CVR Energy Inc (CVI) 2010 Q4 法說會逐字稿

Greetings and welcome to the CVR Energy fourth quarter year-end 2010 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, Mr. Pack. You may begin.

Thank you, Rob. Good morning, everyone. We very much appreciate you being here for our call this morning. With me on the call today are Jack Lipinski, our Chief Executive Officer, Ed Morgan, our Chief Financial Officer, and Stan Riemann, our Chief Operating Officer.

Prior to the discussion of our 2010 fourth quarter and year-end results, we are required to make the following Safe Harbor statement.In accordance with federal securities laws, the statements in the 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, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2010 fourth and year-end earnings release that we filed with the SEC yesterday, after the close of the market.

With that disclosure statement said, I will turn it over to Jack Lipinski, our Chief Executive Officer, Jack?

Thank you Stirling. Good morning all, and thanks for joining us.

You've seen the results we released last night. We ended the year pleased with our results. I will first give my remarks and provide insight into the numbers you saw in the release. Then Ed will report on our financials, and afterwards, I will give you my view on the current operating environment. And after that we will take your questions. In the fourth quarter, we filed an S-1 that addresses our plans with respect to our fertilizer business. In accordance with SEC rules, the Company cannot comment on matters discussed in the S-1. We will do so when appropriate .

With that, let me get started here. Overall, we are satisfied with the way the year turned out, especially given where it began. If you recall, last February, the PADD II, Group 3, 211 crack spread had fallen as low as $4 per barrel. During the year, margins improved and ended with a group crack of just over $12. For the year, we reported net income of $14.3 million or $0.16 per fully diluted share. On an adjusted basis, net income was $39.8 million or $0.45 per diluted share, and that is on revenue of just over $4 billion. For the fourth quarter, we had net income of $2.3 million or $0.03 per diluted share. The adjusted fourth-quarter results are a net income of $12.2 million or $0.14 per diluted share.

Ed will walk you through the details on how we compute adjusted net income. We think the best measure of our success during the year was the $163 million of net cash flow generated from operations. We began the year with $37 million in cash and ended it with $200 million. Even after voluntarily paying down debt on our first-lien bonds. Ed will, again, speak to our cash and overall liquidity position during his remarks. Year-over-year refining operations continued to improve. During 2010, we set and new annual crude throughput record of 113,600 barrels per day. Total throughput, including all feed stocks, averaged 123,700 barrels per day. In the fourth quarter, average crude throughput was 116,300 barrels per day. And our total throughput exceeded 130,000 barrels per day. Operating income for the year from our petroleum segment $104.6 million. In the fourth quarter, we recorded operating income from refining of $60.4 million.

As noted in our previous SEC filings, we had not anticipated outage on our FCC on December 29. The unit returned to full service on January 26. The net effect of this outage on lost production will show up our first quarter results. We estimate that approximately 1.8 million barrels of crude processing will be lost in the first quarter. Despite this outage, we continue to generate positive refining income in the month of January. Our crude gathering business continues to perform well. During the year we gathered at average of 31,060 barrels per day of crude which is a new annual record. These fairly-priced gathered barrels are an important part of our refinery economics. And We continue to move forward on a number of opportunities to expand this business.

As you know from prior calls, we have 25,000 barrels per day of capacity on the recently completed Keystone Pipeline Cushing expansion. Our first delivery was made on March 1. This supplements the 12,000 barrels per day capacity we have on the Spearhead system. We now have the ability to ship all of our heavy Canadian crude needs on contracted pipeline space. This also allows us optionality to ship other grades as well.

Contango for 2010 averaged $0.87 per barrel per month, with a high of $4.59 and a low of $0.12, and ended the year at $0.84 per barrel per month. Since the beginning of this year, we have seen a marked dislocation of Brent and WTI pricing.With the increased volume of crude coming into Cushing, Contango has moved as well. This is a result of vast amounts crude finding their way to Cushing with no easy way of being shipped to other locations. Refiners able to access WTI-related crudes -- related grades of crude -- are now the beneficiaries of this price dislocation.

Our nitrogen fertilizer business performed well. As mentioned in our last conference call, we had an incident on September 30 at our UAN, where a high-pressure vessel ruptured. No one was injured, and damage was localized with no significant off-site impacts. Fortunately, we were preparing for the biannual turn around at the fertilizer plant, which thereby minimized downtime. The gas, fire and ammonia complex returned to service on October 29. The UAN plant restarted on November 16. The repair costs were $10.5 million, and we have a $2.5 million deductible under our insurance policy. As of year-end, recorded $4.5 million of insurance recoveries against this claim.

For the year nitrogen fertilizers had an operating income of $20.4 million. Please keep in mind that 2010 was a turnaround year. Fertilizer prices began the year at $275 per ton for ammonia, and $210 per ton for UAN. Year-end pricing was approximately $600 a ton for ammonia, and $330 a ton for UAN, and prices continue to move upward.

On this note, I would like to turn the call over to Ed. He will discuss the financials and liquidity position. After he is done I will come back and discuss our outlook for the year and my view going forward. Ed?

Thanks Jack, and good morning everyone.

As Jack previously mentioned, with respect to the fourth quarter net income was $2.3 million or $0.03 per diluted share. Our adjusted fourth-quarter net income was $12.2 million or $0.14 per diluted share. We do look as a Company at adjusted net income to evaluate our results. Let me just walk you through the adjustments necessary to reconcile back to this adjusted net income. First, remember that our management team, founders equities, recorded a share-based compensation under FAS 123, and it is directly linked to the movement in our stock price.During the fourth quarter, our share price increased 84%, which increased the non-cash stock-based compensation expense by $23.4 million, net of taxes. Or the equivalent of $0.27 per share in the fourth quarter. Also, with the completion of secondary offering in February, and based on our current stock price we are projecting the share-based compensation impact for the first quarter to be $7.5 million net of taxed, and approximately $1.8 million net of tax for each of the final three quarters in 2011. A second adjustment to net income in the fourth quarter of 2010 is the increase of inventory values that we realized under our FIFO accounting inventory method, equating to $17.8 million after tax or $0.20 per share.

The other quarterly adjustments, included an after-tax turnaround expense at our fertilizer plant of $2.5 million, $800,000 related to assets written off during the turnaround, and a loss on extinguishment of debt equal to $1 million after tax. If you will recall, we do expense rather than capitalize our turnarounds. And the fertilizer business, as Jack mentioned, has a turnaround in each calendar year that ends an even number. The loss on extinguishment of debt is a result of the write-off of costs associated with our voluntary prepayment of $27.5 million on our first-lien notes last December. One of the more substantial impacts to our EPS for 2010 resulted from our 49% effective tax rate for the year.

As I just highlighted , our stock-based compensation was substantially higher this past year and totaled $37.2 million on a pre tax basis. For tax purposes, $19.4 million was not deductible, resulting in an unfavorable impact to our income taxes equivalent to $0.09 per diluted share.

With respect to liquidity, at the end of the year we had cash and cash equivalents of $200 million, an increase of $163 million since the first of the year. This change is primarily due to high levels of operating income, favorable changes in our working capital; we were net receiver of a prior year tax refund, and lower capital expenditures. Net debt, or total debt at the end of the quarter, at the end of 2010, was $477 million, leaving us with net debt position of $277 million. This compares very favorably with the year-end in 2009, when total debt was $491 million, giving us a net debt position at the time of $455 million. On a net debt to capitalization ratio, we have seen significant improvement , moving from 40% of the end of 2009, to 24% at the end of 2010. Maintaining ample liquidity, while generating excess cash flow, allows us to continue deleveraging and is a key component of our strategy to enhance shareholder value moving forward.

On February 22 we entered into a $250 million, asset-backed revolving credit agreement with a new group of lenders. The ABL credit facility is scheduled to mature in August 2014, and does replace the existing $150 million revolver. The ABL credit facility will be used to finance ongoing working capital needs and the issuance of letters of credit as they may be needed. This new facility also has a $250 million accordion feature, should we need to expand the facility over the course its term. The pricing on this new ABL is based on an excess availability grid with an initial rate of LIBOR plus 3%. Compared to our prior revolver, this represents over a 5 percentage point interest rate reduction, which could result in annual interest savings of $2.9 million, assuming our current utilization of $58 million. The current utilization is tied to letters of credit. Currently, we have no amounts outstanding under the revolving credit facility, and availability is at $192 -- aggregate availability is $192 million. Today we had cash and cash equivalents of $103 million. And additionally, we are using our excess cash to carry 1.2 million barrels, or approximately $110 million of crude inventory, to capture the advantages in this Contango market environment that Jack discussed earlier.

Turning over to capital expenditures. For 2010 they totalled $32.4 million, versus $48.8 million in 2009. During the fourth quarter of 2010, we incurred turnaround expenses associated with the fertilizer business that approximated $3.5 million plus $1.4 million in related asset write-offs. In addition we incurred about $1.2 million of expenses in preparation for late 2011 and early 2012 refinery turnarounds.

Looking at 2011, our capital spending forecast is forecasted to be about $90.8 million, of which $78 million is budgeted for the petroleum business, which does include our Cushing tank project. $10.9 million is at the fertilizer business and $1.9 million at the corporate level. We also expect the expense of approximately $65 million at the refinery in connection with the turnaround, starting in Q4, and $50 million of this expense will be incurred in 2011.

As a reminder, for accounting purposes we expense our turnaround costs as they are incurred. Jack, I'll turn the call back over to you.

All right. Thank you, Ed.

Just looking ahead, mid-comp at refineries are very much favored by the current world crude environment. For example, yesterday, West Texas Intermediate, WTI, was selling for $102 per barrel. At the very same time, gulf sweet grades comparable to TI, such as LLS, which is Louisiana light sweet, were selling for over $120 per barrel, or almost $19 per barrel more than TI. NYMEX crack spreads are reflective of Brent crude pricing, and those refiners capable of accessing crude priced off of WTI are clearly advantaged. 100% of our crude supply is priced based on WTI. Yesterday, the NYMEX 211 settled a $25.60 per barrel.

At the end of last year, the crude Contango did warrant us using much of our excess cash to carry inventory. That is no longer the case, as Ed described. We will continue to maximize the return on our cash by storing excess crude in this favorable Contango market. So far we've seen Contango range between $0.73 and $3.92, and year-to-date is average just shy of $2 per barrel. That is $2 per barrel per month.

In 2006, we looked forward and realize that at some point in time, we might have use for additional crude storage in Cushing. At the time we purchased 183 acres of land with attractive pipeline right-of-ways, right in the heart of Cushing. We are now proceeding to build 1 million barrels of storage on a portion of our property to supplement the 2.7 million barrels that we currently lease.

For the first quarter, because of our FCC issue, we expect throughput at our refinery to average between 95,000 and 100,000 per day. The Brent/TI dislocation will continue until adequate pipeline capacity is built to alleviate the bottleneck at Cushing. Increased production in Canada, the Bakken, DJ Basin and other fields will likely exacerbate the problem in the short term. Rail solutions to take crude out of Cushing or out of the Bakken or other areas are economic but will have a limited impact, because simply there aren't enough rail cars to move as much crude as people would like. My expectation is the crude glut Cushing would not be resolved until 2012, or perhaps longer.

Turning to our fertilizer business. Due to world demand for grains and hence strong pricing, we see continued strength in the fertilizer market. We have a -- we have had strong order activity through the spring season. We are currently taking orders in excess of $620 a ton for ammonia, and $330 per ton for UAN for second quarter delivery. And please remember these are net back to plant gate, so, our transportation is netted out.

Finally with the completion of last two secondary offerings, in November 2010, and February 2011, whereby the funds of Goldman Sachs and Kelso & Company sold down holdings, we are no longer a controlled Company. In fact, the funds at Goldman Sachs no longer holds shares in the Company. With this transformation, many of you on the call today are new investors, and we appreciate your support.

I encourage you to reach out to our investor relations team as you have questions in the future, and of course I will be happy to answer your questions today. On behalf of myself, Stan, Ed and others on our management team, we look forward to speaking with many of you over the course of the next year.

With that we are ready to take questions. Stirling, can you take the call?

I will. Rob, would you go ahead and put the investor call through at this time then?

Yes sir. We will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question this morning is from Kathryn O'Connor of Deutsche Bank. Please state your question.

Hi. Good morning.

Good morning, Kathryn,

Just maybe on your last comment about the WTI/Brent differential and what's happening at Cushing. You said that you think it is going to be until 2012 or longer before the situation gets settled. Can just give us some more parameters around the shortest you think it would take to work that out, and the longest, and just some ideas around sort of sign posting?

Well, you know, the mainline -- the line that we will resolve the congestion at Cushing is the XL line. Which is having some problems with permitting, and they are just not 100% ready to go, but they are expected to be operational in 2012. But other people are suggesting they might be delayed into 2013.

I don't expect in the short-term, lines to be reversed. It is quite economic to do so, but I just don't see that happening overnight. People can actually truck crude from Cushing with a $20 differential and take it down to the Gulf coast, as you know, you can with unit trains, and frankly we are even looking at unit train options for ourselves.

The short story is the way this will get resolved is actually with pipe, not with trucks or with rail. And we don't see anything in that immediate future that is going to alleviate that. But when you have this wide a dislocation, the market will react. The wider the dislocation, the faster the correction. While we think the ultimate solution is going to be the XL line, maybe something else will happen. I just don't know what that is at the current time.

Okay. And then just given that backdrop, can you talk to us about, obviously you are using some cash and tying that up with Contango currently, because I think at the end of the quarter you had $200 million of cash and I think you said that you are closer to $100 million now. Today. In terms of cash.

But besides the values of cash, can you talk about where you will use your cash, and remind us how you feel about acquisitions. And it seems like you have some increase flexibility, just based on the ABL that you have put in place.

Yes, we do. Obviously we will look at all opportunities. The Company functionally is in a much better place than it was any time in its history. You know, it should be pretty obvious that we are generating free cash flow at these margins today.

We have $100 million of our excess cash tied up in inventory to garner the Contango. We have our bonds, which you very well know, and we have limited ability to redeem them. So, we are looking at ways of using our cash in the short term, and the best way for us to do that is doing a Contango play. Because ultimately, we will absorb those barrels back into our system. It's not like we have to sell them to anybody else. We will simply process them; we will draw them down.

As far as acquisitions and other opportunities, we will look at the what may makes most sense for shareholders. Right now, liquidity is good, having an ABL, at the level that we have is clearly helpful to us. We have more than adequate liquidity. We don't see the market turning on us, even if you were looking at NYMEX crack spread right now, all the way through the end of the year, I mean, there is the 211 is all above $20. As far as you can see, all the way to July of 2012, and that is all I have on my screen.

If you are looking at that kind of crack spread, our ability to buy fairly-priced Canadian crudes, gathered crudes, and have optionality on our pipelines. With those kind of numbers, it's pretty attractive for us. I'm dancing around the question. I don't have an acquisition target in mind right now, but certainly, we are all ears.

Yes. I guess maybe to touch on a couple of things you said. So a follow-up in terms of seeing those crack spreads that far out to 2012. One of your competitors this morning ended up hedging a considerable amount of their 2011 production. How do you think about hedging, or the possibility of hedging?

That is something we are actually discussing. But by the same token it could go both ways, but these are very attractive levels. The only problem with hedging is , given the short-term, these are really good numbers. But if crude were to run because of a major disruption in the Middle East, and your crude price goes up by $20, $30 or $40 per barrel, those cracks won't look nearly as attractive.

Right. I guess there is a threshold. I think that the competitor only hedged 10% of their output.

Well at 10% you can never be wrong. You can't be all right or all wrong.

Right. And then just a follow-up to the ABL , and the extra liquidity with the ABL. I think on the documents you can do a permitted acquisition that would leave you up to 4.5 times levered. That seems to be the upper bound. Could you just talk about your comfort level in terms of any acquisitions you may do if you find them attractive, what your comfort level is in terms of leverage.

We really haven't gone that far with any of this at this point. The ABL was simply closed last week. We -- One of the first things that we received Board approval on was again this Cushing tank project. It's good for us. We believe Contango, given this market, will be around for a while. Maybe not at these current levels, but certainly enough to pay out the steel that we would -- we would put down there in the meantime give us an opportunity.

We are being very judicious with our cash. We don't want to do anything silly or just do something on a on a whim. If we believe -- I believe that cracks are very attractive right now, but a lot of the numbers in the crack substitute Brent for WTI in the crack. Okay?

If you were to look a Gulf Coast crack using LLS instead of WTI, you have a $5 or a $6 crack. Now I am not saying cracks will revert to those numbers, but at some point, those too shall correct, and I would not overpay for somebody, given this high margin environment, thinking that it is going to last forever. Trees don't grow to the sky.

Okay and a last question, I'll let someone else ask. The tank project is going to be exactly how much, did you say, of the total CapEx number?

It's roughly $25 million all in, but it will be completed in the first quarter of next year, so we will have some of that, the majority of that spent this year with some carryover next year.

And I presume with these kinds of this kind of Contango would be a pretty quick pay back ?

Yes.

Yes.

Like less than one year?

Not sure. If you were to -- let's say, pick a number. If you say it is going to be $1.50 per barrel per month, times 12, so you store 1 million barrels; 1 million barrels are going to cost us roughly $25 per shell barrel. So it is not quite a year payout, but within reason it could be 2 years.

That is one of the reasons a lot of folks are building tanks in Cushing. At some point in time, the Contango may flatten. And at that point, we will actually have tanks that we will on for our own use. We could choose to look at what we do with our leases long-term or perhaps even build out tank farm even further.

Okay. Great. Thanks so much.

Thank you.

(Operator Instructions) Our next question is from Joe Citarrella from Goldman Sachs. Please go ahead.

Thanks very much.

Jack, with the Keystone line coming in last month, starting to bring additional barrels from Canada to the Cushing region and competing with some of the lighter and sweeter barrels. Could you perhaps comment on both how that's impacted the discount of WTI and maybe also what kind of Canadian discounts you are seeing at Coffeyville, and maybe what that means for heavy Canadian runs that you'd expect in this kind of environment?

You know you are starting to see a little bit of strengthening in the Canadian grades, you know they have upgrader issues up there right now, so the sweet grades have actually run. We are seeing April injectors being in the $21 range right now, discounted from WTI. You know that it's nice.

It is just, if you think about it cost you about $6 to bring it home from Hardisty, so that means you are delivering a heavy Canadian at about $14 under WTI. It's still economic to run the heavy barrel, and we are running maximum amounts of heavy barrels because we've put some of these in.

. The other thing is, is in the shipping, you may actually get one, sometimes even two rolls at Contango. As the material you purchased in Hardisty and moves down to Cushing. So that improves your differential a bit. We are seeing more barrels. Cushing is -- hit a new record just off of the stats this week. You see increased Bakken, not that Bakken moves directly to us, but as a matter of fact, we have shipped Bakken, which is called really [U8C] out of Clearbrook.

It's a Bakken over LSB bottoms, which is a light sour blend. And we have received -- we are receiving some of that on our Spearhead system. We will run somewhere near 25,000 barrels per day of heave Canadian crude, be that WCS or Cold Lake or similar grades. The more Bakken we can get our hands on, the more heave Canadian we run, because we run to a blended number.

The heavy differential is nice, but it is not what drives our business. Right now what is driving us is to run as much as we can given this Brent/TI dislocation. And again, I think long-term, when it is this good, it will correct. That was my view when cracks got as bad as they did, as fast as they did, during the last turnaround that they would correct. The more dislocation, the faster the correction. But I think fundamentally, we have an issue in Cushing that won't be resolved completely for perhaps 2 years.

Maybe that this location will be $3 or $4 per barrel or $5 per barrel and not $14 or $15. But basically that is the advantage in dollars per barrel that a mid-continent refinery will have over any of its peers.

That is very helpful color, and as you mentioned, the imbalances look between production growth coming in and what could make it way out in terms of infrastructure.

Is there any color or numbers should provide around or your expectations? As you said, some of the near-term numbers clearly can widen out, and the sharper they are, the quicker they could come back in. But on the other hand, you also mentioned that some of the solutions like trucking and rail are either too small or maybe not economic enough to move the needle.

Perhaps for through 2012 or 2013 timeframe, is there any numbers between imbalances that you're expecting coming into Cushing from Bakken, DJ Basin, Permian, whatever it might be versus what could ultimately make its way out economically?

That's what we are looking is any solutions. If you look at a rail solution, a unit train carries 60,000 barrels; that's 100 cars. Bakken production is going up 15,000 barrels per day every month. Okay, how many potential -- and turn on a rail system maybe 20 or 30 days. So how many rail cars can be built quick enough, and unit-trained loading and unloading be built quick enough to handle the tsunami of crude.

You've got the Niobrara, the DJ Basin, you've got all sorts of other fields coming on. And the logical point is for them to head to Cushing. But you needed major a outflow. You need a relief valve. The relief valve will be the XL pipeline. But again, you could -- literally you could fill your trunk with crude and drive it to the Gulf Coast and pay for the gas. I mean, at $20 per barrel, it's pretty phenomenal.

it definitely is. Jack, as always, very helpful color. I really appreciate it thanks very much.

Okay, thanks.

(Operator Instructions) Or next question is from Rakesh Advani of Credit Suisse. Please state your question.

Hi. It's Ed Westlake, actually. Congratulations on the quarter.

I guess you said you can't say anything about the S-1 in the fertilizer business, does that mean you can't -- in the S1 also you give some guidance about EBITDA sensitivities to the strong environment that you're currently enjoying. Can you make any sort of color on how long you think that environment will last?

We could talk about pricing because it's -- it's in general as we do. We are actually, have taken orders in the last 24 hours that are for June delivery that are higher than some of the numbers we sold a month ago for, actually in-season delivery.

If these numbers hold, and there is really a limited amount of UAN that is for sale, just simply because most people are sold out, we are seeing strength in UAN. Stan would you like to add any comment to that--?

Ed, I think if you just take a step back and look at the fundamentals that are driving the fertilizer price in terms of grain production and economic recovery, and tillable acres, and ending stocks continent by continent. I think you can come to the conclusion that the current fertilizer prices scenarios -- it's got some legs under it and is probably sustainable. You don't recover from ending stocks worldwide in one harvest or two.

I think it is a general opinion of most economists that cover the Ag market that 2011 will be a very good year and 2012 looks very good too. And it will be several harvests, two or three, before you get the ending stocks back into a reasonable level.

So, we are looking at a good 18- to 36-month run in my opinion and others', as far as strength of fertilizer pricing worldwide.

And to give a sensitivity, in an average year, we will produce somewhere between 650,000 and 680,000 tons of UAN. Price is 100% goes to the bottom line. So, a $10 change in UAN price will generate about $6.5 million to $6.8 million per year.

We produce right now about 140,000 to 150,000 tons of net ammonia, so if you do $10 on that as well you can figure that that's about $1.5 million. So if you see prices moving upward by $10, in both products, you can then assume if both go at $10 you are looking at something on the order of $8 million of an incremental EBITDA. And we are actually seeing the market be stronger than that.

And, just switching back to the topic of uses of cash. Obviously you've got a cash pile, you've got some uses for which pay back very quickly. But once you've exhausted those, what are your thoughts about returning more cash back to shareholders?

Well, under our indentures right now, we have some limitations. Obviously that could be a point of discussion.

And those will last all the way to the term of the loan or is there a reopener?

No. Right not there -- but it depends too. I have to be very careful on where he go with all this, because we don't have any plans to do that, but certainly, at some point in time, repatriating our debt becomes a question for the Company. Should we do it, pay the premium or not?

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back to management for further comments.

Well, thank you all for joining us. Again, welcome to our new shareholders, and thank you all for those of you who are accumulating our stock. We are happy to be here and actually serve you. Our goal is simply to return the best performance we can and earn as much money as we can for our shareholders. On behalf of the end our entire management team, thank you. Thanks for joining us.

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