowing.

And then maybe as a follow-on question, how -- what percentage of forward-looking production for the rest of this year and 2012 and 2013 is hedged at below market rates?

Sure. I mean, we've never really said that we hedge 100% of our fuels production. We hedge around 70% or so.

Okay.

Give where our old credit facility required us to hedge a certain percentage on a go-forward -- on a looking forward two-years basis. And given where gasoline cracks were at the time, we overweighted our hedges to jet and diesel fuel.

And so, we were more or less 100% hedged on jet and diesel and then had more exposure to the gasoline market because at some point some in time those gasoline hedges, the crack spreads were actually negative, so we weren't going to do negative hedges.

And looking forward, if Shreveport runs at the 50,000 barrels a day, we should be producing about 30,000 barrels a day fuels there and we're hedged at around 20,000 barrels a day going into 2012, and then less so in 2013. But those are at significantly higher levels in 2013.

Yes, as a point of reference again, I mean roughly around $12 a barrel in 2011 and '12, and around $24 a barrel in 2013.

And that's on what you're hedged, but you're not fully hedged based on current production rates?

That's right.

So you're about maybe two-thirds hedged, I mean 20 and a 30 --

That's right.

-- type of thing, right?

That's right.

Okay. A couple quick follow-on questions. Obviously, the Murphy acquisition kind of is running at current market spreads. So, will you bring that production under your hedge program relatively quickly, or what's kind of the hedge outlook for the Murphy acquisition?

Yes, we do plan on hedging production out of that facility and we're working through all those details right now.

Okay. And then I guess last question, just in terms of how you're financing Murphy in terms of -- the acquisition price is broken down into two components, kind of the purchase of the asset for 213 or whatever the number is, and then purchase of inventory.

With respect to inventory, do you need to finance the whole 400 kind of 50/50 debt in equity? Or, can the inventories just kind of go into the general operational financing? So I guess just a question on kind of is the amount of units that will need to be financed, is that on the whole $400 million, or is that on the $200 million for the actual asset?

Well, we're working through obviously with all of our advisors that's split to do that between equity and bonds and revolver -- we've got quite a bit of liquidity on our revolver. So we're working through all those details, but our long-term goal is to maintain a debt-to-equity ratio of 50/50. And those borrowings on the revolver would fall under that debt number.

Okay. Thank you.

Thank you.

You have a follow-up question from the line of Eric Alofs representing Appaloosa. Please proceed.

Yes, hi. Just a follow-up question or two on the Superior acquisition. Could you just explain a little bit, first around the nameplate capacity, you guys talked about 45,000 versus 35,000?

Is it reasonable to assume you can be closer to that 45,000 if you have access to the late lighter crudes and that would be a more reasonable run rate to assume going forward? And also at both the 35 and 45 run rate levels, is it fair to assume that it's 100% WTI linked pricing?

It's 100% WTI linked pricing, and you're correct when you say the 45,000 barrels a day is if you were running 100% of the lighter North Dakota crude. You know we've -- there are several -- in talking with the plant management, there are several minor debottlenecking projects that could be done there.

So once we get into the facility and understand what -- exactly what the market is and the assets and the cost associated with debottlenecking that facility, we think it could easily run more than the 45,000 barrels a day.

So -- I'm sorry, just to understand what you'd said there. So you don't need -- you don't need any debottlenecking to do 45,000, you just need to change the crude slate and you --

That's right. And then to do -- if you wanted to do 45,000 of Canadian and North Dakota mixed, there was some debottlenecking that would need to be done.

Okay. And I'm sorry, did you also say that you could do higher than 45,000 with --

That's our -- that is what we've been told.

Okay. And can you sort of outline a little bit magnitude there or --?

Not at this time. We're very, very early in the process.

Okay, appreciate the help.

Thanks.

Your next question comes from the line of [Eric Seeve] representing GoldenTree. Please proceed.

Hi, I was just hoping you could give a little bit more color on the acquisition rationale and talk a little bit more about what you think some of the synergy opportunities might be and why the transaction makes sense for Calumet.

Sure, there's quite a few synergies. But even as a standalone facility, this is a great acquisition for Calumet. I think when you see -- when we published their last three years of financial statements, as part of the process of raising financing for this acquisition, you'll see that those cash flows have been stable and strong.

And it's a very -- it's a niche refinery, it fits well with our strategy of acquiring assets that are no longer desirable of the majors. We've done this several time with all of our acquisitions. We like the market that they participate in. We like the asphalt market. There's some niche fuels markets that they participate in that we find to be desirable.

Their crude slate is very advantageous, and their location is very advantageous. It gives us geographic diversity, as well as a nice medium-sized facility to add to our portfolio.

And as far as synergies with what we already have, our Shreveport refinery has run Balkan crude in the past, and so there's some crude synergies there. And our Princeton refinery has run naphthenic -- the Cold Lake naphthenic crude. So there's synergies there as well.

Thank you. And did you -- I heard you say earlier that you were going to provide some more financials in connection with the financing of the acquisition late August. Did you give any color on what the run rate EBITDA level of the facility is?

We'll do that at that time.

Okay, thank you.

Thanks.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Daniel for closing remarks.

Thank you very much, Operator. This concludes the Calumet Specialty Products Partners Earnings Conference Call covering the Company's second quarter 2011 results. Thank you very much for your participation on the teleconference. Please note the teleconference will be available for replay using the instructions contained in our press release.

Thank you for your participation in today's conference. This concludes the presentation. You may not disconnect, and have a great day.