CVR Energy Inc (CVI) 2011 Q1 法說會逐字稿

Greetings, and welcome to the CVR Energy first quarter 2011 conference call. At this time, all participants are in a listen-only mode. A brief question and answer question 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. Sir, you may begin.

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

Prior to discussion of our 2011 first quarter results, we are required to make the following Safe Harbor statement. In accordance with Federal Securities 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 also includes various non-GAAP financial measures, disclosures related to such non-GAAP measures including reconciliation to most directly comparable GAAP financial measures are included in our 2011 first quarter earnings release, that we filed with the SEC yesterday after the close of market. With that brieflysaid, I will turn the call over to Jack Lipinski, our Chief Executive Officer. Jack.

Thank you, Stirling. Thank you for joining us. From the results released last night you can see we had a solid first quarter, consolidated net income was $45.8 million on net sales of $1.2 billion. That compares to a loss in the same period last year of $12.4 million on sales of $895 million.

Adjusted net income was $49.5 million compared to $15.6 million loss in the same period a year earlier. Adjusted net income per diluted share was $0.56 versus a loss of $0.18 a share last year. As always, I will speak first and provide some color about the results. Then Ed will provide additional financial information, including details about the adjusted net income figures I just mentioned. And after that, Ed, Stan and I will take your questions.

The petroleum segment had an operating income of $105.7 million on net sales of $1.1 billion for the first quarter of 2011. The largest positive impact on our results was the significantly improved margin environment we found ourselves in. The biggest negative impact on petroleum segment results was an FCC outage lasting 26 days into January. I mentioned that on our last call. As a result, we were forced to reduce crude runs by 1.9 million barrels. Great margins and good operations followed the outage, allowing us to produce 93% of the quarterly segment operating income, or $98 million during February and March.

First quarter results also reflect derivative losses on crude oil. We bought for line fill and start-up inventory obligationsfor the new TransCanada Keystone Pipeline. That $7.2 million after tax negative impact in the first quarter will be offset in Q2 with a positive impact,as we process these lower cast barrels. And effectively April 1st all Keystone barrels have been transferred into the intermediation agreement. As I mentioned in the last quarterly call, we expected crude runs to average between 95,00 and 100,000 barrels a day, we actually ran 98,700 barrels a day. We also ran 17.2% heavy sour crudes in the first quarter, as compared to 11.3% heavy sours in the same period a year ago.

NYNEX 2-1-1 Crack Spreads for Q1 averaged $20.99 a barrel. That compared to $8.48 in the same quarter a year ago. In February last year, Group 3 2-1-1 cracks dipped as low as $4 a barrel. What a difference a year makes. Last night the 2-1-1 crack stood at $28.49.

Nitrogen fertilizer segment had operating income of $16.8 million on net sales of $57 million for the first quarter versus $3 million in the first quarter of last year. The big news came after the quarter closed with our successful IPO of CVR Partners LP. We issued 22.1 million common units at $16 each. That is $2 over the top of the initial pricing range. We began trading at our MLP on Friday, April the 8th under the NYSE ticker UAN.

CVR Energy subsidiaries still own the MLP's general partner and 69.8% of the common units. The increased proceeds from our offering allowed us to place additional cash on the MLP balance sheet, which will serve us well as we look to aggressively grow this business. Ed will discuss the details in the new MLP financial structure in his presentation. As part of our growth strategy, a portion of the proceeds from the IPO will be used to expand our UAN plant by almost 50% to more than1 million tons per year. Our fertilizer business operated well in the first quarter. Our gasification plant was on stream 100% of the time. Ammonium, our ammonia synthesis loop was on stream 96.7% of the time, and our UAN plant 93.2%. The big change year-over-year is in product realizations.

In Q1 2011, we averaged $564 a ton for ammonia. A year ago that was $282 a ton. UAN priced at $207 a ton for the quarter versus $167 a ton a year ago. We are on track to meet the forecasts we published in the IPO prospectus of $150 million of EBITDA, and $140 million of distributable cash for the 12 months beginning Q2 2011. It is worth mentioning at the end of the quarter we signed an agreement with Chaparral Energy, an Oklahoma-based oil producer, for them to purchase up to 850,000 tons of CO2 from our gasification plant, to be used for enhanced oil recovery in their fields in Oklahoma. Basicallywe now have a carbon solution for our gasification technology fertilizer facility.

Chaparral expects to break ground before the end of the year on the compression station and pipeline interconnects necessary to implement their OER project. Looking forward in the refining business, the Brant WTI relationship will continue to define our market. The 2-1-1 Crack Spread is really based on Brant's to market crude, Brant reflects the world price crude price, and WTI is simply discounted to it as a result of logistics. Today, that spread between Brant and WTI is more than $14 a barrel. This year so far we have seen it range from a low of $3.29 in January to a high of $19.54 in February.

Over time, the congestion of crude and cushion that has led to the wide dislocation will disappear. I believe over the next two years as pipeline connections will allow Cushing crude to reach the Gulf the differential will reduce to the tariff necessary to transport mid-Continent crudes to Cush. I would expect that differential to remain between $2 and $3 a barrel, which would approximate that tariff. We process over 40 million barrels a year of crude, and to me that means we will enjoy an EBITDA advantage in a range of $80 million to $120 million over a similarly situated refinery on the eastern Gulf Coast.

The wild card will remain the astounding increases in production in crude in areas such as Bakken, the DJ Basin and the Eagle Ford, which may lay the groundwork for a structural and larger WTI discount to Brant simply because of volumes. With that said, the next two years look very promising for our ability to generate significant cash. Our crude gathering operations provide yet another advantage for CVR Energy, and will continue to provide a benefit regardless of the narrowing of the Brant WTI spread. In March and April we average 35,000 barrels a day of gathered crude. It was only a year ago that we increased our system capacity from 30,000 to 35,000. We are looking to aggressively expand this business once again.

Just before the call today I received a call from the refinery. We had a flange fire on our CCR, preliminary indications, it will have no major impact on Q2 results. I am mentioning it simply because you may hear about it. Obviously the unit is down and will immediately begin repair, but even so we expect second quarter crude throughput to average approximately 115,000 barrels a day. As of this morning the consolidated business had $694 million of cash and cash equivalents on hand. And cash invested in excess working inventories of an additional $75 million.

Ed will take you through the cash waterflow during his part of the presentation, but as of today with cash on hand we are net debt free. With that, Ed.

Thank you, Jack, and good morning, everyone. At the consolidated level our net income was $45.8 million, or $0.53 per diluted share, versus last year's $12.4 million, or $0.14 per diluted share. Adjusted earnings per share were $0.56 versus a loss of $0.18 per diluted share last year.

We believe that adjusted earnings is a meaningful measure for analyzing our performance, as it does eliminate the impact of nonrecurring items and non-cash accounting matters, providing for better comparison to analyst expectations. In the first quarter, we adjusted for share based compensation, the FIFO inventory accounting, the loss on extinguishment of debt, and turnaround expenses, and I would like to walk you through those adjustments and provide some brief color at this point in time. First, share based compensation for the first quarter was $13.8 million after tax,or $0.16 per share.

Two reasons stock based expectation exceeded our prior guidance on this line item. First, our two prior majority shareholders completed a secondary offering which triggered the settlement of founding management's equity rights. Secondly, this founder's equity is directly linked to the movement in our stock price which increased 53% during the first quarter. Share based compensation expense is projected to be approximately $9 million over the next three quarters, or will average $3 million per quarter.

The second adjustment to net income is increase or decrease in inventory values that we realized in the first in/first out, or FIFO inventory accounting. In the first quarter of 2011 we realized a favorable FIFO impact of $13.2 million after tax, or $0.15 per share. The third adjustment to net income was the loss on extinguishment of debt of $1.2 million after tax, or $0.01 per share. The extinguishment related to the refinancing of our existing $150 million working capital facility into a $250 million asset-backed credit facility, commonly referred to as an ABO.

The final adjustment to net income was the expenses associated with our refineries upcoming major scheduled turnaround of $1.9 million after tax, or $0.02 per share. As you may remember, we treat our turnaround as an expense as incurred rather than amortizing them. We will continue to incur similar costs associated with our upcoming turnaround in both Q2 and Q3, and we do anticipate spending additional $45 million in the fourth quarter for the first phase of our split turnaround.

During the quarter we refinanced our $150 million working capital facility with a $250 million ABL. Besides increasing our liquidity we reduced our letter of credit and drawn interest spread by 200 basis points, and extended the maturity from December of 2012 to August of 2015. The new facility also has a $250 million accordion feature, should we need additional working capital capacity in support of our future growth plans. We ended the quarter with a liquidity position of $445 million, which is compromised of $166 million in cash, $71 million in excess inventory, and $208 million available under the ABL.

In the first quarter of 2011, we continued our purchasing of Canadian crude for line sale in the TransCanada pipeline. During the first quarter we price hedged these Canadian barrels and recognized a $12 million derivative loss. The $12 million derivative loss in Q1 is a one-time event associated with our initial purchase of this inventory. This derivative loss represents a timing difference between the quarters, since the loss will turn into a realized benefit through our cost of good sold, when these barrels are processed in the second quarter. Beginning on April 1, all Canadian barrels being delivered are being purchased through the Vitol intermediation agreement. Our total debt position at the end of the first quarter was $471 million, a decrease of $6 million from the end of the year, leaving us with a net debt position of $305 million at the end of Q1.

Moving to capital expenditures the first quarter of 2011 totaled $7.3 million in spend versus $11.5 million in the same period oflast year. We did incur major turnaround expenses in preparation for the late fourth quarter 2011 and early 2012 refinery scheduled turnaround of $3.2 million in the quarter.

With the completion of our fertilizer and IPO in April, our total 2011 capital spending forecast is expected to be $144 million, of which $38 million is related to our UAN expansion,$92 million is budgeted for the petroleum business, and that does include $23 million for the Cushing Oklahoma tank farm project. We also expect to expense in 2011 approximately $54 million at the refinery, in connection with the turnaround in the fourth quarter of this year. As a reminder for accounting purposes we do expense our turnaround costs as they are incurred.

Briefly in regards to taxes, our effective tax rate was 37% for the first quarter of 2011. As I mentioned a portion of our share based compensation is not tax deductible, resulting in a higher effective tax rate. For tax purposes $5.6 million of share based comp was not tax deductible in the first quarter, resulting in an unfavorable impact on our income taxes to the equivalent of $0.03 per share. We anticipate that our effective tax rate will be approximately 34% for the full year of 2011.

With the recent completion of our public offering for the fertilizer business we will continue to consolidate the full pretax earnings of CVR Partners. All income attributable to the noncontrolling interest of our MLP, will represent a permanent nontaxable adjustment to CVR Energy, and will effectively will act to lower our effective tax rate going forward. In conjunction with the completion of the MLP IPO, we also entered into a new credit facility at the fertilizer business, which includes a terminal and facility of $125 million and a $25 million revolver. This facility also does have an uncommitted but incremental facility of up to $50 million. The facility matures in April of 2016, and has no scheduled amortization payments. The current cost of borrowing under that facility is literally just over 4%.

In connection with the successful completion of the offering, we are required to offer to redeem $100 million of our first and second lien notes at a price of 103, and the holders of the notes have until May 16 to tender notes that I wish to have repurchased. Post IPO and as of today, we have a liquidity position of $987 million, which is compromised of $694 million in cash, $75 million in excess inventory or contango inventory, and $218 million available under our IPO. We are debt free from a net debt perspective, and have positioned ourselves to execute on our growth strategy which will be accretive to our shareholders.

On April 12, Standard & Poor's updated our corporate ratings to a B+ from a single B, with the expectation for continued stability in our rating. At the same time, S&P upgraded their rating for our first lien secured notes to a BB from a BB-, we believe that these upgrades reflect the actions we have taken to properly manage our balance sheet and maximize shareholder return.

With that I would like to turn the call back to Jack.

Thanks, Ed. Before I open the call up to questions I would like to make a few points. We are aggressively recruiting additions to our fertilizer management team to facilitate aggressive growth in the MLP. We are also recruiting new independent Board members for our GP. We have no plans, or intention of making a secondary offering of the LP, common LP units held by CVR Energy through its subsidiaries. We have no need for the additional cash. We like the exposure to the nitrogen fertilizer market, and we will benefit from almost 70% of the distribution from CVR Partners.

As I said in my letter to shareholders in our Annual Report, success is defined by planning your work and working your plan. Our goal was and remains to be a leader among our peers. Over five years ago we recognized what was necessary to configure our facilities into flexible, efficient, and low cost operations. We executed a $500 million capital expansion program that is paying out handsomely today. We put in place a team of operators, managers and support staff, who shared our vision to carry us forward. We have transitioned from a private equity enterprise to a noncontrolled public company, dedicated to returning value to those who invest in us.

Two years ago we focused on strengthening our balance sheet. We were saddled with a term loan that was getting long in the tooth, and we exited from a cash flow swap that cost the Company almost $400 million over its course. Today we have a well capitalized business, a flexible balance sheet, excellent liquidity, and we operate in a region of the country with one of the highest current product margins.

Our message today is no different than what I have said historically. We are a growth oriented company that will aggressively invest in projects and acquisitions that are accretive to our cash flow, and we will deliver long term value the our shareholders. Whether we choose to reduce long term debt, diversify and expand our business or invest in organic opportunities, you can be sure we will act in the best interest of our stakeholders. We truly appreciate your support.

And I would like to open the call up now for questions. Operator, we are now ready for questions.

Thank you, gentlemen. (Operator Instructions). Our first question is coming from Arjun Murti of Goldman Sachs.

Hi, it's Arjun. How are you doing?

Doing fine, doing fine.

Good. Jack I appreciate your comments on the Brant TI LSTI spreads. I guess a couple related questions to that. You mentioned that over the next few years that people build out pipelines, you see the spread normalizing at the pipeline tariff, something we certainly agree with. I think the question is sort of the path and timing to get there, and just to be interested in your thoughts in terms of some of the pipelines getting up and going, and facing permitting issues, et cetera. Do you think all of that can really happen within kind of a two-year window, or is the risk that these things get drawn out? Then just maybe a related question on your crude-gathering business which has obviously been an advantage for you all. I mean, I am pretty sure it is in and around your existing areas and where your refinery is. Are you looking to expand into some of the other shale plays, and further afield, or is it really just building upon the existing infrastructure that you have? Thank you.

Let me talk first, answer your first question about the pipelines. There's a lot of risk today. Last year's pipeline leaks have forced increased regulatory scrutiny on any new pipeline. Everybody wants to be first and then everybody sits there and either overbuilds or it doesn't get built. We believe there will be some lines that will become active in 2013, and if you can get 200,000 barrels a day out of Cushing that will significantly reduce that Brent TI differential.

Like I said in the comment though, the wild card is you have places like Bakken that are growing at 15,000 barrels a day a month. And we still don't have any idea what the Front Range of the Rockies will look like or Eagle Ford, or other areas. I mean, even the Permian Basin is growing with enhanced oil recovery projects, Chaparral we are using RCO two years from now will significantly increase their production. So Ibelieve that this is not going to, I mean two years from now I'd like to talk about it and say I'm right, but I don't expect very much in the way of alleviating the congestion between now and the first quarter of 2013.

On the second question regarding our crude gathering, we are looking afield. We obviously have been growing in our backyard, but given our pipeline connections and the logistics we have we are actually looking at growing our business into the DJ Basin and Bakken, Bakken gets a little bit more difficult simply because you can hire people, you can get equipment, you just can't house them. It is the new gold rush era. But certainly we already gathered crude in eastern Colorado. Our gathering business ranges today, ranges from eastern Colorado all across Kansas into western Missouri. And into southern Nebraska all the way down into Oklahoma. So the first natural progression for us to move into the DJ Basin. I don't know if that answers your question.

Yes, that is very helpful. In terms of crudes you like, obviously the bigger the discount probably the better. But are you noticing material differences in the quality of these crudes from these various shale plays that make you like them less or more?

Actually, most of the shale crudes are better quality than what we have been used to consuming. I mean, they are lighter, they are sweeter, and the lighter and sweeter they are, the more heavy sour we can run.

And then you obviously have this fertilizer MLP now. You had a gathering business, a lot of that stuff is pipeline and related assets. Do you think about those assets down the road as being worthy of an MLP? I presume it would be a separate situation from the fertilizer MLP? But any thoughts there would be appreciated.

I mean, at the size we are right now while we're sizable we don't think we have a critical mass to take our petroleum logistics into an MLP. However if we do acquire another asset or we look for assets, that can become a very easy way for us to improve our acquisition opportunities because this gathering business is very profitable, and it has been a keystone of our growth strategy.

Terrific. Thank you very much.

Thank you.

Thank you. Our next question is coming from [Rakish Aveni], Credit Suisse.

Thank you for taking my questions. I want to start off Iwant to know what kind of demand you are seeing in your specific areas for gasoline and distillate?

We are seeing a very strong demand. I mean, if you take a look an indication, well, first of all, we have seen strong demand and growing demand especially in distillates for the last year and a half. We are seeing demand for gasoline increase. One of the best indicators of that is simply price. We have gone from a few weeks ago, where the basis, meaning the price we receive for our gasoline over the NYNEX, we went from a regime until about a month ago where it was slightly negative to New York. And part of that was because of the rapid run-up in the overall crack. Today, we are seeing gasoline basis, and it has been increasing every day. As much as $0.09 a gallon over the NYNEX for both gasoline and diesel, which is an indication of what demand is. And with the flooding in the Mississippi there is also some concern that this flooding will impact a significant number of refineries further south as it comes down river. And then also, in general, Magellan inventories which we are a Magellan-based marketer, we do move into New Star and move up enterprise, but Magellan inventories are lower this year significantly lower this year than they were last year. All of it indicating that product demand is strong and product supply is weak.

Thank you. And I guess another one is obviously you guys will be building up a lot of cash as you go forward. If you can just talk about what your planned uses are for the cash, and what kind of minimum level of cash are you comfortable with and holding on your balance sheet?

Alright. Well, first of all, the first thing we had to do in conjunction with our offering was offerour bondholders redemption at 103, what was the total? $100 million. The window is still open, so we don't know how much will actually get redeemed. We are getting redemptions but we won't know the number until the 16th.

The minimum amount of cash that lets us sleep at night, if you sit and you look at our business and you say, alright, what if we had another major outage like we did on the cat cracker in the first quarter of the year, we would like to keep something in the range of $150 million to $200 million of cash. Just in reserve. That way we obviously could go into our undrawn ABL. I mean, our ABL has a lot of room, but at that level given the amount of cash that this Company generates, that is kind of the level we would like to stay at. As far as what do we do? I personally believe that we are getting full value for our fertilizer business. You could see where its market cap is. Conversely because we are a single asset refiner we are trading below other peers who have multiple assets. We are not going to go crazy. We are not going to overpay, but we are going to aggressively look for the assets that will increase shareholder value. And I am not a big fan of buying assets that don't flow cash.

Okay. Then I guess a follow-up, so you are looking at possibly refining acquisitions. Would just the preference be something close by to you guys or would you think about going into a new kind of PADD?

Everybody is saying the same thing because everybody is seeing the same thing we are. Anything in the Rocky Mountains and basically PADD 2. I would not however, move down into anything along the Gulf Coast. I am not interested in buying a big monster plant on the Gulf or a small plant on the Gulf. We think that they compared to our earnings potential, they are going to be under pressure from imports.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question is coming from Todd Godfrey of UBS. Your line is live.

Thank you for taking my question. The first one is of that $694 million of consolidated cash, how much is at the UAN level? $227 million. Thank you. Then the next question, I know that Coker outage in January probably caused this, but the percentage of what medium sour was only like 60 basis points, what should we expect going forward, should we get back to the low single digit levels?

No. Actually we processed for the quarter 17% heavy sour.

I beg your pardon. The light medium sour.

Oh, those are, when you looked across those crudes, we buy crude which gives us the best refining value. So we don't target or buy the same crude every day. As a matter of fact, that is what we, when we took over the company, that is the thing we stopped. We don't buy what we did a month ago or two years ago just because it's there. We buy and run anywhere up to a dozen different crudes every month. Every time we buy a crude, we then rerun our LPs and see what goes next. Frankly, heavy crude displaces medium sour crudes. If I have new investors on the call, we are a medium sour refinery. We run up to 1.2% blended sulfur. And we can run from 28 to 35 or 36 API. So we are very flexibility on API and can run up to 1.2% sulfur. And generally we find we buy the crudes that get us closest to that sulfur limit within that API range. It is based on economics and numerous LP runs, so it is nothing structural or fundamental. Just the way we buy crude every day.

Great. You said it maybe subject to change but if I use what the slate was in Q1 that would probably be a decent approximation for the rest of the year assuming things stay the way they are?

I think we ran lighter in January because we didn't want to produce as much cat feed, so we will probably be heavier going forward.

Great. Thanks very much.

Thank you. Our next question is coming from Graham Morris of Contrarian Capital.

Hi. I had a quick question about your comment regarding asset purchases. From where I sit, your refinery trades for under $1 billion after you back out the UAN. And I can't I mean, correct me if I'm wrong, there can't be a Macon refinery that trades for under 4 times normalized cash flow and ignores the fact that there's enormous windfall over the next two years. So concerns me a little bit that you'd pay full price for a Macon refinery that trades at a material of multiple premium to which your refinery trades for. Why not buy back shares of CBI?

That is always a possibility. Again, this something for discussion with our Board. Functionally though we trade at a discount, in large part the fact that we are a single asset. So a way of growing shareholder value as well is to pick up the right asset and again, I stated that we will not overpay. I mean, if you look back at the history of this Company we started as a private equity enterprise in 2005. We looked at almost a dozen acquisitions, and we bought none because we found them to be overpriced. And that same discipline will apply right now. If I can't find something to do with the cash, we will find something else to do with the cash.

Okay. That is comforting to hear. Thank you.

Thank you. Our next question is coming from Gene Laverty of Bloomberg.

Hi. I just wanted to get a little more color on the refineries today if you have anything? If the unit is down or how long it will be down?

Our CCR, we had a flange fire this morning and in these incidents you let them burn out. We have an instrument again, all of this came to me just before the call. But I have enough information to indicate that the unit will be down for several days. We will make accommodations, we actually have plans, kind of the way I said it, you have a plan, you work your plan, we actually have contingency plans in place any time a unit comes down. We would expect we have a hydrogen supply from the fertilizer facility, so that is primarily what the CCR does, it does make gasoline as well but the rest of the plant is running well. We will probably trim rates a little bit for the next several days and then come on back up. When I said we would run in the range of 115,000 barrels a day, based on information given me by the people in the field, we believe that is going to be pretty much our operating rate. Certainly there will be some costs, but this is not a major impact. We did have one minor injury. An operator was actually responding to a leak that he heard, and in getting away from it he tripped and fell.

Okay. Thank you.

Thanks.

Thank you, gentlemen. I am showing no further questions in my queue at this time.

Thank you, Kathleen. Thank you all for joining us. I appreciate you being with us. And we are here to work for you. Join us next quarter and we look forward to what margin gods give us as we go forward. Thank you all.

Thank you, ladies and gentlemen, for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.