Calumet Inc (CLMT) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second-quarter 2014 Calumet Specialty Products Partners earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Noel Ryan, Vice President of Investor Relations. Please proceed.

Thank you, Glen and good afternoon and welcome to the Calumet Specialty Products Partners second-quarter 2014 results conference call. We appreciate you joining us today.

Leading today's call is Jennifer Straumins, our President and COO who will provide an update on our recent performance and outlook for the future. Next, Pat Murray, our Chief Financial Officer will provide detail on our financial performance during the second quarter 2014. At the conclusion of our prepared remarks we will open the call for questions.

Before we proceed, allow me to remind everyone during the course of this call we may provide 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 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 the 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 effect our actual results and could cause them to differ from our forward-looking statements made on this call.

As I indicated in our Press Release issued earlier today, you may download a PDF of the presentation slides that will accompany the remarks made on today's conference call. You may now access these slides in the Investor Relations section of our website at Calumetspecialty.com.

As a reminder, Calumet will host an Analyst and Investor Day at the NASDAQ MarketSite in New York this coming Monday August 11th, 2014, beginning at 1.30 p.m. Eastern Time. The entire event should last just under two hours and will be webcast.

However, should you wish to attend the event in-person, advanced registration is required through our IR Department, who will be available to assist you. As always this event is open to all investors and sell-side analysts following our Company.

And with that, I would like to hand the call over to Jennifer.

Thank you, Noel and good afternoon to all of you joining us on today's call. If you would please turn to slide three in the slide deck for a high-level overview of our second-quarter results.

Calumet generated adjusted EBITDA of $39.3 million during the second quarter compared to $70 million in the prior year period. Without question it was a challenging quarter on a number of fronts. Fortunately, many of the limiting factors that impacted our second quarter results from expected refinery maintenance to elevated crude oil prices (technical difficulties) during the third quarter.

As we indicated in Form 8-K we filed with the S.E.C. in late June, our Shreveport Refinery, which is our largest steel and specialty products plant on a capacity basis, conducted extended maintenance for approximately 30 days during May of 2014. This plantwide turnaround negatively impacted fuel and specialty product sales volumes during the second quarter and represented a single most significant factor driving the year-over-year decline in our results.

The maintenance conducted at Shreveport which included multiple plant optimization and reliability improvement projects reached completion in early June. We are currently operating the refinery at elevated rates during the third quarter compared to the second quarter of 2014.

Our second quarter performance is further impacted by a rapid escalation in crude oil prices throughout the early summer months which contributed to lower average refined product margins in both our business segments compared to the prior year period. Notably, we did enact price increases across the majority of our specialty products offerings in response to higher crude oil prices during the second quarter.

However, given the timing of these increases, we expect their full impact to be more fully reflected in our third quarter results. With crude prices pulling back below $100 per barrel in recent weeks, our specialty product segment stands to benefit from lower feedstock costs during the third quarter versus what we experienced in the second quarter.

One of the more -- please turn to slide 4. One of the more significant wins for Calumet this year was the successful amendment and extension of our revolving credit agreement, which is our primary source of liquidity in excess of cash generated from operations. This was an opportunistic transaction that increased lending commitments under our ABL facility by $150 million to $1 billion. It lowered our borrowing rate and expense maturity of the ABL from 2016 to 2019.

We want to thank our banking syndicate and internal finance staff for arranging a more appropriate funding vehicle capable of supporting the cash needs of our Partnership. Although we will delve more deeply into current potential organic growth projects on deck at our Investor Day next week in New York, we are pleased to report that the construction of Dakota Prairie Refinery and the Missouri Esters Plant Expansion and the Montana Refinery Expansion all remain on schedule.

With regard to cost estimates, the Montana and Missouri Projects remain on budget. However, the joint venture has chosen to upwardly revise its total cost estimate on the Dakota Prairie Refinery from $300 million to $350 million. Currently, approximately 75% of the total scope of work is completed at Dakota Prairie. Approximately 850,000 worker hours have been worked onsite since breaking ground on March 24th, 2013 against a total projected on-site worker hours of 1.3 million. Importantly, there have been no lost time injuries since we began in March 2013. The Refinery remains on schedule for commissioning during the late fourth quarter of this year.

During the second quarter, we completed the acquisition of substantially all of the assets of Specialty Oilfield Solutions, which helps further build upon our Oil Field Service capabilities and is a compliment to the Anchor Drilling Fluids acquisition we announced in March. We also invested in the first small-scale commercial GTL plant in the United States as joint venture partners. And we announced an agreement to supply crude oil and market-finished products for a refinery being built in North Dakota. Each of these transactions have strategic significance for us, and I will discuss them all individually in a moment.

Turning now to slide 5 and 6, taking a look at the factors driving the variance and distributable cash flow during the second quarter versus the prior year period, lower turnaround costs were more than offset by a 40% decline in adjusted EBITDA. When we dig into the reasons behind the decline in adjusted EBITDA, we see that Shreveport operated a little over 40% of capacity during the second quarter versus the 50% to 65% utilization in the prior four quarters.

Recall that Shreveport produces both fuel and specialty products so the extended turnaround at the refinery during May impacted sales volumes for both segments during the second quarter. I think it's worth noting that with the conclusion of the Shreveport maintenance in Q2, we've completed major turnarounds in the last -- in three of the last four quarters at our largest Fuel Refining Facility.

While any given year will include limited unit-specific maintenance at several of our Specialty Product Facilities, we do not expect any plantwide turnarounds similar to what we have experienced during the past year until the next expected turnaround cycle commences at our Fuels Refinery in 2018. Importantly, even during a period impacted by heavy scheduled maintenance, our DCF has averaged between $20 million and $50 million per quarter during the past two years implying that we have either covered or been close to covering our distribution despite significant maintenance related outages at key facilities.

As you can see on slide 5, Fuel Products gross profit per barrel fell into the negative territory during the second quarter of 2014. As a reminder, when comparing our Fuel's gross profit per barrel to the 211 Gulf Coast crack spread, you need to add back direct operating expense per barrel in order to get an apples to apples comparison. We believe our direct operating expenses per barrel within our Fuel segment are generally about $10 per barrel, which implies a much improved capture rate versus the 211 crack spread on an adjusted basis.

Please turn to slide 7. Last week we acquired substantially all of the assets of privately held Specialty Oilfield Solutions for a total cash consideration of approximately $30 million. Specialty Oilfield Solutions was founded in 2005 and is based in Houston. It is a full-service solids control and drilling fluids Company with operation in the Marcellus, Eagle Ford and Utica shale plays.

This transaction further positions Calumet as one of the leading suppliers of specialty oil field product and services to the drilling industry. Building upon the Partnership's acquisition of Anchor Drilling Fluids in March 2014, SOS will operate as a subsidiary of Anchor Drilling Fluids which is wholly owned by Calumet. This transaction will enable Calumet to provide a more comprehensive offering that extends beyond drilling fluids to include solids control equipment and services.

On slide 8 we will talk about the GTL joint venture. In early June we announced our investment in a -- as a joint venture partner in the construction of a commercial gas liquids plant that is expected to produce approximately 1100 barrels per day of refined products including waxes, drilling fluids, distillate and naphtha. These products will be produced from natural gas.

The Lake Charles Louisiana Plant which is expected to be operational by late 2015 at the total estimated cost of $135 million. The plant will be owned and operated by Juniper GTL LLC and is expected to be funded through a combination of equity and senior secured debt. Calumet intends to invest $25 million in exchange for an equity interest of approximately 23% of the joint venture.

Business innovation has been a central theme in the Calumet growth story since our inception. From our construction of a new refinery in North Dakota capable of sourcing cost advantaged Bakken crude oil to our proposed participation as an early adopter of GTL Technology, Calumet continues to achieve profitable growth in part through forward thinking strategic investments. Looking forward, we believe this project puts Calumet in a leadership position to capture promising GTL opportunities, which we anticipate to arise given expectations for continued growth in domestic natural gas production in future years.

Now turning to slides 9 and 10, since announcing our intent to build Dakota Prairie Refinery with MDU Resources three years ago, several investor groups have come to the table seeking to build similar diesel hydro-scanning plants to address local demand for distillate throughout North Dakota. While some of these investor groups have come and gone, one group, Dakota Oil Processing, has moved forward with the development of a 20,000 barrel a day refinery in Trenton, North Dakota that is expected to commence operations in 2016.

The team at Dakota Oil Processing came to us recently with a proposal that would position Calumet as the sole true supplier and marketer finished the product for the Trenton refinery. In mid-June we signed a multiyear agreement that made this proposal official. While 2016 is still years off, this deal is important on a number of levels.

First, this transaction further builds our ability to increase our crude oil marketing capabilities, something we've talked about for quite some time. Second, it allows us to participate in product flow stemming from two of the three refineries operating in the state, the Dickinson and Trenton Refineries.

Third, it puts us in a position to increase our presence in the Bakken shale. And fourth, it allows us to pursue an asset-like strategy that stands to provide EBITDA uplift with no capital investment on the part of Calumet.

Whether it be in the oil field services businesses of Anchor and SOS or in the downstream with Dakota Prairie and Dakota Oil Processing, Calumet continues to build its presence throughout North Dakota keeping true to our rig-to-retail vertical integration strategy.

Looking ahead to the third quarter, market conditions have shifted in our favor. Pricing and demand for specialty product remains strong. Crude oil prices are on the decline. Demand for asphalt products is much improved from a year ago levels.

Our organic growth projects remain on track and most importantly our Refineries are operating reliably with no planned maintenance on deck for the foreseeable future. Overall we're looking to improve our performance as we transition into the remainder of the year having exited a tough second quarter.

With that, I will turn the call over to Pat.

Thanks, Jennifer. Let's all turn our attention to slide 12 for a discussion of adjusted EBITDA.

We believe the non-GAAP measure of adjusted EBITDA is an important financial performance measure for the Partnership. Adjusted EBITDA, as defined under our financing instruments, decreased to $39.3 million in the second quarter of 2014, down from $70 million in the same quarter of 2013.

As illustrated on the chart on slide 12, the bulk of the year-over-year decline in adjusted EBITDA was due to declines in Fuel Products margins given a significant year-over-year decline in Refined Product crack spreads. And lower sales volume due to the extended Shreveport turnaround.

We encourage investors to review the section of our Earnings Press Release found on our website entitled non-GAAP financial measures and the attached tables for discussion and definitions of EBITDA, adjusted EBITDA, and distributable cash flow financial measures and reconciliations of these non-GAAP measures to the comparable GAAP measures.

Turning to slide 13, fuels refining economics declined significantly on a year-over-year basis during the second quarter. The benchmark Gulf Coast 211 crack spread averaged $19 per barrel during the three months ended June 30, 2014, compared to $24 per barrel in the same period last year.

The year-over-year decline in the 211 crack spread was driven primarily by a sharp drop in the diesel crack and to a lesser degree the gasoline crack. Crude oil price differentials remained volatile throughout the quarter, a factor which further impacted gross profit in our Fuel segment.

Turning to slide 14, as we look to sources and uses of cash between the first and second quarters of this year, it is important to highlight the factors that reduced our cash position from $180 million to $15 million. This decline in our cash position was expected and is partially offset by liquidity enhancement under our amended revolving credit facility, which I will touch on shortly.

Looking at the bridge, a significant use of cash during the period involved the increase in working capital primarily inventory, which we expect to be temporary. We are focused on working capital reduction initiatives that we expect to make progress on during the third quarter. Spending on the organic growth project including our investment in Dakota Prairie Refining, was another significant use of cash in the period followed by turnaround spending at our Shreveport Refinery.

Turning to slide 15, Calumet has been very opportunistic in both the debt and equity markets during the past two years, raising more than $1.5 billion since January 2013 with which to support continued growth of Partnership. In July, we completed a transaction that enabled to us increase the size of our revolving credit facility by $150 million, lower our borrowing costs, and extend the term of the facility to 2019. This transaction also demonstrated strong support from our lending syndicate and includes a $500 million accordion lending feature should the need arise.

During the first quarter of 2014 we launched a three-year $300 million at the market equity issuance program. This program is not only more cost effective in terms of raising equity than a traditional overnight equity offering, it also allows for an orderly transition of small volumes of units into the market. Importantly this program is used by many MLPs and should be viewed as one of many potential funding options available to us.

Turning to slide 16, from a total liquidity perspective, while our cash position has declined due to some of the near-term factors I mentioned earlier, our access to liquidity as provided for by our amended and restated credit facility has increased by $115 million since the start of the year. This facility remains our primary vehicle that assists us in funding the ongoing cash needs of the Partnership. Understandably, lowering leverage from current levels over time remains a priority for Calumet.

Turning to slide 17, due to a number of factors that we have touched on today, our second quarter performance was below our initial expectations. The year-over-year decline in our adjusted EBITDA impacted both our distribution coverage and the leverage ratio with LTM debt to adjusted EBITDA exceeding seven times as of June 30th, 2014. Despite challenging second quarter performance, the third quarter looks more promising as Jennifer described with our key refineries operating at improved rates compared to the second quarter of 2014.

Now turning to slide 18, looking ahead for the remainder of 2014, we have hedged approximately 5.9 barrels of our anticipated fuels production. We have locked in 2.6 million barrels of gasoline at an average price margin of $12.80 per barrel, 2.7 million barrels of diesel at an average margin of $27.56 per barrel, and just under a million barrels of jet fuel at an average margin of approximately $24.50 per barrel.

Looking ahead to 2015, we have begun to hedge more of our anticipated gasoline production. Between the first and second quarter of this year we hedged 1.6 million barrels of anticipated 2015 gasoline production. We continue to seek to hedge to up to 75% of our anticipated fuels production as far as four years out. Currently we have hedge positions out into 2016.

Turning to slide 19, we are updating our capital spending forecast for the full year 2014. Total estimated spending including replacement, environmental, turnaround and growth, capital project spending is forecast to be $365 million to $410 million for the full year 2014, up from the prior forecast of $340 million to $385 million.

An anticipated decline replacement environmental spending is more than offset by a slight increase in Dakota Prairie refining cost estimates, higher turnaround costs at Shreveport, and a portion of our investment in the Juniper GTL project. Having completed turnarounds at our Shreveport, Superior, Montana and San Antonio Refineries during the last 12 months, annualized turnaround CapEx is expected to be in the $20 million to $30 million range until our next major turnaround cycle expected in 2018.

And with that, I will turn the call over to the operator so that we can begin the Q&A session. Operator?

(Operator Instructions)

Your first question comes from the line of Richard Roberts from Howard Weil.

Good afternoon, folks. Couple of questions from me here. I guess first, do you have any idea of the opportunity costs for the downtime at Shreveport in the quarter?

The opportunity cost was probably about $7 million.

So last quarter on the call the idea of the potential for a separate logistics MLP came up. I was wondering if you guys had any updates thoughts or anything new you could share on that front?

We've continued to work with several of our banking partners to evaluate the opportunities there. We are continuing to evaluate our asset base as to what would be appropriate assets to potentially be dropped down into a logistics MLP.

Okay. Great. In a recent 8-K you guys filed about a month ago, you talked about exploring strategic alternatives for the Shreveport Facility. Can you give us any idea what kind of options you're looking at there?

Sure, there are a lot of options available there. There's some expansion projects that we're considering to modify and upgrade our product slate.

There's the Feedstock opportunities that we're pursuing that would slightly modify the Feedstocks that we run at that Facility. And you always can look for joint venturing partnership opportunities or an outright sale of the Facility. And, you know, we're talking about Shreveport here but that's true in the case of any of our assets or product lines.

Okay. And then maybe just one more from me. So I know on the fuel side, no more turnaround really planned until 2018. Is there any notable maintenance at any of the facilities in your portfolio at all, either in the back half of this year or in 2015?

We will have some minor downtime in our Cotton Valley facilities in late this year.

Your next question comes from the line of Edward Westlake with Credit Suisse. Please proceed.

Good afternoon and probably a host of questions from Monday, so good luck. Just focusing on this GTL investment, I mean, it seems like $135,000 per flowing barrel, something like that or maybe slightly under that, then obviously you've got to buy gas, then you are going to sell a chunk of diesel at a premium to wherever the oil price is.

So I'm just wondering is it really the specialty uplift that drives the economics of this project? What sort of IRR do you think you could make at this sort of capital cost?

We've not disclosed the IRR for this Project. And again this is a very small investment for Calumet.

Quite honestly, the EBITDA that we will be generating from our portion of the Facility will be a very small part of our overall EBITDA. The bigger opportunity -- and going back to the initial part of your question, you're correct, there was substantial margin uplift from the specialty margins part of the barrel.

The Fischer-Tropsch waxes are high margin as well as some of the other products that come off. We're putting our toe in the water, so to speak, trying to decide if we want to invest in other technology in the GTL area or move forward with a larger facility somewhere else in the United States.

So this is sort of a pilot plant? I mean obviously some of the other majors have built much larger plants than this so I'm just wondering how you think the economics stack up against the global competition. Or all competing technologies.

I think the economics are comparable on a dollars per barrel basis with some of the larger facilities. And again this Plant is focusing on the Specialty Product part of the barrel where a lot of the other facilities are focusing solely on the Fuels part.

And you said dipping your toes. So we shouldn't anticipate building in lots and lots more CapEx as you decide to roll out plants in this sort of area?

No, not at this time.

Okay. Just coming back to more of the earnings, you made an intriguing comment about demand for asphalt having improved. I get that the oil prices reduced and that will help your margins in 3Q. But intrigued by that comment, because that would be probably a change in the market for asphalt.

Well, if you recall, we've done a substantial amount of work on our distribution network for asphalt over the last year with our joint venture with Allstate Materials in Albany, New York and then the additional Asphalt Terminal in Muskogee, Oklahoma. So by broadening our market diversification, our geographic diversification, it has helped enhance the demand for those barrels.

Right. So it is not unit demand it's just your share is perhaps getting better, or your ability to get asphalt to market that's improving?

That's correct.

Okay. And then if I may, just one more. Just on the North Dakota, obviously as we get closer to start-up on Q4, or presumably Q1, maybe talk about how normally refineries take a bit of time to ramp-up. Maybe talk about your ramp-up plans? But also, just for modeling purposes, what sort of yield should we assume for the Refinery?

The yields for the Refinery are about 8,000 barrels a day of diesel and 6,000 barrels a day of ATB, atmospheric tower bottoms. And the balance is a naphtha diluent product that we will be selling into the crude market in Canada is the plan for that.

As far as ramp-up goes, we have about two and a half to three months of ramp-up budgeted in our models. You are correct, any time you bring something new on-line it takes time to line out and work out the kinks if you will.

And one follow-on question on that. The pricing of diluent, when you present your EBITDA estimates for these projects, have you based it on historical relationships for diluent prices or have you been a bit more conservative?

We've been a bit more conservative.

Any idea of --

That Diluent market price can swing from WTI plus or minus $10 a barrel. So there's quite a bit of volatility in that number.

Your next question comes from the line of Cory Garcia with Raymond James. Please proceed.

Thanks. Good afternoon. One quick housekeeping item.

Noticed a sizable uptick in selling costs. I apologize if I missed it but how much of that is simply a function of the integration costs involved with all the acquisitions or --? I'm really just trying to get a better idea of the appropriate quarterly run rate for that particular cost.

That run rate will actually probably go up now with SOS, their Sales Team being part of that number. There really are no integration costs in that number. That's just straight selling expenses and people.

Okay. Great. Higher overhead. That makes sense.

Now, again, try not to jump the gun ahead of the Analyst Day so I will keep this to what's already in your 2014 backlog. Can you update us in terms of that $305 million to $335 million growth CapEx figure? How much of that includes logistics if any?

Guess part of that depends on how would you define logistics. So you are talking about how you would -- of that growth, how much of it would be available to drop down into a logistics MLP?

Yes, that's sort of the angle I'm looking at.

Sure. Really depends on how deeply you want to define logistics. Obviously (inaudible) has taken tank farms and dropped those into their logistics MLP. You could say 35% to 50% of that CapEx could be around logistics assets.

That's definitely a lot higher than I would have thought. I appreciate it.

If you want to be really aggressive in how you define logistics.

Your next question comes from the line of T.J. Schultz with RBC. Please proceed.

Just beyond looking at the potential assets for a logistics MLP -- just trying to understand what else is on the table -- is there still the potential to put, or to separate Specialty and Fuels into structures so that Fuels is variable?

We've looked at that. That's not our preferred way to go at this time.

Okay and then just kind of -- ask again on timing. You're talking to your banking partners here, but how far along are you in the process? Is this something we should expect more details on next week or is this something that is going to take awhile?

We will provide a few more details next week. We've got a special presentation to our Board of Directors in September to review some of these opportunities when the option is available to us.

I would say we would have a lot more information for you on the November earnings call. And as we said last quarter, we expect it would take us nine months or so to get all the work done before we would be ready to do anything.

(Operator Instructions)

And your next question comes from the line of Roger Read with Wells Fargo. Please proceed.

Doing well, thanks. I guess I would like to maybe come at the Dakota Prairie thing slightly different than the questions asked already. Are there any particular critical path items we need to be aware of at this point? Anything on the equipment side, labor side, et cetera?

Yes, there are a few different critical path items. The main one is the construction of the reactor for the diesel hydro-treator which is being done in Europe. And that reactor was finished and put on a boat last week and is expected to arrive in Houston on August 19th, then it will be transported to North Dakota. So that is on schedule.

The construction and commissioning of a Waste Water Treatment Facility at the Refinery is also a critical path item and we have received the equipment and the permits necessary to build that, so, again, on schedule and looking like it is on budget. Those were the two main critical path items.

Okay, thanks. And then Anchor, now you've had it I believe for a full quarter or at least close enough, certainly once we go through July. How is that performing relative to expectations?

And then just in terms of what seems to be reasonably good drilling activity levels, any comments you can offer there in terms of positive impact on margins, pricing, et cetera, or is there any cost inflation we need to be aware of in that business?

Number one, the integration is going very well. The Business continues to grow at elevated rates compared to historical levels. It's far surpassing our expectations from an EBITDA standpoint and we really don't speak a lot publicly about the cost and prices associated with this Business.

We are actually honestly still working through how we're going to be reporting this, what metrics and KPI's we will be sharing with the public as we continue to grow this part of the Business. If you give us a few months on that I would appreciate it.

We did complete the construction of an additional Mud Plant in Midland, Texas. So we're pleased about that. We will be able to increase rig count in that area due to that project finishing.

Okay, great. The last question I had was, on the Specialty Product side, one of your major competitors added some capacity earlier this year.

You talked about being able to raise prices recently, and then obviously the benefit of falling crude price is helping margins out. But just as a broad market comment, how is new capacity in the market affecting you or affecting the market in general?

The market is fairly well balanced at this point in time. There are other refiners on turnaround and having some maintenance issues that have kept the supply of Paraffinic Base Oil fairly well balanced with demand. We do caution that as those refineries experiencing planned and unplanned downtime come back on-line we do expect to see length in the Paraffinic [food] market.

So all good for now but we'll keep our eyes open?

Right.

Okay. And then, I know this will probably be a bigger item for Monday, and if you don't answer until then that's fine with me. But any thoughts on CapEx for 2015 at this point, or in maybe just general terms, flat, higher or lower as a way to think about it?

Maintenance and Environmental CapEx, between $50 million and $60 million a year on average. We will not have any major turnaround expense next year just minor routine turnaround expense. More like 2012 type of levels.

Growth CapEx, our growth projects are driven by ability to raise capital and the types of returns. So we don't have anything outside of the announced major projects that we're contemplating at this point in time for 2015.

I would now like to turn the call over to Jennifer Straumins for closing remarks.

Thank you for joining us on today's call. Should you have any additional questions, please don't hesitate to contact Noel Ryan, our VP of Investor Relations. And we look forward to seeing some of you guys on Monday in New York. Thanks.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.