Calumet Inc (CLMT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2015 Calumet Specialty Products Partners earnings conference call.

(Operator Instructions)

As a reminder, today's program is being recorded. I would like now to introduce your host for today's program, Noel Ryan, Vice President, Investor Relations. Please go ahead.

Thank you, Jonathan, for that introduction. Good afternoon, and welcome the Calumet Specialty Products Partners fourth-quarter and full-year 2015 results conference call. We sure appreciate everybody joining us today. On today's call are Tim Go, our CEO; Pat Murray, our EVP and Chief Financial Officer; Bill Anderson, EVP of Sales; Ed Juno, EVP of Operations; and Steve Pocsik, our new VP of Specialty Operations.

Before we proceed, allow me to remind everyone that, during the course of this call, we may provide various forward-looking statements within the meaning of Section 21-E 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 that 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 affect our actual results that could cause them to differ from our forward-looking statements made on this call.

As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks made on today's conference call, as indicated in the press release we issued earlier today. You may access these slides in the Investor Relations section of our website at CalumetSpecialty.com.

With that, I'd like to introduce Tim Go to the call.

Thank you, Noel, and good afternoon to all of you joining us today. Since I joined Calumet as CEO, just 50 days ago, we have witnessed significant volatility in both the commodities and capital markets, as crude oil prices have fallen more than 20% and our equities unit price has declined nearly 30%.

While I had hoped for a warm welcome, the past two months have more closely resembled a trial by fire. Suffice it to say, this isn't my first rodeo, and it won't be my last. One of the key lessons my three decades in the energy industry have taught me is to manage businesses with a long-term investment horizon in mind, while adopting to near-term market realities in a way that mitigates risk.

The reality is this: my Leadership Team and I are focused on managing all those factors within our control. If we optimize our assets, improve our operating efficiency, capture increased feedstock advantages, and expand our product distribution efforts -- among a long list of potential opportunities that we'll discuss today -- we will generate stable-to-growing cash flows that justify a premium value for public debt and equity.

Our fourth-quarter results were disappointing, and for our team, we view this as the bottom from an operations perspective. From a capital spending perspective, we're hitting the reset button, as we commit ourselves to doing more with less. From here, we will work our way up, and we will do it together -- as one team, with a well-defined vision. No excuses, only accountability.

In my first conference call as CEO, I will begin by discussing our full-year financial performance, although the bulk of my prepared comments will introduce my vision for Calumet, with specific emphasis on the supporting strategic initiatives that we expect to be instrumental in driving long-term profitable growth for the Partnership. After my remarks, Pat will provide a comprehensive financial review of our fourth-quarter results, followed by a Q&A session.

With that, please turn your attention to page 3 of the slide deck. On a full-year basis, our core business has performed well, as demonstrated by nearly 22% year-over-year increase in distributable cash flow, excluding special items, as refining system utilization and product sales volumes reached all-time records in 2015. Despite challenging market conditions evident during the fourth quarter, our full-year results highlighted stable growth in our Specialty Products segment, where gross profit per specialty products barrels sold increased to $45.39 versus $41.82 in 2014, driven mainly by lower feedstock costs and record annual sales in the branded- and packaged-product category.

After more than three years of heavy capital investment, our Montana refinery, heavy crude oil expansion, our San Antonio refinery, specialty solvents project, and our Missouri specialty esters plant expansion project have all reached completion. Our new crude unit in Montana is currently operating at 17,000 barrels per day, and is expected to reach 25,000 barrels per day by the end of March. San Antonio has started selling specialty solvents to customers, while our Missouri plant has started selling specialty esters post its expansion.

On balance, we anticipate all three projects will begin contributing material EBITDA, beginning in the second quarter of 2016. With the organic growth projects complete, our current focus remains on capital conservation, as our capital spending is poised to decline more than 60% in 2016 versus the 2015 period. Pat will speak to this in more detail in his remarks.

Although I officially became CEO of Calumet just 50 days ago, I've had the past five months to visit all 14 of our operating plants while meeting with our employees, our Senior Management Team, and our Board of Directors on a regular basis. In January, I rolled out a new long-term strategic vision for Calumet, one that is intended to provide a well-defined roadmap for how we intend to become the leading petroleum-based specialty products company in the world. I will walk you through this strategic vision in the remainder of my remarks today.

Please turn your attention to page 4 of the slide deck. In recent years, Calumet's business has become increasingly diversified away from its core specialty products business. This investment philosophy has yielded some home runs, such as the acquisition of the Superior and Montana refineries. It is also resulted in several less-successful investments.

Looking forward, our focus will be on developing niche specialty businesses, where we have a proven sustainable competitive advantage. We are getting back to basics, investing in markets where we know we can win, over the long term. For us to successfully execute on this strategy, we have laid out three central focus areas for Calumet.

First, as shown at the base of the pyramid diagram, our organization will be committed to operational excellence in all that we do. In application, this means we will better optimize our base operations, whether by running at higher utilization rates, processing more cost-advantaged feedstocks, improving product yields, or upgrading our products to support higher netbacks. We will capitalize on organic opportunities within our portfolio of assets to extract incremental value for our unitholders.

Second, our organization will pursue opportunistic self-help projects that are smaller in size, scope, and duration, as compared to our prior capital campaigns, but which carry attractive return profiles, capable of supporting sustained growth and EBITDA. We will be disciplined in our evaluation of projects, requiring a high degree of confidence in the return profile, as supported by fully engineered plans, prior to allocating capital to a project. These projects will be self-help in scope, will be conducted in phases, several at a time, and will likely cost less than $50 million in capital spend per project. We expect such projects to carry one- to two-year paybacks.

Third, our organization will engage in targeted strategic acquisitions of specialty assets that leverage an existing core competency and that have an identifiable competitive advantage we can exploit as the new owner. At the same time, we will begin evaluating our portfolio to identify potential divestiture candidates that are non-core to our business, and which are worth more to a strategic or sponsor than to us, while seeking to maximize our return on invested capital.

So, given that overview, let me dig a bit deeper into each of these focus areas and how they translate into new opportunities for Calumet. Please turn to page 5 of the slide deck. Between 2011 and 2014, Calumet completed a series of Fuels and Specialties Products acquisitions in rapid succession, resulting in a material expansion of our asset portfolio. While many of these assets have performed well in our portfolio, none of them have been optimized to their fullest potential. I believe Calumet has a unique opportunity to build a more efficient, more profitable version of its current self, beginning with the assets we own today.

From my vantage point, asset optimization requires a commitment to operational excellence through continuous improvement. In application, continuous improvement can mean increased processing of cost-advantaged condensate and heavy Canadian crude, it can mean upgrading intermediate streams into higher-value finished products, it can mean capturing transportation and logistics efficiencies across our asset portfolio. I've listed a few examples on the slide to illustrate these points.

Today, Calumet is winning as a specialty refiner. When I refer to the concept of specialty refining, I think it is important to pause for a moment and be clear how I define specialty businesses going forward. A specialty business isn't just one where we engage in the production and sale of lubricants, waxes, or solvents; rather, a specialty business describes a unique market dynamic, where we have a clear-cut competitive advantage, whether it be a niche-market advantage, a feedstock advantage, a formulation advantage, a quality advantage, a technical service advantage, or innovation advantages -- you name it. In a specialty business, the products being produced aren't fungible, they aren't commoditized, they have some unique aspect that customers are willing to pay a premium for. It is these types of businesses where Calumet will focus its attention moving forward.

As you can see on slide 6, gross profit margins in our Specialty Products segment, where we are a price maker and recognized market leader, are stable. However, margin in the Fuels Products segment, where products are commoditized, is noticeably more volatile. While we have taken steps to offset the inherent volatility of the Fuels business through derivative activities, the fact remains that, as a fixed distribution MLP, fuels refining adds significant volatility to our cash flows, as evidenced by our fourth-quarter results.

Over time, we will grow our presence in Specialty businesses while mitigating exposure to higher-risk cash flow streams. While we are not currently shopping any of our Fuels assets, Calumet must become increasingly disciplined when it comes to what it owns, and why it owns it. Our return on invested capital has been well below expectations in recent years, and, going forward, we have an opportunity to put capital to work in a more disciplined manner that plays to our strengths.

Please turn to page 7 of the slide deck. During the past five years, we have invested approximately $750 million in growth projects and joint ventures that have a total anticipated return of approximately $100 million. From my vantage point, these projects were challenged in several regards, although I have the benefit of hindsight.

First, several projects, such as the grassroots Dakota Prairie refinery, had multi-year lead times, periods in which market dynamics and return profiles changed dramatically. Second, these projects were highly capital intensive, so much so that they required significant capital to be raised in the public markets to be completed. And, third, given the long lead time associated with the projects, we were forced to invest significant capital on the front end of these projects, putting ourselves in a position where we were capital constrained during the course of their completion, limiting our ability to grow the quarterly cash distribution at that time.

Beginning this year and moving forward, we will seek to identify and capitalize on a series of opportunistic self-help projects that are shorter in duration, much lower in cost, and which generate one- to two-year payback profiles -- although we only intend to pursue a few of these projects at a time to base our spending conservatively. As illustrated on slide 7, we recently entered the evaluation phase on three self-help projects: at our Shreveport refinery, we have a project under review that is expected to increase the de-asphalting capacity at our PBA unit, which will allow us to make more specialty products at our plants; at both our San Antonio and Superior refineries, we are reviewing projects that would allow significant feedstock optimization by increasing the volumes of discounted condensate and WCS that we run at each of these facilities.

Please turn to page 8 of the slide deck. A big part of our fuels refining story this year will involve our ability to lower our feedstock cost by processing increased volumes of heavy Canadian crude oil at our Superior and Montana refineries. While many crude oil differentials have evaporated in recent quarters, the WCS-WTI differential remains intact, with WCS priced $12 per barrel below WTI on a 2016 year-to-date basis. We expect this differential to remain structurally advantaged over the next several years, given a combination of continued production growth out of the Canadian oil sands, coupled with limited pipeline off-take capacity from the region.

On slide 9, you can see that by year-end 2016, we intend to increase the volume of WCS processed at our refineries, from 20,000 to 25,000 barrels a day to 40,000 to 45,000 barrels a day. This is very significant for us. Part of this increase involves the expansion at Montana, where we are going from 10,000 barrels a day to 25,000 barrels a day in total capacity by March 2016, with the remaining increase being at our Superior refinery, where we are looking to step up WCS processing, from 15,000 to 20,000 barrels a day. Longer term, we believe we have the opportunity to increase WCS processing up to 70,000 barrels a day at both refineries, subject to market conditions, representing well over half of our total Fuels feedstock slate.

Notably, as we increase our appetite for heavy crude oil, our Fuels Products slate will become increasingly weighted toward asphalt. While we currently sell asphalt out of our refineries, and through a series of third-party terminals in the Midwest, we recently entered an agreement with Alon to begin marketing our asphalt out of their terminals in the Southwest. Through this agreement, which is significant from a product marketing perspective, we will avoid oversupply in our traditional markets, while capitalizing on incremental demand in new markets.

As we increase our exposure to the WCS-WTI differential, we believe it is important to use selective hedging strategies to mitigate downside risk. With this in mind, between the second quarter and fourth quarter of 2016, we have hedged approximately 15% -- we have hedged approximately 50% of our anticipated WCS-WTI exposure, as indicated on slide 10. For the vast majority of this position, we have utilized percentage hedges, which essentially means that we capture more of the discount as crude oil prices rise and vice versa. We intend to layer on additional positions in out-years on an opportunistic basis over time.

Please turn to page 11 of the slide deck. Thus far, we have discussed our plans around operational excellence and self-help projects. The final layer of our strategic plan involves targeted acquisitions.

Let's pause here for a moment and discuss how we have approached M&A in the past, and how we will approach it going forward. Historically, we have cast our nets wide when evaluating potential acquisition candidates. We explored assets across the energy supply chain, from assets in the Oilfield Services business, to a wide range of refining assets. Going forward, we will tailor our approach toward owning businesses with stable-to-growing cash flows that support our quarterly cash distribution.

Today, many of our businesses fit this description, while others do not. Our Superior and Montana refineries are niche inland assets, with significant feedstock advantages. Our Cotton Valley facility makes some of the best solvents in the United States. Our branded products, such as TruFuel and Royal Purple, capture elevated margins in a very brand-loyal market. These are just a few examples of what we mean, when we say we want to own assets with competitive advantages. Over time, we will look to have assets and brands that support the stable-to-growing cash flow model I mentioned earlier, and become the vast majority of our operating cash flow.

Please turn to page 12 of the slide deck. Before I turn the call over to Pat for a review of our fourth-quarter results, I wanted to outline our priorities in the near, mid and long term. Near term, liquidity and capital conservation remain a top priority. We have many opportunities to grow our business, but we will maintain a high level of balance-sheet discipline, when pursuing such opportunities, most of which will have no or low capital requirements. We will seek to grow our core business, with the goal of supporting our current distribution, subject to market conditions.

Over the midterm, we will be very focused on optimizing our base operations and executing on the operational excellence initiatives I laid out earlier, while deepening our talent bench to help lead the best practices required to take our businesses to the next level. Importantly, we will build the infrastructure and systems to help us make increasingly data-centric, informed business decisions that will facilitate organic growth in our business.

Finally, longer term, we will focus on layering on additional self-help projects that grow EBITDA, while pursuing the acquisition of competitively advantaged specialty assets. We will manage liquidity in a prudent manner, seeking to improve our return on invested capital well above historical levels.

In closing, I want to be very clear that while Calumet's performance was significantly improved during the first nine months of 2015, our fourth-quarter results were disappointing. I view this performance as unacceptable, and am personally committed, along with the rest of my Management Team, to driving improved results going forward. I want to affirm our great group of employees, who are committed to leveraging our competitive advantages and growing this Company, with a long-term investment horizon in mind. And I look forward to sharing with you the progress being made in future business updates.

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

Thanks, Tim. Good afternoon, everyone, and thank you for joining us today. Please turn to page 14 of the slide deck, for a review of our fourth-quarter results.

As Tim mentioned, clearly, our fourth-quarter results did not reflect the level of strength evidenced in our overall business during the first nine months of 2015. Although we achieved record fourth-quarter throughput and record sales volume within our Fuel Products segment, fuels refining margins decreased materially between the third and fourth quarters, as reflected by a 45% quarter-over-quarter decline in the 2:1:1 Gulf Coast crack spread, along with the significant narrowing in select crude oil price differentials.

Our ability to source increased volumes of cost-advantaged crude oil is possibly one of the most important actions we can take to increase profitability within our Fuel Products segment. As Tim referenced earlier, we have initiated efforts to increase the volumes of heavy Canadian crude oil processed in our system. To that end, we processed 14% more WCS-linked crude oil in the fourth quarter of 2015, which is priced at $12 below WTI, when compared to the prior-year period.

As we continue to increase our WCS exposure within our refining system, we anticipate significant raw material cost savings, subject to market conditions. In January, we declared a quarterly cash distribution of $0.685 per unit, or $2.74 per unit on an annualized basis, for the fourth quarter, on all of our outstanding limited-partner units. This distribution level is consistent with the amount paid to unitholders in the previous quarter, and on a trailing four-quarter basis, distribution coverage, excluding special items is 1.1 times.

During the fourth quarter of 2015, affiliates of our general partner provided Calumet with an unsecured $75 million loan at an annual interest rate of 6%, demonstrating their continued long-term support for the partnership. This loan, in concert with additional measures aimed at increasing our liquidity cushion, have helped to support our liquidity position at year end.

Please turn to page 15 of the slide deck. Our reported fourth-quarter adjusted EBITDA included $59.3 million of special items that, if added back, bridges you to our adjusted EBITDA, excluding special items, of $21.7 million in the period. These special items include: a charge related to a lower cost or market inventory adjustment of $31.2 million; a $21.7 million loss related to the liquidation of LIFO inventory layers at year end; a $22.3 million gain on the early settlement of select derivatives contracts; and a $28.7 million adverse mark-to-market impact from the Partnership's existing RINs liability.

Looking beyond these non-cash items, the single biggest variance in our business on a year-over-year basis was the deterioration in Fuels refining economics, together with losses at our DPR joint venture and in our Oilfield Services segment. As you can see on slide 16, these factors combined to result in significantly lower DCF on a year-over-year basis, although we continued to maintain 1.1 times coverage exiting the year, excluding special items.

Now, please turn to page 17 of the slide deck. As referenced earlier, Fuels refining economics faced seasonal headwinds during the fourth quarter, as lingering strength in gasoline margins exiting the driving season dissipated during the final months of the year, while diesel margins declined on both a quarter-over-quarter and year-over-year basis. Although WCS maintained a healthy discount to WTI, our refineries exposed to less advanced crude oil grades were impacted by the narrowing crude oil spreads.

Please turn to page 18 of the slide deck. On slide 18, we bridge cash and liquidity between the third and fourth quarters of 2015 The combination of lower working capital requirements and the $75 million loan from affiliates of our GP during the fourth quarter was offset by higher capital expenditures and lower operating cash flows.

On slide 19, we see that as of December 31, 2015, we had $240 million of cash and availability on our revolver combined, a decline from the prior-year level. Investors should note that a decline in crude oil prices affects the value of the crude oil and refined product inventories our lenders use as collateral to determine the borrowing base under our revolving credit facility. This decline in crude oil prices during the fourth quarter impacted our borrowing base, resulting in a lower availability at year end.

On slide 20, we see that, on a pro-forma basis, excluding special items, our debt-to-trailing 12-month EBITDA stood at 5.3 times as of year-end 2015, down from 5.6 times as of year-end 2014. At present, we believe the Partnership has sufficient liquidity from cash on hand, and from operations, as well as availability under our asset-based revolving credit facility to fund general business requirements, subject to market conditions. We are currently evaluating a number of liquidity-enhancing initiatives internally, that could help us improve this situation relative to our year-end position.

And, finally, please turn to page 21 of the slide deck. Calumet is in a uniquely advantaged position right now with regard to our capital spending outlook. In the first-quarter 2016, we concluded a major multi-year capital spending campaign. With this campaign having ended, our capital spending is expected to decline by more than 60%, to $125 million to $150 million in 2016, as the growth component of our capital program is forecasted to decline by more than 75% on a year-over-year basis.

Beginning in 2018 through 2020, we will commence our next fuel refinery turnaround cycle, which will require a step-up in maintenance and turnaround capital spending. However, during 2016 and into 2017, we anticipate capital spending should remain closer to maintenance levels, not including smaller self-help projects Tim referenced earlier.

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

(Operator Instructions)

Richard Roberts, Howard Weil.

Maybe to start on the shift to running more Canadian crude, could you maybe walk us through how much of that shift is really just on the logistics side, and getting more crude to the refineries, versus how much actual change to the steel you have to make the plants themselves? And then maybe to follow- on with that, just how much you would expect your product yield to change as you increase the Canadian crude throughput this year?

Richard, this is Tim. Let me try to answer your question. From a logistics standpoint, we've talked a lot about the Montana expansion project, which involved quite a bit of steel, as you mentioned.

As we have completed the project during the process of starting up now, most of that increase is going to be happening in the Montana site, where the expansion project has already been built. When you look over at our Superior refinery, where we will have the other knob to turn on increasing WCS, at least in the short term, we are trying to do this with existing facilities, and no additional processing units, although we may have to do some debottlenecking on loading and transportation of the asphalt outside of the plant.

Okay, thanks. Maybe to stay on the fuel side, so generally, you are selling into some pretty nichey markets with your fuel refineries. Can you update us on maybe how the demand picture looks in some of your primary markets, and maybe what kind of competition, if any, you are starting to see some coming in from the outside, and trying to push into those markets?

Yes, Richard, this is Tim. I will try to take your question on again. We do have local niche markets that we believe we are advantaged for in the long term. I think what we saw in the fourth quarter was, as the Bakken drilling was slowing down, and diesel demand continued to drop in that North Dakota region, obviously that impacted our DPR refinery significantly.

We also saw some carry-on effects in both our Montana, and specifically our Superior refineries. So what's happening is, as diesel demand was extremely high one or two years ago, it was pulling diesel in from those out-of-state markets, and as the diesel demand started coming back in, what we saw was a backing up of the diesel, back into those respective production areas.

So we saw significant drop in the fourth quarter at both our Superior racks, as well as our Montana rack. As we continue to watch that, we've seen that the inventory is starting to clear, and the Superior racks in particular have rebounded significantly here, in the last week or two. So we are hopeful that as the inventory has been run off, that we're going to return back to the more typical supply-demand balances that we've seen in those local regions.

Good, thanks Tim, and maybe one more for me. I know the past couple of quarters, you have been talking about looking at a distribution increase in 2016. I'm just wondering, given where your yield is today, certainly a clear shift in the MLP sentiment towards having more coverage, and not so concerned about distribution growth. Does it make sense to still try and raise your distribution this year? Is that on the radar? Maybe any comments around the distribution that you can provide would be very helpful. Thank you.

Richard, let me take one shot, and then I will let Pat answer more your questions there too. Back on your fuels demand question, I will point out that we had a record fuel sales year last year, so that in the markets that we serve, it just shows we do have local advantage, or we can place our products, and we continue to see that through the course of 2015. In terms of our use of cash, let me turn that over to Pat, and let him answer that question.

Okay, thanks, Tim, and thanks for the question, Richard. I think that there are always a lot of factors that go into consideration of distribution strategy and policy, and I think where we are today, and what we have said repeatedly over prior quarters is, it is a discrete quarterly discussion that we have with our Board of Directors and we make recommendations. I think that as we looked previously, a lot of our decision-making was focused around getting the organic projects online and operating. We are really pleased to report that those projects have completed now, and we think long-term, those are going to be very good contributors for us.

I think that we remain highly focused on distribution coverage as another metric that we would use to inform our decision-making. We look at our overall leverage, and I think that our goal is to of course serve everybody in the capital structure. But I think with this focus on liquidity, we're going to continue to have to take that on a quarter-by-quarter basis, see where we are, and see what our outlooks are at the time that we have to make those types of decisions. I think that's -- I think a consideration of all those types of items leads us to continuing to look at this on a quarter-by-quarter basis.

Yes, Richard, I would just chime in and say, when we look at our strategy around use of cash, clearly in today's environment, reducing debt is our top priority, and managing that. We do have some small quick hit growth projects that I mentioned that we would consider additional cash for, but it would have to be a robust project like I described earlier. And then of course, as Pat mentioned, on a quarter-by-quarter basis would look at impacts to the distribution, and whether we would increase it or not.

Understood. Thanks.

Neil Mehta, Goldman Sachs.

This is [Christina Seaborn] for Neil Mehta. Just to follow-up on the distribution question, what is the risk that Calumet actually would need to reduce the pay-out or potentially switch to an alternative structure such as a variable rate distribution versus the current fixed rate distribution?

Again, to echo a response to the prior question I think it becomes a question of looking at several factors each quarter, not only the outlook of where we see the business today, and then also considering leverage, considering where distribution coverage is. Certainly in this environment of a volatile crude oil situation, and product pricing, we do have to evaluate the changes in our liquidity around those factors.

There's a lot that goes into that decision each quarter, and so I wouldn't want to place any one item as a particular risk, but it is a combination of several factors. Our view and our position is that we are fixed distribution MLP, and that is where we are today. Consideration of alternative structures, we are not in a position at this point to comment on this call.

Christina, this is Tim. What I would say is, we are committed to growing cash distributions in the long-term. We've got a track record of 40 consecutive quarters, where we've paid a distribution. The last 28 were at or above the previous level. We take that seriously, and we will consider to look at all options, before we would have to make a decision of changing a distribution like that.

That's very helpful, thank you. Just two quick follow-ups. One, can you provide any color on what the current asset sale opportunities might be? And just any additional information on what the Company is doing to mitigate near-term losses at the oil services business, as well as the Dakota Prairie refinery? And thank you very much for taking the questions.

Okay, Christina, you have asked a couple of big questions there that I will try to tackle, one at the time. Let's start with the last one on Dakota Prairie. Clearly, that has been waiting on our earnings in the fourth quarter, as the Bakken field has slowed down significantly. We have made several -- we've taken several steps to improve the profitability of that operation.

Remember in the first place, that we just started that plant up in the middle of last year. And as we work through some of the startup kinks I think we are in a position now where our reliability has been significantly improved, and we hope to be able to realize some improvement in 2016, based on that improvement. We have also taken some leadership changes, just to be frank, at the plant, and we think that has made a significant change. We've already seen the difference here in the last couple months.

And one example of that is, we were running a diesel yield at the plant somewhere in the 32%, 33% range, and after we brought in some additional resources from some of our other assets that were more familiar and experienced with distillation columns, we were able to make some significant moves and increase our diesel yield to 44%, or in that range. Those are some of the significant opportunities that we believe we still have to take at our Dakota Prairie refinery. Our captive is to be cash flow neutral during this bottom of cycle condition. I would tell you we are not there yet, but we have many more steps that we are trying to execute on today, to get us into that position.

At that point, once we become cash-flow neutral, then the role that an asset like Dakota Prairie refinery has in my portfolio is that the cash -- it is a call. It is a call on future increases in crude price, and that has some value, in my portfolio. So when I say we have a vision of becoming the premier specialties petroleum products Company in the world, what I mean is going forward, that's what we're going to be focusing on, in terms of our growth strategy.

It doesn't mean we're going to try to fire sale any of our assets that are currently in our portfolio, because they do have value to me. However, in the event that someone else views any one of our assets in our portfolio with a higher valuation than what we view it as, of course we would consider selling that asset. That would include any of our fuels assets, any of our specialty assets, any of our oilfield services assets. To the extent that it has higher value to someone else because their portfolio has different synergies or competitive advantages that can take advantage of that asset, we would certainly consider moving that asset out.

What I would say, Christine is, in the past, I don't think we really held that view. We pretty much held onto the assets until like they were in our portfolio for good, and I think what I'm bringing to the discussion now is an openness to say, hey maybe other people view these assets at a higher valuation than we do. So that's our philosophy, going forward.

Great. Very helpful, thank you.

Johannes Van Der Tuin, Credit Suisse.

A couple quick questions, but first one is in the past, you all have signaled a desire to get to a leverage ratio of 4 times or below. Is that still the target that you are looking at? If so, what is the cadence of that, how long do you think it would take to work to that goal?

That remains -- that certainly remains our goal. I think that the cadence to which we are able to reach that goal depends on several things, including the outlook of where earnings may play out over the course of the year, and given where fuels refining economics play out.

I think, though, that as we signaled before, in terms of our capital spending and our focus on quick hit, quick return projects versus a long cycle time between capital investment and ultimately harvesting earnings, I think under this model and vision I think we have, certainly on balance, a better opportunity to get there faster, all other things being equal. But that firmly remains our goal. We didn't make as much progress on that goal in 2015 near the end of the year, based on what we've already talked about, but that certainly remains the goal for us to be below 4 times leverage.

Okay. Not to press point on the dividend too much, but I was curious if you could give us some framing as to what trends in the market, or in your actual balance sheet would cause you to have really think about whether or not you needed to cut the dividend, or adjust that in any particular way?

I think that, to go back to earlier comments, it's a view on overall liquidity, it is a view on trend of earnings in the segments. I think it's where we are overall in distribution coverage, so I don't think there's any, it is a convocation of all those factors more so than sitting a specific line item, it has to be this, or it has to be that in one factor or another. So it is really a combination.

To reiterate what Tim said, our goal is to keep the distribution unchanged. But again, we have to look at that on a discrete quarter-by-quarter basis and see where we are. And in this type of volatility, we have to think about things in multi-dimensional levels, and that's what we are going to do in a couple months from now. And we will know more in a couple months then we know today.

Okay, then more on the operational side. In the past, you've given some amount of guidance as to what you thought the EBITDA generation capacity of Montana and Missouri esters and the other recently-completed projects would be. Given the current macroenvironment, is that guidance in your mind still the target you would be looking at, or is there risk to it?

This is Noel Ryan. Good to hear from you. The single biggest driver underlying the economics of our portfolio of organic growth projects is the WCS-WTI spread. As it pertains to, specifically, the Montana project. Currently, the WCS discount is about $12 below WTI, which is within the range of what we had forecasted for the purposes of that EBITDA contribution that we had previously given.

With regard to the opportunities around, say the Montana refinery, we do increase, do intend to increase the amount of processing of any Canadian crude oil that we have in the past by virtue of the increase in capacity of that facility. But I will say that really the story has become increasingly, on the fuel side of the business, oriented towards the pace at which the Canadians continue to produce, and the apparent lack of pipeline offtake capacity that has resulted in the structural disconnect between WCS and WTI. I think moreover, as it pertains to say our solvents and esters products, we are selling on test products from both facilities, and we do intend to take advantage of that in the full year 2016.

Apologies for being a little bit greedy, but just one last quick question. I do appreciate, good to hear from you, Noel, as well. For the Canadian that you're going to be increasingly running in Montana and at Superior, how is that likely to change the product slate for those refineries, given the heavier molecule going into them?

Sure. So basically were going to be producing incrementally more asphalt, and as Tim referenced in his prepared comments in the script, we recently entered into a long-term marketing contract with Alon, such that we're going to be taking product out of our traditional MidCon markets, where we sell asphalt. We produce asphalt at refineries like Superior and Montana and Shreveport, and I believe Princeton, as well, and those four refineries generally sell their product into the MidCon. We do have a retail marketing relationship on the East Coast with All States, but we've never really done much on the western portion of the country. So our marketing efforts with regard to that incremental production, a lot of it is going to be going through Alon, and their southwestern marketing terminals.

Johannes, this is Tim. What I would echo into what Noel said is you've asked about how the product slate changes. It really does boil down to the asphalt pool. The diesel and gasoline pools don't really get impacted significantly, but on the asphalt side, we make considerably more asphalt.

That's why we entered into this agreement with Alon, to help us retail that asphalt. I think that is consistent with what we've been planning all along, in terms of this Montana project. I would also tell you that our asphalt business was very profitable in 2015, and all signs seem to indicate that it will continue to be very profitable in 2016 as well, so we are looking forward to that summer season of the asphalt.

okay, are there any particular aspects of the deal that you were doing for distribution with ALJ, that you would like to highlight? Something that you think is particularly interesting about it?

Probably not at this time, but at a future time, we speak with our partner and we choose to disclose more than maybe at that time, but not at the present time.

Okay. Thank you for taking my questions. Appreciate it

Brad Heffern, RBC Capital.

So Tim, obviously we spent a lot of time on the fuels business. I was curious if you could just talk a little bit about how demand has looked on the specialty products side. Obviously the full site is probably a little more consumer-driven, specialty is probably a little more industrial-driven, and we've seen a lot of industrial headwinds of late. Have you have seen any softness in demand, how the margins looked and so on, the trend over the past several months?

Yes, that's actually a great question. Let me ask Bill Anderson, our EVP of Specialty Sales, to comment on that.

Sure, thanks, Tim. In 2015, we actually sold more specialty volume throughout the course of year than we had in the previous year. We moved all of our products consistent with the types of volumes we have in the past, maintained inventory levels that we were desiring to hit by year-end, and continue to see volumes move nicely out here in 2016.

Yes, Brad, what I would say too is on -- I think we talked about this on a previous earnings call, but the solvents group of our specialty segment has seen some slow down in relationship to the oilfield services slow down. But all of the other segments, as Bill just mentioned, saw increased volumes. The other thing I would mention is in the past, we talked about the lag that we see in specialty pricing, associated with dropping crude oil prices. That has been going on pretty much for too much for the year of 2015.

What I would tell you is that lag is catching up now. So you have seen a lot of announcements from some of the large base oil manufacturers of price cuts in those areas. Those will certainly put pressure on our base oil margins.

What I would tell you though is base oil is just a fraction of our specialty portfolio. The waxes, the solvents even, the petrolatums, the white oils, some of our branded products, the Royal Purple, the Bel-Ray, the TruFuel, all of those, as they are further away from the crude oil supply chain and closer to the retail customer, have continued to see the strong margins that we typically see.

Okay, great. Thanks for that color. Then I guess in your prepared comments, Tim, you mentioned liquidity-enhancing initiatives. Obviously, you have the loan from the GP, and you spoke about potential divestitures, as well. Is there anything else you would throw in that bucket, that you would like to put a finer point on?

A lot of these are items that I don't think are appropriate to talk on the phone, but we settled some early -- some derivatives early, and liquidated and monetized the value of some of those derivatives. Things like that, that would free up cash.

Working capital, spread management, things like that.

There are several -- we have certainly been through cycles of volatile commodity before. We understand how business operates in that type of an environment, so we always working on several initiatives all at once to enhance. And I think some of those are operational and some of those are strategic, so it's -- we think there are multiple options here to improve our situation, and we're focused on all of those simultaneously.

I think just to your reference on Heritage Group, we've got very supportive general partner. They continue to own 22% of the LP units and 100% of the GP, and I think the 6% loan that they gave us was highly supportive, it was unsecured, and it really illustrates the long-term support that they intend to give this Company. So in an environment where MLPs are out of favor, I think having a GP as supportive as ours is a competitive advantage.

Sure, okay, understood. Just one more on liquidity. For the borrowing base, how does business size accordion on that? Was it basically just mark-to-market for the value of the inventory at the end of the year, and so it probably hasn't degraded any more since then, or is there a lag effect?

There is a little bit of a lag effect. Our borrowing base is calculated at different points in time based on where our overall usage of the facility lies. So currently we measure that on a monthly basis, and so there's a little bit of a lag effect in that construction. I think it is one of those -- it does take some time for a change in the commodity price, like a change in the price of crude to work its way through ultimately to product pricing changes, but it flexes up and down based on those changes at the required frequencies that we have to measure it.

Okay, I will leave it there. Thank you.

Sean Sneeden, Oppenheimer.

Pat or Tim, maybe I missed a little bit of discussion on cash flow neutrality, but could you maybe comment on when you think that you are actually going to get to that point? And just to be clear, when you think about cash flow neutrality, is that really including distributions, or are you just looking into operating cash flow less CapEx?

Sean, this is Tim. Are you referring to DPR in particular, or are you referring to the Company as a whole?

My comments were about the Company as a whole, but maybe your comments were just about DPR.

Yes, that's right, Sean. When I use the term cash flow neutrality, and I don't know if anyone else used that as well, we were specifically talking about the Dakota Prairie refinery. We did see a significant loss in the fourth quarter. That's probably one of these significant bridges for why our fuels numbers were lower than what you might have thought. And the focus of our management team right now is to get that Dakota Prairie refinery in a cash flow neutral position. We are working very closely with our partners, MDU, to make that happen.

Got it. I guess maybe on that topic, when you think about general margins for the business, as we look forward throughout 2016, how are you thinking about your cash flow position? It would appear to me that you are likely to be free cash flow negative for the full year, but any commentary on how you are thinking about that would be helpful.

Sean, we don't give you EBITDA guidance. We do give capital spending guidance, and our capital spending is down 60% or more year over year. So I think the variable in the model right now, the single biggest variable is not specialty. We are seeing stability there, and it is a tremendous business, and the margins are strong.

What we're really seeing variability in is whether or not fuels demand holds up the way it did last year. Whether we begin to see inventory build in major markets, things like that, that people are talking about, with reference to the five consecutive weeks we've seen in the DOE inventory numbers in terms of refined product build. The question becomes, can refiners begin to cut runs, be disciplined as an industry, so that we can have five product margins stay at a healthy level?

The other question and probably for us an equally important question goes back again to where does that WCS spread go? If WCS blows out, those fuels refineries in the North do really well. And vice versa. So I think that speaks to Tim's comments around hedging that spread to the tune of 50% of our WCS-WTI intended -- 50% of our WCS intended purchases in the second half of year had been hedged.

And we've done that on a percentage hedge basis to the tune of about anywhere from I think 69% to 71% of WTI, and then we've done a modest amount, a nominal amount of fixed price hedges, I think to the tune of about 6,000 barrels a day. But you can see that in the slide deck. The bottom line is that cash flow is going to depend, the variance in our cash flow is going to depend on the variability of fuels refined product margins.

Sean, let me just make it clear to you and everyone else on the line, just so that we make sure we don't spread any false rumors here. When we talk cash flow neutrality, we are only talking about Dakota Prairie refining. We don't believe we're going to be anywhere near cash flow neutrality as a Company. We believe we are going to be well above that.

Okay. When you talk about cash flow neutrality, you are talking just operating cash flow less CapEx or before distributions?

Yes.

Okay. That's helpful. So I guess, any kind of funding that you're going to need in the near-term from, as you work through the self-help that you've outlined and increasing your WCS runs, should we really be thinking about that being funded entirely under the ABL, or are there further conversations going on with the GP, or how should we think about that in the near term?

I think in the near term, a lot of the projects remain in the evaluation phase, and as Tim said, we are looking at certainly priorities for things that require less capital versus more capital. I don't think, at this point, based on the scale of what we are talking about in the near term, our abilities to fund would be from available sources of liquidity, and not necessarily requiring some special form of funding.

Okay, that's helpful. And then maybe just as a follow-up, on the $75 million note, can you talk about little bit about the terms there? For instance, is that piece of paper parity with the unsecured bonds and what's the maturity of that facility?

We're going to offer more disclosure around that note as part of our 10-K filing. It is a note from a related party. Its tenure is relatively short term, but again it is with the support of general partners, so we will work through those matters as we proceed. It is a low level of interest loan, basically to continue to support the ongoing needs of the partnership. I think it demonstrates, again, a very supportive general partner. When we file our 10-K, we will offer some additional disclosure around the note itself.

Okay. Fair enough. If I can sneak in just one last one in there. On your slide about potentially growing WCS volumes from your 2016 targets -- that 70,000 target, what do you think the capital you need to be able to get there, would roughly be?

Again, I think, Sean we're going to wait for another day to discuss that. I think it is going to be fairly modest, but compared to some of the capital spending you have seen us do in past years, but it is it is something that we are going to save for another day.

Yes, I think that's the right answer, Noel. What I would say on the chart, we show what are 2016 target is, and we talked about that. That requires no additional capital, just to reiterate what we said earlier on the call.

Okay. That's helpful, thank you.

Gregg Brody, Bank of America Merrill Lynch.

Most of my questions were asked and answered. Just a few, if you don't mind. Good to see liquidity in the hedges. It sounds like that was primarily just for liquidity enhancement. So anything more to that, that I should be thinking about, or that's what really drove it?

Yes, Gregg, I think you are thinking about it aligned with our considerations, as we looked at again levers that would be helpful and constructive during the fourth quarter, and that was the driving decision.

Then, just trying to think about your EBITDA this year. I know you don't give guidance, but clearly Dakota Prairie has been, you're pointing out was big overhang. The other three segments, are those still within the framework of what you thought it would be in terms of EBITDA? As last quarter, you even said it might be over $100 million. But is that still the way to think about it, or is there other things impacting that, specifically at the Montana refinery?

I'm not sure I understand the question, Gregg. I can say that we had a very strong year that was supported by a combination of unbelievably strong refined margins on the specialty side, and still very healthy fuel cracks. And again back to the prior question that Sean Sneeden asked at Oppenheimer, a lot of the variance in 2016 is going to be predicated on whether or not receive a consistent strength in fuels refining margins. We don't expect to see large variances in our cash flow generation within specialty products.

And I will say the oilfield services segment has obviously been very hard hit, been we've been effective at cutting cost there to try to get us back to close to cash flow neutral there. So really, when you talk about the major deltas in the model, it is going to be how well or not well did fuels refining do, and we're again taking a conservative tact by hedging a significant portion of our anticipated fuels production, as well as our hedging around WCS. We are trying to take out any risk that we can, that we think is prudent.

Okay. Thank you for the time.

Mike Gyure, Janney.

I think all my questions have been answered, thanks.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Noel Ryan for any further comments.

Thank you, everybody for joining us in today's conference call. If you have any questions please contact our Investor Relations Department, and we will be happy to assist you. That concludes the call. Talk to you soon.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.