CVR Energy Inc (CVI) 2009 Q4 法說會逐字稿

Greetings and welcome to the CVR Energy fourth quarter and year-end 2009 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 Jackie, we very much appreciate being here. We appreciate everyone being on the call the morning. There are a large number of you who are there and some still dialing in, bull we're going to go ahead and start as close to the proposed starting time as we can. Again we appreciate you being here for our call this morning. With me this morning is Jack Lipinski, our Chief Executive Officer; Ed Morgan, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.

Prior to discussion of our 2009 fourth quarter and year-end results, we are required to make the following Safe Harbor Statement. In accordance with federal security laws, the 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 disclosure related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter and year-end 2009 earnings release, which we filed yesterday after the close of the market.

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

Thank you, Stirling.

Good morning all. Thanks for joining us on our fourth quarter and year-end earnings call. I'll begin by talking about our results and then speak briefly about the operating and economic environments we find ourselves in. After my comments, Ed Morgan will provide more information regarding our reported financials, and Stan Riemann, our Chief Operating Officer, will then join Ed and I in taking your questions.

As Stirling said, after the market closed yesterday, we reported fourth quarter net income of $9.5 million, or $0.11 per basic share, bringing our full year net income to $69.4 million, or $0.80 per share. As you all know, we is two diversified but complementary business. Our petroleum business is comprised of the 115,000 barrel per day complex full coking sour refinery, and a 30,000 barrel per day crude gathering system. We have also have the nitrogen fertilizer business that utilizes gasification technology with low cost petroleum coke as its feed stock. Ours is the only such plant in North America.

The refinery supplies transportation fuels to the Southwest portion of Pad 2, which is community referred to as Group 3, and our nitrogen fertilizer business applies two products, anhydrous ammonia, and urea ammonium nitrate solution to America's agricultural heart. Over the past five years, we made the necessary investments to structure our companies to survive in a low-margin environment. Our refinery operating costs are lower in aggregate than many of our peers, even considering our high complexity. In addition, we have the lowest cost nitrogen fertilizer plant in North America at current natural gas prices. As a result, we have cost advantages and operational flexibilities that let us react competitively in the volatile markets we face today.

When assessing our quarterly results, it's important to consider what factors helped us along in the fourth quarter. Operationally, our plants ran well. We had no significant unplanned outages at the refinery or the fertilizer plant. Through-put to refinery to the fourth quarter totaled 125,966 barrels per day, which includes crude, deep stocks, and blend stocks. Our nitrogen fertilizer plant performed equally well. We maintained a 98.9% on-stream position for the gasification units, and we ever on stream 98.1% of the time in our ammonia synthesis loop, and 96.7% of the time in our UAM facility.

In addition, we benefited from the continued contango in the crude oil market, as we have most of the year. Late in the fourth quarter, the contango spread, while still positive, declined to the point where it became less of a benefit for us. Starting in January, we began to reduce inventories held in our contango play, and applied some of the cash proceeds to pay down $25 million of our long term corporate debt. That is part of our ongoing focus, using our cash where it is most effective, but the goal is strengthening our balance sheet.

Anticipating tough environmental conditions, we took actions to minimize costs, and rein in capital as long as it did not compromise our environmental health and safety performance. A remaining required capital project this year is the addition of an ultra low sulfur gasoline unit. This unit will come on-line during the second quarter.

Looking at petroleum operations, the throughput at the refinery for the full year totalled 120,239 barrels per day, up from 117,719 barrels per day in 2008. Although we posted higher throughput for the quarter and the year, that is not our main focus. We optimize our refinery, not for maximum throughput, but for maximum economic result. In determining how we run our plant, we balance a mix of factors, including product demand, yields, crude differentials, and feed stock costs. Our refinery in Coffeyville sources a wide variety of crudes from Cushing, Oklahoma, and from our proprietary crude gathering systems.

Having access to a wide range of crudes enhances our ability to select the most cost effective plant. During recent months, sweet sour and heavy light crude differentials have been compressed, making our locally gathered barrels as well as WTI relatively more attractive to us. Five years ago, our crude transportation group gathered about 7,000 barrels per day. In the fourth quarter, we gathered an average of 28,400 barrels per day, despite being impacted by several winter storms. Today, we have a capacity to gather over 30,000 barrels a day of crude, and when our few injection station in Osage County, Oklahoma comes on-line later this month, our capacity will jump to 35,000 barrels per day. Access to the fairly price gathered barrels represents an important portion of our realized refinery margin. Refining margins, meanwhile, have remained weak. You may recall in the first quarter of 2009, we saw crack spreads that were higher than seasonal norms. So far this year, we're seeing crack spreads that are lower than seasonal norms.

Let me talk a moment about nitrogen fertilizers. As I mentioned earlier, our on-stream rates were higher in the fourth quarter than in the corresponding period last year. Ammonia and UAM production for 2009 set a new record for our facility, which began operation in 2000. We are a high fixed cost low variable cost operation, and reliability is the key to our profitability. In the fourth quarter, we produced 111,800 tons of ammonia. Of that, 39,300 tons were available for sale, and the remainder was converted into 176,600 tons of UAM.

For the year, we produced 435,200 tons of ammonia, compared to 359,100 tons in 2008. And 677,700 tons of UAN in 2009 compared to 599,200 tons the previous year. At these production levels of UAN, we represent approximately 6.5% of the production in the United States. As you know, nitrogen fertilizer pricing fell dramatically nationwide in the last half of 2008, and we first half of 2009. But they have showed a steady stable recovery over the past 8 months.

Most of our fertilizer is sold on a delivered basis, and I normally speak in terms of realized prices. Recently, we have taken orders for second quarter delivery in the range of $220 to $230 per ton net back. Equal to prices we saw in the 2006-2007 time frame. That is a substantial increase from the levels seen 8 months ago, and it's been pretty much a straight line improvement. Since we carry a fairly substantial book of forward orders, changes in current prices take time to roll through our financials. So the lower priced orders taken last summer affected our fourth quarter results, and to a lesser degree will affect our first quarter. With the steady improvement in nitrogen fertilizer prices, we will see a corresponding steady improvement of results in future quarters.

Looking forward, we anticipate some economic growth in 2010. We are operating our business as if this year will be no better than 2009. We continue to control costs, and discretionary capital expenditures, and keep our focus on strengthening our balance sheet. One reason the refining industry is struggling right now is the large overhang of product inventory.

This is similar to what we experienced last year in our fertilizer business. Fertilizer inventories have cleaned up and margins have improved. We expect the same to happen with refinery margin when demand improves. Given the strength of our fertilizer business, the flexibility of our refining operations, and the technical strength of our management team, we believe we're well positioned to weather the current downturn in the petroleum service sector.

With that, I'll now turn the call over to Ed Morgan, who will discuss financial highlights as we head into 2010. Ed?

Thanks, Jack. Overall, we're pleased with our 2009 operating results. My comments today will be limited to a brief discussion of matters pertaining to our capital structure, capital spending, and an understanding of what's impacting our effective tax rate.

As Jack mentioned, the long-term debt under our total agreement totaled approximately $479 million at the end of the year, of which $25 million has been paid down in the first two months of 2010. Again primarily as a result of a partial reduction in our contango play inventory. Our focus will be to continue our efforts to utilize the free cash flow in our business to deleverage our company through the downturn in the economic climate.

As of the end of the year, we had cash and cash equivalents of $36.9 million and aggregate availability under our revolver totaled $86.2 million, which included a letter of credit to Vitol for the purchase of crude oil over the extended holiday weekend. Our usual and customary practice would be to prepay for these barrels, but due to the additional business day holidays at the end of the year, we chose to backstock this working capital with an LC instead. Currently, our availability under the revolver stands at $114.2 million, and our current cash balance as of today is approximately $26 million.

Our capital expenditures for 2009 totaled $48.8 million, which is approximately $11.5 million less than what he had communicated to the market at the first of 2009. The majority of our capital spending in 2009 related to our efforts to meet the Tier 2 gasoline standards on which we spent a total of $21.2 million during the course of the year. It is expected that we will spend another $22 million in 2010 to bring this unit on-line sometime during the second quarter. Once we have completed our sulfur gasoline project this year, the majority of our near-term regulatory capital spending requirements will have been completed. The total capital spending budget for both businesses combined for 2010 is going to be $68.4 million. We believe the flexibility we have in our capital spending program will allow us to meet our goal of focusing our excess cash flow from operations, and reducing our overall total outstanding debt.

Now, turning to our tax rate for 2009, which approximated 29.7%, compared to an effective full year tax rate of 2008 of 28.1%, the overall increase in the the effective tax rate for 2009 is primarily attributable to a higher level of federal and state income tax credits that we generated in 2008 as compared to this past year. One of the largest differences is that we reach the maximum level of federal tax credits available in the first quarter of 2009, related to the production of ultralow sulfur diesel. In 2009, these federal tax credits approximated $4.8 million, versus $23.7 million in 2008. The income tax benefit for the fourth quarter of 2009 was approximately $3.7 million on a pretax income of $5.8 million.

As I mentioned, in all of our previous earnings calls, this benefit was primarily the result of the company receiving in the fourth quarter, our 2009 certifications in Kansas under the high performance incentive program that are commonly known as HPIP. The gross HPIP benefit recorded related to 2009 certifications was approximately $4.3 million. While our realized tax rate has historically shown some significant swings from quarter to quarter, it is reasonable to assume with the final recognition of ultralow sulfur diesel credits in 2009, our 2010 effective tax rate will increase, you may expect to see an effective tax rate in 2010 between 34% and 36%.

Now Jack, I'm going to turn the call back over to you, for some final remarks.

Okay. Thank you, Ed. Just in closing, we pride ourselves on having very good assets, but the real strength of our company lies with our employees. Too often, many companies fail to recognize the value of their workforce,, and ours is exceptional, and we applaud their efforts. We work together very well as team, and as a team, we'll go forward, and improve our company every day, as we can. I'll turn the call over to Stirling for questions.

Thank you, Jack, and I'll add, an excellent presentation. Jackie, we're prepared to take questions now, so if you want to switch to that mode, that would be fine.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment, please, while we poll for questions.

Thank you.

Thank you. Our first question is coming from Paul Sankey of Deutsche Bank.

Hey, guys.

Hello, Paul. How are you?

Good. Still expecting capacity. Jack, could you just give us a little road map of how you see the rest of this year playing out? Firstly, from a seasonal point of view, any unusual or interesting effects that you're seeing firstly in refining? I'm thinking obviously about things like the snow cover and what's going on perhaps in the agricultural industry. Secondly, on a secular basis, how you think the refining industry in general is going to play out here, given the inventory overhangs, given the excess capacity we seem to have, how you see your own position and the secular shifts that we might see in the industry, even global industry over the rest of the year. And finally, and I know this is kind of an enormous question, but you have gone some way to answering it already in your comments, but just the outlook for Coffeyville itself, any changes that you may anticipate in ownership, in debt structure, whatever it might be, just for the rest of the year.

Okay. Paul. Well, to start out, the fourth quarter was seasonally weak. If you look back, and I'll quote in some numbers, you can resurrect these in a public domain. The Group 3 crack, for example, in the fourth quarter, averaged about 576. That's a daily average of plants reported cracks.

And against crude, we used to use crack as a percent of crude. That's historically low, but even so, the fourth quarter was weak. In general, in the group, January and February tend to be the weakest months. Interestingly, they're not much weaker than the entirety of the fourth quarter, and in history, we've seen March turn, where margins hit their lows typically in February, and then they turned as we approached the end of March, activity picks up in our area, farmers start moving into the fields, they start plowing, they start doing work in the field, and we see spring does finally come, and we see a resurgence of activity. If you take a look at the current quarter, and if the cracks hold, the group cracks hold, as of what we're seeing on the screen, and March is only a few days old here, we'll probably see something between $0.25 and $0.50 improvement in overall 2 on 1 group crack first quarter over fourth quarter. And, again, this is less than what we've seen in times past, and part of it is due to this inventory overhang, but, again, in the group, we see two major seasons. It's the spring and the fall, when demand picks up.

On a more global level, inventories are high and demand is down. A lot of that has to do with basically two factors. One is unemployment. People don't drive when they're unemployed. I'm not sure that there's an absolute numerical correlation, but its pretty easy to see that as unemployment has risen, miles driven have dropped. We are starting to see that turn. One of the major truck stop operators published some information that, basically if you read it, basically said that from 2007 to 2009, their distillate sales, diesel sales, dropped almost 20%, but Q4 was the first turn, basically. There's light at the end of the tunnel.

When we see manufacturing pick up, we expect to see the inventory overhang somewhat clear up. We also expect to see some more rationalization in the marketplace. I mean, if you're in the group, one of the benefits we have is an operating cost at or below $4 a barrel. That's kind of hard to match.

Everybody else in our group is seeing these same numbers, plus our crude gathering and being a sour plant, we're able to deliver crude and run it below WTI. I think in our view, we believe 2010 will look a look like 2009 with improvement coming in late third or late fourth quarter. We expect fourth quarter of 2010 to be better than the fourth quarter of 2009, but until we see some direction, changes in our employment and changes in actual manufacturing, the overall GDP increase doesn't seem to be moving into the products market. I don't know if I answered your question.

Well, that's then kind of seasonal stuff. I mean, I would think that you're somewhat less exposed because you're more interested in how much farming activity is going on, right? Isn't that the primary driver for you guys?

That's absolutely correct. Generally the spring and fall are our best periods. Summer, if driving season kicks in, we benefit with everybody else. We're in a niche market. We're probably, if not the low cost, one of the lowest cost refining operations, and we also have a fertilizer business that at least continues to improve. That business provides a great source of cash for the company, and it buffers the rough road we see in refining right now.

That leads into the into the second part of your question, which was a long question, but it was to do with anything major over the course of the year that you anticipate either regarding how you handle cash, regarding structure, regarding ownership.

Ed, would you want to?

Sure. From an ownership perspective, Paul, we've talked about it historically on previous calls, but we don't have any additional guidance in regards to what our shareholders will choose to do or not do. In regards to structure, one key difference from fourth quarter is -- actually really from all of last year, the contango market has not been there for us as much as it was historically, so we have hedged that position. We did use partial proceeds to pay down some debt in the first quarter so far. I mentioned $25 million to date. You could expect to see that continue. We will continue to also try and manage our business with a high level of cash on the balance sheet as well kind of going forward, given the uncertainties in the market.

Okay. So the main thing is going to be trying to pay down debt, but also retaining cash?

Well, liquidity. Again, we basically have $114 million of undrawn capacity on our revolver, and $20 million some-odd in cash right now. We have not fully exited our contango play. We still have some barrels. We're not in any great rush. There's still a little contango in the market, still pays us a little bit to do it, but given the fact that companies are viewed by the strength of their balance sheet, that's what we're focusing on. We have the lowest cost nitrogen fertilizer operation in North America, and one of the lowest cost refineries on a complexity basis, and we continue to focus on that. We'll grow our gathering business, but there's not a whole lot else we could do other than focus on the balance sheet and try to build shareholder value that way.

Okay. Fair enough. Thanks very much for your complete answers. Thanks.

Thank you. (Operator Instructions). Thank you. Our next question is coming from [Julia Kudju] of Simmons & Company.

Hi, guys. Good morning.

Good morning.

Just two quick questions for me. On the refining side, as far as maintenance goes, are there any major turnarounds coming up in 2010? And if so, what is the impact there, and otherwise for the rest of the year, still looking around 110,000 to 115,000 barrels per day?

Okay. As far as turnarounds, our scheduled turnarounds, we are taking partial plant turnarounds. One is scheduled late in the year in 2011, and the other earlier in the year in 2012. We are not taking the whole plant down at one time. That's one of the benefits that we -- we can now claim from our expansion project, so we have cash flow during both turn around periods. As far as -- Stan?

There's no other major capital, and our rates should be in the that as you articulated in the 110 to 115 range.

I think in this quarter, you should expect us to see between 100 and 105. We did, with margins being as thin as they are, we opportunistically took some unit outages for short periods of time to do unit cleanups, but it seem likes we do tha almost every year at this time when margins get a little soft. It's the best time of year to do it, and frankly, we have no major maintenance planned. Our ultralow sulfur gasoline unit will be coming up. Capital is -- we don't have any exceptional capital requirements in the company. Stan?

The only turnaround we have for this year is in fertilizer operation, which is significantly smaller in terms of cost and scope and on the refining side we'll be down for 16, 17 days, and we're only talking $5 million to $7 million. so it's not the scope of taking a refinery down. We'll do that this fall. The capital requirements are relatively flat with the completion of our new LSG here in about five weeks, and we'll start off on working on our scrubber, which isn't really due till 2012, and that's really it. The rest will be relatively flat, as far as sustaining capital on both sides of the footprint.

Yes. And the fertilizer, this is an every other year event. So even if you look back at our historical productions, these turnarounds don't have a major impact on our overall annual production.

Okay. Great. I appreciate it. On the fertilizer side, just curious, can you talk a bit about how you're seeing Q1 deliveries shape up? Is weather cooperating, or are you seeing any delay in deliveries? Or how is Q1 going so far?

This is Stan. No, we ship on a ratable basis on the UAN and ammonia. If there's any slow up, it may be on truck ammonia, but it's still early. We're not losing any sleep over to it, to speak of. Our real season kicks off in mid-March, and we expect it will, spring will come. But we shape ratably every day, so no, our inventories are where we wants them to, and product is moving as we expect it.

To that point, weapon generally have at this time of year, 150,000 tons or more of UAN on a forward book, which is almost three months of production. the way we run our business, and most fertilizer companies do as well on the nitrogen side, you maintain a large forward book, and you deliver ratably as you produce the material. We don't have any substantial storage on site. We continuously move it out using our rail fleet, both ammonia cars and UAN cars.

Okay. Thank you.

Thank you, Julie.

Thank you, ladies and gentlemen. (Operator Instructions).

Okay, Jackie, I think that concludes our comments, and we appreciate all of those who have attended us on our call this day, and are certainly available for any follow-up questions that people may think of during the course of the day. So thank you everyone, again for being here, and we appreciate your interest in CVR. Thank you all.

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