CVR Energy Inc (CVI) 2009 Q1 法說會逐字稿

Greetings, and welcome to the CVR Energy first-quarter conference call.

At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Stirling Pack, Vice President of Investor Relations for CVR Energy. Thank you, sir, you may begin.

Thank you, Ryan. Good morning, everyone, and welcome to our conference call. We appreciate very much your interest in CVR.

With us this morning are Jack Lipinski, our Chief Executive Officer, Tim Rens, our Chief Financial Officer, and Stan Reimann, our Chief Operating Officer. The presenters will be Jack and Tim.

So, prior to the discussion of our 2009 first-quarter results, we are required to make the following Safe Harbor statement. In accordance with Federal Securities laws, statements in this earnings call relating to matters that are not historical facts are forward-looking statements based on management's beliefs and assumptions using currently available information and expectations as of this date, and are not guarantees of future performance, and do involve certain risks and uncertainties, including those noted in our filings with the Securities and Exchange Commission.

This presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures are included in our earnings release which we filed today.

Jack, I will turn the call over to you then. Thank you.

Thank you, Stirling. Good morning, everyone. Thank you for joining us for our first-quarter 2009 earnings conference call.

I will start by briefly reviewing our quarterly operating results and also provide some context to the current quarter. Tim Rens will follow with a review of our reported financial results. I will first begin with the petroleum business and speak specifically to our refinery operations.

In the current refining environment, operating flexibility enables the Company to take advantage of an ever-changing market. At CVR, we strive for just such flexibility to take advantage of opportunities.

Our first-quarter Petroleum segment operating results reflect our ongoing efforts towards this end. Factors that influence these results include selection of crudes and product mix, operating rates, reducing costs while maintaining efficiency, and meeting our overall goal of doing this all safely.

Crude run rates for the first quarter averaged 106,170 barrels a day. Feedstocks and blendstocks added another 14,500 barrels a day, for a quarterly average throughput of 120,700 barrels a day. This rate was up slightly from the 119,725 barrel-a-day rate in the first quarter of 2008 and reflects slightly higher feedstock input. Although we have the capacity to operate at substantially higher levels, we balance output to meet the needs of our local market.

Crude and feedstock costs averaged $37.10 in the first quarter, versus $92.90 for the comparable period in 2008. Refined product sales averaged $49.82 a barrel, versus $101.48 in the same period last year. Our quarterly crude costs benefited from the ongoing contango in the WTI crude market.

The delivered cost of crude, calculated on a FIFO basis, averaged $6.45 less than WTI. This represents about $1 per barrel improvement over the first quarter of 2008, at which time the absolute crude costs were much higher.

The sweet-sour and heavy-sour differentials narrowed significantly in the first quarter of 2009, and the product basis differential between the Group 3, which PADD II Group 3, and Nymex was negative for the entire quarter. The average product basis in the first quarter this year was a negative $1.23. For the first quarter of 2008 by comparison, it was a positive $1.09 per barrel.

Total refinery production for the first quarter averaged 120,640 barrels a day, of which 53% was gasoline and 38% was distillate, as compared to 49% and 40% for the first quarter of 2008.

Year-over-year, we increased gasoline production due to the strengthening of the gasoline crack. We have the ability to shift our gasoline and diesel mix by several percentage points depending on the economics.

Direct operating expenses for the first quarter of 2009 were $3.62 per barrel, versus $4.16 per barrel in the first quarter of 2008.

With respect to the second quarter, our plan is to run about 110,000 barrels a day of crude. Feedstocks and blendstocks are expected to average between 12,000 and 14,000 barrels a day.

We have yet to see the seasonal rise in [ULS feed] demand for agricultural use due to the late planting season. But we expect demand to increase as planting finally gets underway.

PADD II Group 3 has historically been short on refining capacity and (inaudible) historical regionally demand and we generally benefit from our geographic location.

The current NYMEX WTI forward curve shows Contango extending out almost indefinitely. We expect this condition to turn when the world economy returns to positive growth. In the near term, we also expect the sweet-sour and heavy-sour differentials to remain compressed.

I will also note that Brent Crude traded over WTI in the first quarter of 2009, which is historically not the case. We simply didn't purchase any Brent-related crudes in the quarter.

We control 2.7 million barrels of crude oil storage at Cushing, which provides flexibility and a substantial opportunity for us to purchase attractively-priced crudes and receive the benefits of a Contango market. Due to the unique oil market conditions and continued Contango, we are finding that WTI remains one of the most attractive crudes for us [to own].

Our cash flow to swaps reduces from 5.9 million barrels a quarter to 1.5 million barrels a quarter on the last day of June this year. This lower swap level rolls off completely at the end of June 2010.

This is also the first quarter we operated under a new crude oil intermediation agreement with Vitol.

We continue to grow our crude gathering system volumes. They now average about 28,000 barrels a day, and we now have the system capacity to do more.

As I stated in our last conference call, the nitrogen fertilizer industry went through an unprecedented pricing cycle in 2008. Product realizations for nitrogen-based fertilizers are down this year versus last. Persistent wet weather in the Mid-Continent has limited planting. This delay has caused an overhang in product inventory throughout the industry and has delayed buying (inaudible).

Operationally, our fertilizer plant had an excellent first quarter. We were able to maintain 100% onstream time for both our gasifications and ammonia synthesis unit. The UAN plant operated at a 96% streamtime metric. This accomplishment follows our successful plant turnaround in the fourth quarter of 2008.

Ammonia production for the first quarter was 108,000 tons with UAN production at 170,000 tons. Ammonia available for sale after production was 39,000 tons. Sales of ammonia were 48,000 tons, while sales of UAN were 143,000 tons during the quarter. Realized prices for ammonia were $373 per ton, and realized plant gate prices for UAN were $316 per ton. These prices reflect our standing order book and spot sales. For comparison, ammonia prices through the first quarter of 2008 were $494 per ton with UAN prices of $262 per ton.

Our fertilizer spring order activity has been affected by the late arrivals of the spring application (inaudible) season due to a late winter storms and a very wet spring. In the short term, the logistics of product shipments is rapidly becoming a defining issue to the industry.

We maintain our view that the fundamentals of our fertilizer business is sound, as evidenced by the number of acres forecast for cultivation and the underlying demand and prices for these grains. A late spring usually favors UAN applications over ammonia application. Currently, we expect to see a shortened but potentially more intense application period as soon as weather permits.

As I noted, nitrogen fertilizer forward prices are down substantially year-over-year, but we expect CVR second-quarter realized prices to average above current industry spot prices due to the impact of our standing order book. Directionally, prices should trend towards spot over time.

Onstream rates for the second quarter will be slightly lower than the first quarter due to a seven-day maintenance outage at the third-party air separation plant which supplies our facility.

We believe that CVR's assets are competitively positioned in our two businesses. We remain focused on operational excellence and bottom-line results. We believe increasing shareholder value stems from establishing measurable operating expectations and then meeting them. Value is also derived from prudently reducing expenses and managing capital outlay. We believe successfully executing in both of these ways will allow us to achieve this strategy.

With that said, Tim Rens will next review our reported financial results. Tim?

Thank you, Jack.

As reported, CVR Energy's first-quarter net income was $30.7 million or $0.36 per diluted share, compared to $22.2 million or $0.26 per diluted share for the first quarter of 2008. Adjusted net income for the first quarter was $45.9 million, or $0.53 per share, compared to $30.4 million or $0.35 per share for the first quarter of 2008. Adjusted net income has been adjusted for the impact of share-based compensation and the unrealized loss of the cash flow swap, but it has not been adjusted for the impact of FIFO accounting or the realized losses from the cash flow swap.

The realized loss on the cash flow swap for the quarter was $15.7 million, compared to a loss of $21.5 million for the same quarter in 2008. For the first quarter of 2009, the impact of FIFO accounting was unfavorable in the amount of $6 million, compared to a favorable impact in the first quarter of 2008 of $20 million, or a negative variance of $26 million over the comparable period.

Consolidated operating income for the first quarter, which will be discussed in more detail by segment, was $91 million, which included the $6 million unfavorable FIFO impact, compared to $87.4 million, including the $20 million favorable FIFO impact for the comparable period in 2008.

Starting with the Petroleum segment, operating income was $64.7 million, including the unfavorable FIFO impact of $6 million. For the first quarter of 2008, it was $63.6 million, including a favorable FIFO impact of $20 million.

Refining margins per barrel, including the FIFO accounting impact, were 13 $13.36 per barrel, compared to $13.77 per barrel for the first quarter of 2008. Adjusted for the impact of FIFO accounting, refining margins for the first quarter of 2009 were $13.99 per barrel, compared to $11.70 per barrel for the comparable period of 2008. The higher margin was primarily the result of the improvement in the crude oil discount which we were able to secure as a result of the contango that continues in the crude oil market.

Refinery direct operating expenses, exclusive of depreciation and amortization, were $34.6 million or $3.62 per barrel of crude oil throughput for the current quarter, compared to $40.3 million or $4.16 per barrel for the same period in 2008.

Moving to the Fertilizer segment, net sales for the quarter increased to $67.8 million compared to $62.6 million for the comparable quarter in 2008. Operating income was $29.3 million for the first quarter of 2009, compared to $26 million for the first quarter of 2008.

For the first quarter of 2009, higher prices for UAN of $316 per ton versus $262 per ton for the first quarter of 2008, as well as increased ammonia sales volume from 22,100 tons to 39,000 tons contributed favorably to the Fertilizer operating results. These benefits were partially offset by reduced fertilizer demand, which resulted in lower ammonia prices of $373 per ton versus $494 per ton for the first quarter of 2008 and a reduction in UAN sales volume from $158 per ton -- excuse me, from 158,000 tons to 143,000 tons.

Direct operating expenses, excluding depreciation and amortization, were $21.6 million for the quarter, compared to $20.3 million in the first quarter of 2008.

SG&A expense, exclusive of depreciation and amortization for the quarter, was $19.5 million, including share-based compensation expense of $3.6 million, compared to $13.4 million for the first quarter of 2008, which was negatively impacted by $100,000 of share-based compensation.

Adjusted for share-based compensation, SG&A expense for the first quarter of 2009 was $15.9 million, compared to $13.3 million for the same quarter in 2008. The change was primarily the result of increases in payroll and bank charges, the latter of which is the result of the credit facility amendment completed in December of 2008.

I will now speak briefly regarding cash flow and current liquidity. As of March 31, 2009, we had cash and cash equivalents of $28.4 million, availability under the revolver of $116.1 million, and total outstanding bank debt of $483.1 million.

During the quarter, we received $11.8 million in insurance proceeds related to the property claim, and repaid in full the J. Aron deferral in the amount of $62.4 million. As of March 31, 2009, the total insurance receivable recorded on the balance sheet was $1 million, which is related to the crude oil discharge.

As of April 30, total outstanding debt under our credit facility was 481.9 million. The Company had $40.4 million of cash and cash equivalents and availability under the revolving credit facility of $116.1 million.

Income tax expense for the quarter ended March 31, 2009 was $12 million or 28.1% of income before income taxes. That is compared to the $6.8 million or 23.5% of the income before income taxes for the three months ended March 31, 2008.

Jack will now provide his concluding remarks.

Thank you, Tim. I will be brief.

CVR reported the best first-quarter operating income results in our history. While we cannot control our margins or fertilizer prices, we are focused on operational excellence, remaining flexible, adapting to changing market conditions, and doing our jobs diligently and safely.

Stirling, I will turn this now back over to you for questions.

Thank you very much, gentlemen. I appreciate your presentations. Ryan, we are prepared at this point to take questions from the call listeners. So if you would go ahead and queue that, thank you.

Sure. Ladies and gentlemen, at this time, we will be conducting the question-and-answer session. (Operator Instructions). Jeff Dietert, Simmons & Company.

Good morning, Jeff Dietert with Simmons.

You had a good operating quarter at the UAN plant with strong production. Sales were off seasonally. Can you talk about what your inventory of UAN is and give us a feel for what those sales volumes might look like in the second quarter, given your outlook?

Sure, I will turn this over to Stan. Stan, if you would like to (multiple speakers) --

Yes, thank you, Jack.

Jeff, our inventories historically year-over-year. the last two or three years right now on UAN, would be roughly in the 20,000 to 25,000 tons range right now. We are sitting on about 35,000 tons. So we are about 10,000 tons heavy. That is really not a big issue, and is certainly logistically able to move it out.

Our expectations on sales, I mean, although they have been slow getting started due to the planting season, in our trade territory -- I can't speak to some of the fringe trade territories -- but we supply mainly to core MidAmerican corn market, and we expect the acres to be there and we expect the nitrogen demand to be there. Quite frankly, as the season gets later, that bodes well for us, other than ammonia or other area applications.

So I expect the season to have a real tail on it and drag out into June, but when the smoke clears, I really expect to be there on tons.

(multiple speakers) Go ahead, I'm sorry.

Jeff, just a little clarity, I'm sorry. We have also been moving material into other markets, out of our core area, just to keep product moving. Obviously, there are other areas -- California, West Coast, Pacific Northwest -- other areas that we have been moving product into that have not been impacted by this wet weather.

What is your visibility into pricing for the second quarter? Have you sold volume in advance or is it going to be priced kind of on a spot basis?

Right now, we are at the fill season -- until the inventory is somewhat emptied in the field at the dealers and distributors, there is not a lot of fill order activity that provides the bulk of our business right now. Most of this is spot.

We are seeing numbers in area at or around $200 a ton for UAN, possibly a little higher, as we move out, a little lower. Ammonia is over $300 a ton. It's just not all that bad; it's just nothing is moving right now.

Very good. I appreciate your comments.

Vance Shaw, Credit Suisse.

Good morning. Great earnings report. Congratulations.

Thank you. We worked hard!

I know, and I couldn't imagine a tougher industry to get decent number in, right?

A couple of questions for you -- can you give us some granularity on, from a refining perspective, how the quarter looked month to month? Did cracks and operating performance sort of get better throughout the quarter or worse? Then can you give us an idea of what April's looked like?

You know, I don't have that specific information; I will do this from memory. January wasn't as good as February or March looking at the first quarter. Everybody is seeing some softening in cracks this quarter. I mean, I looked at the screen. 211 was in the $9 range yesterday.

Crude differentials -- contango had softened somewhat. It is still there. You know, we had a hell of a first quarter with contango, given the fact that we were able to store a bunch of our crude and then roll it.

Overall, cracks are down somewhat from the higher levels in February and March, but given history on a percentage basis which you've heard me talk about numerous times, it's just not that bad. It is 16%, 17%, as much as 20% at times of crude, as compared to last year when crude prices ran and you didn't see those kind of cracks on a percentage basis.

Now, the reason for that is both that inventories of finished product are sort of lower than they were and demand is a little bit better, do you think?

You know, right now, in our area -- again, I mentioned it, that there hasn't been a big run on diesel yet in the Mid-Continent because of the late planting season.

Generally, what we see is, as soon as the farmers go into the fields, the diesel inventory disappears in our group. Again, they're just not in the fields yet. But overall, gasoline cracks have made a surprising rebound over distillates. I mean, if you look back three, four, five months ago, distillate was way over gasoline. Now, you are finding the inverse, which again we have the ability, with the way our refinery is configured, is to swing several percent either way. So that is what we are doing right now.

I got you. Now, your market area -- is there a particular grain? Is it corn that matters more, or wheat that matters more, or how does that work?

Well, I mean, if you are talking on the petroleum side of the business though, it doesn't matter. The tractors use the same diesel.

On the fertilizer side of the business -- and I will turn this back over to Stan -- it is corn-related, obviously. Soybeans do not prefer nitrogen fertilizers.

Stan, would you like to --?

No, that is correct. We track to corn acres much more aggressively than we track anything else in our market in our market. Our market is pretty consistent. Iowa, Nebraska, and Missouri, those corn acres just don't fluctuate that much because that's your core area. The big fluctuation is in the perimeter of the corn area.

I got you. The late planting season is an obviously weather-related thing. I'm in New York City, so it is hard for me to tell but --

Yes, it is definitely weather-related just until this morning, just the planting, and quite frankly Iowa and Minnesota and Nebraska are just slightly below their five-year average. Illinois and Indiana are dramatically behind their five-year average. But with the equipment that is used in production ag, you can catch up very quickly. If you get five, six, seven, eight good days of planting, you'll see these numbers change dramatically. So, Western corn belt is not in that all bad a shape; The Eastern corn belt has got some catch-up to do.

I got you.

Now, to turn to your balance sheet just briefly, I guess the only debt you guys really have is your bank debt, and that is a pretty expensive proposition. Any thoughts on dealing with that or the timeframe which you might want to recapitalize the right side of the balance sheet, or any of those things?

Well, I think, right now, with where we are at, I think the focus is on -- clearly, Jack has talked about looking tight at both expenses and capital expenditures, and focusing on continuing to position the balance sheet better.

One of the alternatives, as we see that cash balance increase, is taking a look at the debt side. There is nothing that is current or imminent that we've discussed, but obviously, as we continue to have good, positive cash flow, we will take a look at opportunities to either reduce the debt balance or do something on that side of the balance sheet. But nothing imminent right now that is ongoing.

Okay, thanks very much. I appreciate it.

(Operator Instructions). Jeff Dietert.

I wanted to ask, on crude feedstocks, if you are seeing anything different in what you anticipate with the Seaway expansion and the White Cliffs line coming into Cushing, if you see any big opportunities there.

Well, obviously, the more crude that comes to Cushing, it gives us other opportunities. Obviously, White Cliff, you know, the Rocky Mountain crudes have been significantly discounted because they were somewhat stranded. We think that may provide us an opportunity. We have even gone so for as we now rail certain crudes into the plant, up to 3000 barrels a day that are attractive.

We are always looking -- anything that gives us optionality on crudes we immediately look at. Anything more into Cushing -- again, if we can get our hands on Rocky Mountain crudes, that would fit. Again, we blend crudes. We blend anywhere from, I don't know, a typical month is 10 to 12 different crudes. Every time we buy one, we just reset our LP and then go pick the next best one. So the more they come our way, or the ability for us to get more just kind of puts us in a better position because having the crude storage in a direct line to the refinery basically puts us as if we are sitting in Canada or sitting on the Gulf Coast. We get to access it all.

Could you talk about contango benefits, what trade role benefit, how significant was that during the quarter and if there were any other contango benefits that you got on the refining side?

I mean, I will let Tim talked to the specifics, but with the ability to store crude in the contango market, you simply do a month-to-month roll, so the longer you hold it, the cheaper the crude gets.

Obviously, there were some pretty significant spikes in the first quarter in contango. If you were to track it over the course of the month as it came up to expiry, the contango would blow out. It still tends to do that, but it is not as deep as it was. I mean, we saw numbers at $6, $7 at the peaks. Right now, we are seeing $2 and change at the peak. So contango is off, but it is still there. To some degree, the cracks track the contango and the crude disc track the contango.

How much storage are you working with at Cushing?

We have a total of 2.7 million shell barrels and then we have another approximately 1.2 million or 1.3 million barrels in the refinery and in our gathering system. So we have to leave some room in Cushing, obviously, because we are bringing crudes in from all over and we have to blend them and ship them up to the refinery. But certain portions of inventory are carried under our remediation agreement. Other portions are carried on our own balance sheet. Our inventory levels overall are higher than they were, say, on December 31 of last year.

What we've done is we have the ability now, with this refinery, to run significantly higher rates. So there are times where we will actually run harder, increase our inventory of finished goods so that we can keep shipping them. Then we will do maintenance, opportunistic maintenance on different units so it doesn't cost us on a run-rate basis where, in the past, if we had to bring a unit down, it would cost us throughput. Now what we do is we anticipate it.

As far as crude, I guess, Tim, we have 400,000 to 500,000 on our own -- 400,000 barrels to 500,000 barrels on our own balance sheet?

Well, incremental, that is part of the opportunity of taking advantage of contango. We have kind of our basic crude inventory that tends to run about 500,000 to 600,000 barrels. Then in addition to that right now, due to the kind of contango in the market, we are carrying an incremental plus or minus 400,000 barrels.

So I mean, if you look at the cash position of the Company, we could liquidate that excess inventory, if need be, and bring ourselves down to a level at the end of 2008. That number would be probably today somewhere in the range of 700,000 barrels.

But as long as contango is paying you to keep it you (multiple speakers) --

We are going to sit on it, yes.

Very good. Thanks, Jack and Tim.

Vance Shaw, Credit Suisse.

I apologize. I just missed what you had just said there on the excess barrels that theoretically you guys could liquidate. How many barrels are we talking about?

Tim, what is it today? About 700,000 barrels?

On the crude side, about 400,000, and also do currently have some incremental product inventory as well. So I think, in total, if you get back down to kind of what we would consider our normalized hydrocarbon inventory across all products -- crude, intermediates and finished products -- about 700,000 barrels that we could liquidate.

Okay, cool, thanks. Just one other follow-up -- so far in 2Q, I know cracks have been down, and we covered the situation with your diesel. But in gasoline products in your market area, what is going on there? Are you seeing sort of better demand levels now than you were 3, 6, 12 months ago, or no?

It is still pretty soft. You know, the product basis is still negative. Generally, if you look at our group, historically, as soon as the season gets underway for ag, it makes everything all that much better.

I mean, historically, our group has a positive basis to the Gulf of -- I'm going to do this from memory -- $1.50 or $1.60. It may even be more. And against NYMEX on a three-year average, that's even significantly higher than that. Everything seems to be kind of slow right now, and it seems to be all weather-related.

Okay, thank you.

Seeing as there are no further questions, I would like to turn the call back to management for any concluding remarks.

Well, listen, everyone, thank you so much for joining us. I always appreciate the opportunity to talk to you.

Stirling, I will turn it back to you.

Thank you, Jack. Thank you, everyone, for participating in the call this day. We will obviously be available for any additional questions that you might have, if you give me a call, or clarifications or anything like that. But we do appreciate you being here and appreciate the management team participating in this call this morning. Thank you again very much; we will speak with you shortly.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.