CVR Energy Inc (CVI) 2009 Q3 法說會逐字稿

Greetings and welcome to the CVR Energy Third Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stirling Pack, Vice President of Investor Relations for CVR Energy. Thank you. Mr. Pack, you may begin.

Thank you, Joe. Good morning, everyone. We appreciate very much your being here for our call this morning. We know that there are a large number of you that have called in and we appreciate that very much.

With me this morning is Jack Lipinski, our Chief Executive Officer; Ed Morgan, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer, who will be participating either in the call or in the question-and-answer time period. So, we will proceed with that introduction.

Prior to discussion of our 2009 third quarter results, we are required to make the following Safe Harbor Statement -- In accordance with federal securities laws and statements in this earnings call relating to matters that are not historical facts are forward-looking statements based on management's belief and assumptions using currently available information and expectations 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 including reconciliation to the most directly comparable GAAP financial measures are included in our third quarter 2009 earnings release which we filed yesterday after the close of the market.

With that said, I will quickly turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

Thank you, Stirling. Good morning. Thanks for joining us this morning on our third quarter earnings call. I will begin by reviewing our results and speak briefly about the operating environment we find ourselves in. Following my comments, Ed Morgan, our CFO, will provide a more detailed look at our reported financials. And then, we will conclude the call with your questions.

As Stirling mentioned, yesterday after the market closed, we reported a third quarter net loss of $13.4 million, or $0.16 per basic share. Our results reflected soft commodity markets, loss for refinery throughput due to mechanical issues on two critical units and the costs of extraordinary repairs.

Loss for refinery production associated with mechanical problems on our FCC and CCR cost us approximately $0.22 per share on a pretax basis for the quarter. Without these interruptions and their associated maintenance costs, our reported results would have been near breakeven.

We pride ourselves on operational excellence and we're really disappointed with the mechanical issues we experienced. Early in the quarter, the cat cracker was forced down to an internal catalyst circulation issue. You may recall from our last investor call that I mentioned the unit was being returned to service following a repair.

Subsequently our CCR, which is a continuous catalytic reforming unit, operated at reduced rate severity for a period while we corrected an issue that have been a trouble since the deferred unit was first brought on stream.

Permanent repairs were completed and both units are now operating as we would expect. These interruptions did reduce our overall throughput for the quarter. We averaged 101,500 barrels a day compared to 114,700 barrels a day for the same quarter last year.

We always try to turn adversity into opportunity and did so during the quarter. We performed maintenance and upgrades on the affected units as well as other units in the plant. We successfully debottlenecked the CCR, raising its weighted capacity from 24,000 barrels a day to 26,500 barrels a day. This increase has already begun to pay dividends as the CCR is critical to our blending program and is the source of supplemental hydrogen supply to our fertilizer plant.

Some of the work we performed this past quarter was scheduled to be done during our 2011 turnaround. We can now scratch those work items off our list and get benefits now instead of two years from now.

Our petroleum marketing and crude gathering programs performed as expected during the quarter. We gathered about 27,000 barrels a day of crude during the quarter. Access to fairly priced gathered barrels is an important portion of our realized refinery margin. Our system is capable of delivering over 30,000 barrels a day. And with the addition of a wholly-owned location in Osage County, Oklahoma, our capacity will grow to about 35,000 barrels a day. We expect this location operational in the next two months.

We also currently market through our wholesale racks at 30 different locations in our marketing area. We do this to capture higher margins above what we would get in bulk sales.

We continue to utilize our substantial crude storage both in Cushing, Oklahoma, and on site to store roughly 500,000 barrels of crude in a contango-carry program. Crude remained in contangos for the entire quarter and remain so today. The spread level varied from a low of about $0.20 a barrel to a high of just over $2 per barrel in the third quarter. It is approximately $0.65 a barrel today. Using our cash to fund the carry program is an effective way to generate additional profit. From a pure spread perspective, it pays us to carry crude with our cash even at a $0.10 contango.

Sweet-sour and heavy-sour differentials were at barely compressed levels during the quarter. But starting in late August, we began to see the debt slide now. CVR can access virtually any crude that finds its way to the Gulf Coast and we have direct access to numerous domestic crudes as well as Canadian crude. We continue to optimize our crude selection to deliver the lowest price plan to our refinery.

Refining margins were soft in the third quarter. The quarter began with a NYMEX 2-1-1 crack at about $7 a barrel. These cracks moved above $13 a barrel in mid-August and fell to below $4 a barrel in September. The lowest is $3.07 on September 28th. Today they stand roughly $6.50 per barrel. Even at today's low levels, you should note that our refinery remains cash-positive.

And crude is only one of the profit contributors to our operation. We purchase feedstock for our cat cracker and our coke group and blend significant volumes on low-cost, low-octane gasoline blend stocks, using the octane capability of our CCR.

While we faced some operating challenges at the refinery, our fertilizer plant operated exceedingly well. On-stream rate to the gasification unit was 99% for the quarter. The ammonia synthesis loop was on stream 98% of the time, and the UAN plant clocked in at 96%. These are all excellent operating statistics.

2008 marked the historical high for all fertilizer prices. We witnessed the decline in prices since the beginning of the year and we now see prices turning upward. Nitrogen fertilizer prices bottomed in June, when we were taking orders for UAN in the low $120-per-ton level, net back to the play and keep.

On the same play-and-keep basis, we took orders last week in the high $160 per ton level. There were indications that the price levels have stabilized and may move higher as we approach the spring application system. Just as comparison, in the third quarter, our average sales price for UAN was a $138 per ton net back. Those were for orders taken.

The operating synergies between the fertilizer plant and the refinery go beyond the supply of petroleum coke. In the third quarter, the refineries supplied 3.3 million cubic for the day of purity hydrogen to the fertilizer plant. This was then converted into approximately 50 tons per day of ammonia.

CVR Energy's competitive status remains centered on around our two complementary but diversified businesses. Our mid-continent location is a niche petroleum market and our fertilizer plant has distribution advantages as we are located in the ag belt. Both our facilities are state-of-the-art. Our fertilizer plant is unique in North America in that it has twin gas suppliers and its source of feedstock is low-price petroleum coke, while our refinery now benefits from the major upgrade and expansion that was completed last year.

Our Cushing storage and pipeline system allows us access to an extensive menu of crudes, both domestic and foreign. Our gathering operations continue to provide good quality, fairly priced crude for direct refinery consumptions.

And always foremost on our mind is safety. Reliability remains our focus and we look forward to better operations this quarter and are actually seeing that as we move through the quarter. October was a fairly good month for us.

With that, I will now turn the call over to Ed Morgan who will discuss in greater detail our financial results. Ed?

Thank you, Jack. As Jack stated, CVR Energy's 2009 third quarter results were a net loss of $13.4 million, or $0.16 per basic share. This compared to $99.7 million, or $1.16 per diluted share, for the third quarter of 2008.

As historically reported, there are three primary financial statement impacts that caused fluctuations in our financial performance from period to period. These impacts are: the unrealized gains or losses from our cash flow swap, the inventory impacts due to our First In, First Out or FIFO accounting for inventory, and share-based compensation expenses or reversals, which are also non-cash items. The consolidation of these three impacts, net of the tax impacts, is reported separately in our press release as adjusted net income or loss.

The adjusted net loss for the third quarter of 2009 was $6.7 million, or $0.08 per basic share, compared to an adjusted net income of $57 million or $0.66 per diluted share for the third quarter of 2008. To compare our adjusted net income to what was reported, please note that our adjustments to the third quarter of 2009 were less significant than they've been in prior years.

Our unrealized gain on the cash flow swap net of tax for the third quarter of 2009 was only $1.6 million compared to roughly a $59 million gain in the third quarter of 2008. Our impact of FIFO accounting was favorable in the amount of $4.4 million net of taxes for the third quarter versus an unfavorable impact of $35.6 million last year.

And finally, our share-based compensation expense net of tax was $12.7 million in the current quarter versus a share-based compensation expense reversal of $18.6 million in the third quarter of 2008. When you look forward, in regard to shareholder compensation expense through 2010, I think it is fair to say for every $1 increase in the Company's stock price subsequent to our September 30th close price, you can expect a $3 million to $4 million increase in non-cash SG&A expense.

In summary, our third quarter results were influenced principally by our lower realized fertilizer pricing alongside lower refinery throughputs caused by the refinery operational issues discussed earlier by Jack. We believe that had these incidents not occurred, our earnings for the quarter would be flat and our EPS would have been neutral.

I will now speak to each segment specifically. In the petroleum segment, the adjusted operating loss was $5.8 million for the third quarter of 2009 compared to $72.4 million of operating income in the third quarter of 2008, a decrease of roughly 78 million. Our refining business operations were negatively impacted compared to the prior year by a couple of factors.

First, crude runs at approximately 13,000 barrels per day were lower than the previous year. And in addition, our adjusted refining margin was $6.74 per barrel of crude throughput versus the $12.50 we realized in the third quarter of 2008.

Refinery direct operating expenses exclusive of depreciation and amortization were $37 million, or $3.97 per barrel of crude throughput, for the current quarter. This compares to $37 million, or $3.52 per barrel, for the same period in 2008.

Compared to the same period last year, this per-barrel difference was directly attributable to the lower crude throughput volumes caused by these unexpected interruptions in our refining operations and approximately $3 million of unbudgeted maintenance expenses associated with these outages as well.

Moving to our fertilizer segment, operating income was a negative $3.9 million for the third quarter of 2009 compared to an operating income of $46.5 million for the third quarter of 2008. These results were directly impacted by sharply lower sales prices for both ammonia and UAN.

Direct operating expenses in our fertilizer operations for the quarter excluding depreciation and amortization were $21 million versus roughly $19 million in the prior year. This difference was attributable to a $1 million increase in deferred compensation and a change in sulfur prices, which benefited us in the third quarter of 2008.

Earlier in my comments, I did list three primary financial statement impacts that caused fluctuation to our financial performance from period to period. One of this is the end realized gain or loss from our cash flow swap.

I'm also pleased to report that CVR and J. Aron, our counterparty to the swap, mutually agreed to terminate the cash flow swap effective October 8th. The termination resulted in a net settlement whereby J. Aron paid CVR approximately $3.9 million.

CVR was permitted to terminate the cash flow swap under the conditions of the amended credit agreement entered into on October 2nd. This agreement to amend our credit facility with almost unanimous lender consent allowed us more flexibility in this volatile business environment. Year-to-date, we are pleased with our cash flow and strongly believe it is able to support our future capital and debt obligations. For the many lenders listening to our call today, we appreciate your support and the continued dialogue we have built.

I will now speak in some detail in regard to our liquidity capital spending and our 2009 tax rate forecast.

As of September 30th, we had cash and cash equivalents of nearly $87 million. As of the end of the quarter and currently, we have no amounts outstanding under our revolving credit facility and $116 million of aggregate availability.

As of September 30th, funded long-term debt including current maturities totaled nearly $495 million, yet our net debt position of $408 million at the end of the quarter is an improvement of approximately 7.5% versus the same quarter last year.

The net debt-to-equity ratio at the end of the third quarter was approximately 35%, an improvement of nearly six percentage points over the same period in 2008.

It is our intention to continue to process to deleverage the balance sheet, to manage capital prudently, and to find reductions in operating costs in response to the slowdown in the economy.

In regard to capital expenditures, for the third quarter of 2009 they totaled $11.9 million, of which approximately $9.6 million was spent in the petroleum business and $2.1 million in our fertilizer business.

The majority of our refinery capital spending in 2009 is directly attributable to our ongoing low sulfur gasoline project for which we forecast to spend $25 million in 2009 and $16 million in 2010.

The total anticipated capital spend for 2009 for the refinery will be approximately $45 million. For 2010, our preliminary capital budget for the refining operations is $55 million, of which again $16 million is directly attributable to the completion of the ultra-low sulfur gas project.

At our fertilizer facility, we anticipate spending approximately $16 million in 2009 and a total of $15 million in 2010, which also includes $4 million for our plant turnaround of the fertilizer facility. For the total company, our current forecast for 2010 capital spending is approximately $72 million.

Income tax benefit for the quarter ending September 30th was $4.6 million, or 26% of our pretax loss, as compared to $40 million, or 29% of pretax income, for the three months ending September 30th, 2008. Our 2009 effective income tax rate is lower than the expected statutory rate of 39% primarily due to our federal income tax credit generated in 2009 related to the production of ultra-low sulfur diesel fuel.

As I reported last quarter, the Company generated additional credits which reached the maximum amount available to us during the first quarter of 2009. No further credits related to the production of ultra-low sulfur diesel are expected to be generated.

However, we are currently waiting on certification for 2009 related to additional state income tax incentives available to us in the State of Kansas. We do expect to receive our certification prior to the end of 2009 and this will improve our overall effective tax rate for the year. At this time, we are not able to currently include this additional benefit for financial statement purposes.

At this point, I would now like to turn the call back over to Jack for his concluding remarks.

Thank you, Ed. In conclusion, at CVR, we intend to exploit every opportunity that presents itself while remaining focused on safety and operational excellence. We firmly believe we are competitively positioned in our businesses and have high expectations in moving CVR forward in a positive manner. We believe that the soft markets and fundamentals of our business are showing real evidence of recovering and we look forward to opportunities that will arise.

As always, we thank you for joining us today and I'll turn the call back to Stirling for any questions. Thanks.

Thank you, Jack and Ed. Joe, we are prepared at this point to take questions from the listening audience now.

Absolutely, Mr. Pack. Thank you. We will now conduct a question-and- answer session. (Operator Instructions). Our first question is from Jeff Dietert with Simmons & Company. Please proceed with your question.

Good morning. Your Coffeyville cash operating costs are lower than the industry average, and yet you have strong yields there as well. Could you talk about your targets for refinery throughput in the fourth quarter and under what margin environment would you increase or reduce those runs?

Okay. Our target is to run between 110 and 115 for the quarter of crude. In large part, we run crude to feed our CCR. We have a rather oversized reformer and because of the blending opportunities which are significant, we find ourselves running crude to give ourselves advantage in downstream processing.

Even at these levels of 110,000 to 115,000 barrels a day, we find ourselves net short of cat feed and coker feed and we are buying both of those feedstocks as well. Our total throughput will probably be in the range of 125,000 barrels a day -- they are round numbers. That would be blend stock, feedstock and crude.

The refinery as configured, you mentioned, has low operating cost. We did put a lot of capital into the plant and the way it operates, it operates very efficiently. We have increased our liquid volume yield across the plant. We have done a couple of things that are shoring up just what would be plain old crude economics. The crack spread again is only one leg of that three-legged stool that we operate under.

I don't know if that answered your question, but we are running pretty much flat out at these levels.

And I guess as long as you're EBITDA-positive, you will continue to run at full rates?

That's correct. I mean, we are obviously cognizant of the market. You can't physically oversupply your own market. We have done a few things that we'll see benefits of in the upcoming and this current quarter. We looped a work deal to loop one of our pipelines to make sure we can evacuate the plant at higher levels. That loop should be coming on stream probably some time in December, if not, maybe early first quarter. As we had expanded the plant, we have had to expand our markets as well.

As you think about your 2010 budgeting, how do you think about the 2-1-1 crack for Coffeyville? What expectations do you have?

Well, if you take a look, you can see it as well as I that the crack is certainly in contango as you go forward. We are in a situation that the crack is compressed and we believe the crack is compressed simply because of inventory. Once inventory starts clearing out, we would expect cracks to return to a more normal level.

In an $80 crude environment, you would expect cracks to be somewhere between $10 and $12 a barrel. We would be budgeting -- or we would expect something in that range longer term. In the short term, it is the overhang of inventory that is keeping everything somewhat in check.

What we are seeing, though, is we are seeing a widening of the crude diff; I did mention that. We're back to buying maximum amounts of Canadian heavy within the capacity of a line coming down from Canada. We're on Spearhead right now.

Shifting over to the fertilizer business, can you talk about what UAN prices you sold at for 4Q and where you're seeing first quarter sales?

Okay. Well, the way we take orders, the fertilizer business is a little different than the refining business. You're always taking orders now for future delivery. There's really three ways that fertilizer is sold. It's basically sold prompt or spot. Somebody is buying it per application today.

They buy it for fill, meaning that there is -- most of the inventory of fertilizer in the country is held in third-party storage all over because fertilizer goes down about in about a six-week period during the planting season, so you have to have the fertilizer close to the field. So, on fill tons, we take orders and then we could deliver the fill at any given time.

Then, there is also another way of doing it. It is called prepay, when people are willing to pay up and pay some cash upfront to guarantee delivery in a window. We have seen strong movement in the last few weeks of fertilizer prices increasing. Again, it is the reverse of what we are seeing in petroleum. In petroleum, we're having head-high inventories. Last year, we had high inventories in fertilizer which depressed prices.

Those inventories are starting to clean up and we're starting to see prices move. We took a substantial amount of orders last week in the high $160s. We've actually taken orders for delivery up near $180 a ton on a prepay basis. And all of those are net back numbers; they are not local numbers. We run a rather large fleet of both ammonia and UAN cars. So, when we say a net back number, it is the actual price less the cost of delivery net back to the plant. Stan, would you want to add anything to that?

No, I think you said it well. The prices have strengthened significantly over late second quarter and third quarter and we continue to see that happen. And you'll see the results of that in our first quarter and second quarter shifts.

Right. And we have a rather large book. We have about 200,000-ton book of UAN orders roughly. That will stretch out into the remainder of this quarter and into next year.

And now, as far as fourth quarter sales go, should that follow prompt prices or is there a substantial book that has already been sold for 4Q?

The fourth quarter book shipments will resemble the third quarter, the uptick in the pricing you are going to start seeing in 2010.

Okay. And the sales you're making now are for 2Q 2010?

We are doing some prompt but it's minimal. And if we do more prompt, then the fourth quarter will be better than the third quarter. But basically you are right; the orders at the higher net backs will be the first quarter and predominantly second quarter-type numbers.

Okay.

The book of orders is somewhat of a buffer. If prices are falling, your book tends -- and your quarter tends to look better than the stock market. Conversely, if the market is rising, it takes a little bit for you to work through the book of orders that you have taken. And so, our book is increasing substantially as we go forward.

Very good. Thanks for your comments.

Thank you, Jeff.

Thank you. Our next question is from Mr. Paul Sankey from Deutsche Bank. Please proceed with your question.

Hi. Good morning, guys. Just thinking about your cash flows a little bit. You said that your debt actually came down quite sharply, and it sounds as if you have got pretty firm idea of where you would like your CapEx to be next year. Could you talk a little bit more about where you would like your excess cash to go? I assume it is to more debt paid down, and how far you would want that to go. I guess that kind of debt-to-equity target is what I am looking for.

Paul, this Ed. We are focused on primarily using excess cash to continue to reduce that level. I think at this stage of the game, Jack and I would like to see that net debt start to approach 30%. That would be our preliminary target. We will take a look at -- when we get there in consideration to what our next steps would be. But our CapEx program spend is -- working with Stan, we do a very good job and have done a very nice job of planning out the remainder of '09 and '10. And I think that will help us continue to control that capital going forward as well.

Yes. And, Paul, we are using some of our cash to fund this carry program. At some point in time, the market will flatten. I am not suggesting that we see an indication that it is going to go into backwardation but certainly right now, keeping that $40 million of cash, working our crude carry program pays us nicely.

I guess you could always argue that it would come off that to [XT], depending on your view of prices in the future, right?

That is correct.

Can you talk a little about more about -- just give me -- I can probably do this myself but the progression of your reduction in debt is a little bit counterintuitive. You mentioned how year-over-year, it has come down but I guess this wasn't as you said the strongest quarter. So, could you just give a little bit more detail on how that came to pass in terms of cash flow?

Over the course of this quarter?

Yes, for instance, or even on the year -- I mean, I think the number you gave us year-over-year wasn't what you've got then?

Have I provided a net debt number, Paul?

Yes.

That's where we saw -- our cash is up substantially this year at the end of the quarter versus where we were at the end of the quarter last year by approximately $50 million, if I'm not mistaken. So that's --

That's what I'm driving at. You've got -- so that's the net debt that has come down. It's because the cash has gone up. But I was just wondering how come the cash has gone up so much given the market was not exactly strong in Q3?

Okay. Paul, last year we had this cash flow swap that was, at least, from our perspective deeply underwater. So, even though we had margins and we had reported earnings, we also had a lot of cash being paid down on the swap. And our capital program this year, we got through our capital where we're now in a pretty much steady state mode going forward.

Yes. And on top of that, you're basically out of the swap, right? So, the swap is basically gone.

It is gone.

Yes. So, now we've taken out that noise and the largest part of the counterintuitive move in your debt-to equity is the fact that that has ended?

Right. And if margins go up, the cash stays inside the Company.

Yes. Just going to the market guys, a little bit more harvest season, I have read various things. I was actually in Kansas not that long ago, maybe chatting to some people, believe it or not. So, the harvest season is not going that well but the margins have bounced. Can you talk a little bit more about that?

Paul, remember the predominant product we sell is UAN, which is liquid nitrogen which isn't prone to be affected by a late harvest and hydrous ammonia and urea would be. And the prices coming back is just the economics coming back in supply and demand. But a late harvest won't affect us because we don't -- it would affect hydrous ammonia or urea produce but we don't move a lot of ammonia so it's just not going to affect us that much.

Yes. To be honest, I was thinking a little more about distillate markets and whether or not there was low demand because of the lower activity amongst the plants.

The distillate markets will be there. I mean, they will get the corn out and they will harvest it. And the weather is breaking nicely across Nebraska and Iowa -- you are absolutely right. It's going to be late. But the gallons to take out the bushes of corn won't change.

Is that right? Because my understanding was it would actually be a smaller harvest season in general.

I don't think so. I mean, that remains to be seen. I could be right, I could be wrong. I actually own a farm in Nebraska and it is doing quite well so I don't -- it's my second job.

(inaudible question - multiple speakers) fertilizer?

It is all about taking bushels off the acres and the power required to do that. And I think you'll find the yields will be similar to past years. And we can have this conversation in 60 days and I can be wrong or right. But we're not seeing less yield and that will determine the power to take it out of the field.

Yes.

There was a comment that I heard made this morning that it's the latest harvest since 1967.

Yes, it is. It is very late and you would expect [products to be frozen] right now and you would expect to see that distillate demand in October. We're probably going to see it in November and it's going to have a tail on it. I mean, we are probably not going to get a big bump but the gallons will have to be there. You've got to get it out of the field.

Yes. I mean, I have to say, Deutsche Bank's meteorologist thinks it is going to be very warm to us this week indeed --

Yes.

For several weeks, actually. It is just -- without wanting to get too off track. So, what I'm trying to get to the macro level is the bounce in margins that we've seen. You have mentioned that the inventory overhang is still very much there. What is causing the bounce in margins? That's what I was kind of driving at, and I am talking about oil products.

Oil price. I mean, there is a minimum level. I mean, a lot of our peers are not anywhere near cash positive. They are probably operating on a contribution of fixed costs, if that at all. If you take a look at a $6 crack and basis differential, being in a niche market where some are protected, the folks on the Gulf and East Coast aren't as well protected. When you figure in a typical volume metric loss and operating costs and crude differentials, if prices were to drop very much more, I think you would see massive run cuts.

Yes, I guess that's what I was driving at. Is there anything unusual just in passing about crude market from your perspective? I know you've got a very strong position to look at pretty much the global oil market from your central location. Is there anything that you would highlight as particularly weird or wacky about where we are at right now?

No. Actually, there is some semblance in normalcy returning. It is still -- when you talk $75 or $80 crude and you are talking a little over $2 on a WTI, WTS spread, we used to see $2 on crude that was $40. What has happened in the last two or three years is a lot of the historical norms or checks and balances don't exist. We have a little bit of hard time reading through "what does it mean." We used to be able to pick a crude price and pretty much tell you what crack spread it would be. We haven't returned to normalcy yet.

Yes, but it is coming back somewhat?

It is coming back somewhat, yes. We are seeing the indications. We think we are seeing the bottom. When the crack spreads, when the 2-1-1 drops to $3 a barrel, you better have some other parts of your business to hold you up because I don't know anybody on the Gulf Coast or the East Coast that can operate with those kinds of margins.

Right. And then, very finally from me, sorry to go on, the impact of Holly's recent moves, could you just talk a little bit about how that may impact you guys?

Well, actually we have [sent] Coffeyville looking to our Southern neighbor in refineries and wondered for years why they didn't put themselves together. We actually think it is a very good move on Holly's part. You have two sweet crude refineries. You now have one unit that will be -- or two units that will be consolidated into more or less a single operation.

From the public information, you can see that they're planning on reducing crude runs in the order of 40,000 barrels or 45,000 barrels a day. Being in a niche market, we will be the beneficiary of that as well. As crude comes out, we can expect some reduction in production in our backyard. I give Matt Clifton and his guys a lot of credit for pulling that deal off.

Great. Thanks, guys.

Joe, do we have any additional questions?

Yes, Mr. Pack. Our next question comes from the line of Vance Shaw of the company of Credit Suisse. Please proceed with your question.

Yes. Hi, good morning. This is Vance from Credit Suisse on the buyer's side.

Hey, good morning, Vance.

Good morning. Mr. Sankey got most of my questions answered, but just to continue on from his last one, what are you guys thinking strategically? It seems like -- obviously, you guys can't control the markets but your operations seem to be pretty efficient now and humming along. Any thoughts on acquisitions or anything like that?

Vance, let me just say we're always looking. We need to find the one that works. You could look around, and a lot of refineries that have been for sale are not exactly the ones anybody wants to own. We're using Holly for example. You had two plants that were somewhat compromised that they were able to buy and put together and make one good one out of it, but owning each one individually may not have been that great a story. Let me just put it this way, we are looking.

There seems to be a lot of plants in Oklahoma, and I don't know what you call them, almost like teapot refineries, really small ones. They probably wouldn't fit what you guys are looking at filling over the frac, right?

No, I mean, you need to look at complexity. You need to look at flexibility. If somebody is operating a really small plant in a topping mode or whatever, I mean, I don't know how those plants survive.

Got you. And would you be looking also at infrastructure? You guys have this great storage asset and the pipeline going right at Cushing, maybe some sort of more logistics fly around?

Absolutely, long term -- we are always looking for something that is synergistic with what we own.

Are you operating at 115,000 barrels? Is that pretty much as much you could do?

No, we can actually run higher. We can actually run -- we have run as high as 121,000 or 122,000. Right now, purchasing blend stocks and feedstocks is more economic than filling the plant out with crude. We buy -- when we talk about feedstocks, blend stocks, again that's DGO, cat cracker feed back into our bottoms or asphalt. Particularly this time of the year, it's pretty distressed.

We have room for 2,000 or 3,000 barrels a day of coker feed on a daily basis. Our expanded plant actually expanded a little more than we had on paper. And then, we used the octane capability of our CCR to blend low-octane natural gasoline, natural gas liquids.

Got you. Thank you very much.

Thank you, Vance.

Any additional questions, Joe?

(Operator Instructions). Mr. Pack, we have no further question in the queue at this time.

Okay. Thank you again, everyone, for being here. The questions were well thought through. It gives us an opportunity to speak very openly about the Company and how we are doing, and we appreciate your being here on the call. We'll see you next quarter. Thanks again.

Thank you all.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.