CVR Energy Inc (CVI) 2011 Q2 法說會逐字稿

Greetings and welcome to the CVR Energy second quarter 2011 conference call. At this time all participants are in a listen-only mode. A brief 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 Jay Finks Director of Finance. Thank you Mr. Finks you may begin.

Good afternoon everyone. We very much appreciate you being here for our CVR Energy call this afternoon. With me today are Jack Lipinski Our Chief Executive Officer, Ed Morgan our Chief Financial Officer and Stan Raymond our Chief Operating Officer.

Prior to discussion of our 2011 second 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 belies 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 2011 second quarter earnings release that we filed with the SEC yesterday at close of the market.

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

Thank you Jay. Thank you all for joining us.

From the results released last night, you can see we had very solid second quarter. Consolidated net income was $124.9 million or a $1.42 per fully diluted share on sales of over $1.4 billion. That compares to net income of $1.2 million in the same period a year ago on sales of just over $1 billion.

Adjusted net income was $130.4 million or dollar $1.48 per fully diluted share in the second quarter. Non-cash adjustments like FIFO and share-based compensation along with a few other items account to the difference, as Morgan will provide you more detail on that during his remarks. Today, I'll first speak about our results and where we go from there. After that Ed, Stan and I will take your questions.

Let me go first to the petroleum segment. If you joined us for last quarter's conference call that morning we had an issue with our CCR. Aside from some reduced rates during the CCR outage we are very happy with where the quarter turned out operationally. Because of the CCR issue, we filed an 8-K indicating that we expected to operate about 108,000 barrels per day average for the quarter. We actually bettered that sum an averaged 109,500 barrels a day.

Since then our CCR has returned to normal operations and now we are running the plant capacity above 115,000 barrels a day. The petroleum segment had operating income of $183.5 million as compared to $4.6 million for the same quarter a year ago. Adjusted EBITDA for the petroleum segment was $208.4 million versus $46.5 million a year ago.

The continuing story for the second quarter is and was the Brand TI spread which drove margins for oil refiners with access to WTI base crude's. We are a 100% WTI based refiner and we were able to capture this difference between Brent and WTI. The Brent/WTI relationship will continue to define our market as we look for at least in next two years. Today that spread was $21.75 and it is moving around a little bit -- this is a new number.

This year so far we've seen it range from a low of $3.29 to a high of $22.63 on July 14. In addition, all indications are that we will continue to seem our group cracks -- our regional cracks at above historic levels. During the year, our crack averaged $26.71 versus $11.75 a year ago. Today the NYMEX 211 stands a little over $33 a barrel.

We realized an average refining margin of $25.49 per 3-foot barrel compared to refining margin a year ago of $6.70. It's remarkable what difference a year makes. This quarter we increased the amount of heavy sour recruits we ran to 21.2% of crude input. That's up from 17.2% in the first quarter and also up from about 12% a year ago.

We actually set a record of 24,600 barrels a day of heavy sour Canadian crude's processed during the quarter. Western Canadian Select one of typical marker heavy Canadians, traded at $17.61 discount to WTI for the quarter. While this is not a bond burning discount, we continue to maximize our runs of heavy crude so long as these differentials continue.

A final note on the petroleum segment. Our gathering business set another record in June gathering more than 36,000 barrels a day. These fairly priced barrels are an important our refinery economics and we are absolutely focused on growing this business.

Let me turn to nitrogen fertilizers. The fertilizers segment had second quarter operating income of $39.3 million on net sales of $80.7 million for the second quarter. That compares to operating income of $16.5 million in the second quarter of 2010 on net sales of $56.3 million.

Those of you who listened to the earlier CVR partners call with -- CEO Byron Kelly, know we are very pleased with their results. He reaffirmed IPO guidance of $1.92 in distributions per common unit through the four quarters ending March 31, 2012. The quarterly distribution of [$0.40] per common unit announced last week covers the period with the effective date of the IPO on April 13 through the end of the second quarter.

CVR Energy through its subsidiaries owns the general partner and 69.8% of the common LP units. CVR Energy receives proportional distributions with respect to our ownership.

Recapping Byron's call, the fertilizer business operated very well in the second quarter. On-stream stats for gasification were 99.3% on stream times, ammonia 98.5% on stream times, and UAM plant ran at 97.6% on stream time. Part of the story looking year-over-year is the difference in fertilizer prices, and again we report fertilizer prices as net back to plant gain.

This quarter we averaged ammonia sales at $574 a ton and UAN, and again for those of you unfamiliar is urea ammonium nitrate solution, at $300 a ton. That compares to a year ago of $312 a ton for ammonia on and $205 a ton for UAN. Year-over-year we are seeing significant improvement net back prices. To kind of give you an indication, our UAN book this time last year was 295,000 tons of orders at $167 a ton. This year our book is approximately 300,000 tons of orders with an average net back over $300 a ton.

All right looking forward, this fall we will begin a bifurcated turnaround of the refinery with approximately two-thirds of the work being done in the fourth quarter of this year. The remainder of the turnaround work will be completed late in the first quarter 2012. Because of the way the work is scheduled, we will continue to operate even though we'll be at reduced rates during our turnaround period. On average we expect to run between 110,000 and 115,000 barrels a day in the third quarter, and looking forward, between 90,00 and 95,5000 barrels a day in the fourth quarter when we're in turnaround. You should all remember that we expense our turnaround costs as they are incurred. So when you look forward to our fourth-quarter, we'll not only be running fewer barrels but we'll have increased expenses at the refinery.

As of this morning our consolidated businesses had approximately $810 million in cash and cash equivalents on hand. And cash invested in excess working inventories of an additional $42 million. For the quarter, we had operating cash flow of $179 million. Cash on the balance sheet has increased more than $100 million since our last conference call. We remain net-debt free, but we expect our current cash position to decline as we reach the end of the year because of turnaround expenses, tax payments, and capital expenditures.

With that I'll turn the presentation over to Ed. Ed?

Thank you Jack and good afternoon everybody.

Just to recap a few points, at the consolidated level, the net Income was $124.9 million or $1.42 per diluted share versus $1.2 million or $0.01 per diluted share in the second quarter of last year. However adjusted earnings per share were a $1.48 versus $0.22 per diluted share last year. Just to remind everybody we do believe that adjusted earnings are the meaningful metrics for analyzing our performance as it does eliminate the impact of our accounting for major turnaround expenses in non-cash accounting matters providing for a better comparison to market expectations.

In the second quarter, we adjusted for share-based compensation, FICO inventory accounting so let me briefly walk you through these adjustments and provide some brief color. First, with share based compensation in the second quarter there was $1.3 million after-tax or $0.01 per share. With the exit of our private equity shareholders during the second quarter and our share based compensation expenses projected to be approximately $6 million over the next two quarters or approximately $3 million per quarter on a pre tax basis.

The second adjusted to net income is the increase or decrease in inventory values that we realize under First In First Out or FIFO inventory accounting. In the second quarter of 2011, we realized an unfavorable FIFO impact of $2.5 million after-tax or $0.03 per share. The other after-tax adjustments to the income include a loss on extinguishment of debt, a loss of disposition of assets, and expenses associated with the upcoming refinery turnaround. In total these three items represented add back of $1.7 million after-tax $0.02 per share.

Turning to liquidity. we ended the second quarter with a liquidity position just over $1 billion. Which is comprised of $748 million in cash and cash equivalents, $42 million in excess inventory, and $243 million available under our working capital facilities.

The significant events driving this increase in cash were the completion of the IPO with a net term loan financing on April 13, which added $419 million from the IPO and $179 million of operating cash flow during the second quarter. As of June 30, our current debt to capital was 35% versus 43% the same period a year ago. Our long-term target for our debt to capital is 25% to 30%. Our total debt position at the end of the second quarter was $595 million and as Jack mentioned if you net out our cash on hand we were in a cash positive position of $153 million.

In connection with the successful completion of the MLP IPO we were required to offer to redeem [100 million] of our first and second lien notes at price of [$1.03.] As a result of this offer we did receive acceptance for [500,000] of the first lien notes and [2.2 million] of second lien notes.

Now moving over to capital expenditures. The second quarter of 2011 they totaled $13.6 million versus $5.4 million for the same period in 2010. Our 2011 total capital spending forecast it still expected to be $144 million, of which $38 million is related to our UAN expansion. Of the total, $92 million is budgeted for the petroleum business which includes $23 million to complete the Cushing, Oklahoma Tank Farm Project.

We do expect to start inputting crude oil in the new Cushing Tank Farm at the end of the first quarter in 2012. We also expect to spend in 2011 approximately $54 million at the refinery in connection with the turnaround in the fourth quarter this year. As a follow up to what Jack mentioned earlier, for accounting purposes, we will expense these turnaround costs as they are incurred.

From a tax perspective our effective tax rate for the quarter was 36% and we do anticipate our full year tax rate will be 36% as well. With the recent completion of the public offering for the fertilizer business we will continue to consolidate the full pre tax earnings of CVR Partners. All income attributable to the non controlling interest of our MLP, will represent a permanent non taxable adjustment for CVR Energy and will effectively act to lower our effective tax rate on a go forward basis.

With that Jack, I'll turn the call back over to you.

All right thanks Ed.

As you know, we operate in a very volatile industry. For WTI based refiners the sky is blue and the seas are calm right now, but it's not always that way. A year ago in February, we saw group three crack spreads as low as $4 a barrel. We'll are now seeing group cracks over $30 a barrel. I'm not expecting any returns in these low levels. But those who don't study history are doomed to repeat it.

While we have a very substantial cash position right now, we intend to manage it conservatively. I'm in discussions with our board. They clearly understand our situation and fully intend to do the right thing to enhance shareholder value as we move forward. With that operator, we are ready to take questions.

Thank you we will now be conducting a question-and-answer session.

(Operator Instructions)

One moment please while we poll for questions. Jeff Dietert with Simmons.

Good afternoon. You talked in your intro about your gathering system volumes rising to I believe 36,000 barrels a day and maximizing your Canadian heavy purchases as well. Can you talk a little bit about the remaining portion of your feed stock?

And where the most attractive barrels are being sourced? Is it midland? Is it Cushing? Is it Bakken coming in to Cushing? I don't think that would be it, but where are you seeing the most attractive barrels for the balance of your feed stock portfolio?

Basically it is WTI out of Cushing. If you take a look WTS West Texas Sour is a pretty thin discount to WTI. And frankly in our view doesn't quite actually -- it doesn't' value out.

We'd rather run the WTI and certainly Bakken and is trading at $6 over WTI if you just take a look at where the spreads are, and that's up in Clearbrook. So our crude de choice is WTI. It's the heavy Canadians and it's gathered barrels and then it's WTI finished.

What's driving the WTS weakness -- excuse me the strength in the limited discount? What's driving that away from being an attractive crude?

You know I think there's a couple things that happened, there were some pipeline issues and some maintenance that had taken place which limited the amount of heavy Canadian that could down Keystone, which then drove people to look for the next cheapest source of crude. Secondly, in this kind of environment, if you could run a domestic crude, you're getting -- I'm sorry I'm stumbling over my words, you are capturing that Brent WTI spread it doesn't really matter if it's sweet or sour.

And as you work on your gathering system, what's drilling activity look like? What pace of increase are you expecting as far as further benefits of the gathering system?

Well we are seeing -- we are expecting fairly substantial increases in Oklahoma for production as we move forward. You know we continue to look for gathering opportunities whether it's the Bakken or the DJ Basin or the Eagle Ford. You know we are always looking to expand there. But some very interesting opportunities are starting to crop up, with increased drilling in Oklahoma, which is our backyard, where we can gather those barrels and bring them home.

Thanks for your comments.

Thank you.

Ed Westlake with Credit Suisse.

Yes, congrats on the quarter. I guess it should have listened to the first part of the call. If I look at spot UAN prices, they have exceeded the $300 a ton. So presumably that should start to flow through in the second half of the year into the UAN earnings?

Yes. Let me tell you and those of you if you've listened to my comments before, there's two or three distinct fertilizer seasons in a calendar year. In season prices usually ends in June, and then when you get into the July to December time frame the producers take large volumes of orders to carry them through the end of the year, when the producers produce and actually deliver into third-party stores. And the prices drop very significantly from in season and then they kind of creep back up.

So early in the fill season, we were seeing numbers in the high $200's, say $290. Today those numbers are closer to $350. So if you take a look at our book, there's a large numbers of orders taken in the beginning to assure ourselves that we had outlet, and then we slowed down our order book and captured more of the higher priced tons. I said over $300 million, I'm not going to go in to any more detail, but it is over $300 a ton.

Okay. And just on the refining, 24% of WCS obviously the discounts aren't necessarily wide enough. But if you were to think of WCS and maybe WTF in terms of what's the maximum sour barrel that you can get through?

I think we are there. What we do is it's pretty much on a spring. We run to a blended sulfur limited between 1.2% and 1.3% at the refinery. And we can run pretty much, because of our configuration, with two crude units, we can run anywhere from 28 to 37 API crudes.

So what we do is we balance running WCS or cold lake as the discounted crude with WTI to fill out as much of the downstream unit capacity as we can. With us running over 20% heavy Canadian crude, that's pretty much all we could run. The WTF, West Texas Sour doesn't impact us as much and actually drives our sulfur more than the refining value does simply because right now we're doing pretty good processing WTI.

And then final one from me, you mentioned during the right thing by shareholders and discussing that with the Board. Obviously we saw a special from Holly last night and I think that they're moving that direction as well with the excess cash. In prior thought process it had been that you would think about returning cash after the turnaround had been completed. Is that still the thought process?

Well, you know, again, I have had many discussions with the Board. We would certainly want to see where we are before the end of the year. We have lots of options available to us, including reducing our debt and certainly other options available.

Right now we're taking a conservative approach you can see the shape of the economy right now. Certainly the Board is absolutely focused on enhancing shareholder value. We think we've done a pretty good job over the last year, 18 months, and we believe we will continue to do stuff. Right now all options are on the table.

Thanks very much.

Paul Sankey with Deutsche Bank.

Hi Jack. Talking of all options, you mentioned the sun is shining and the sea is calm. We've seen quite a good valuation come in on Superior. I'm wondering how you now perceive the M & A market to be? Whether or not you would consider this to be not the optimal time to be looking to buy stuff or whether you believe values are not reflective of earnings? Thanks.

Well, the Superior deal was not outrageous. It is quite a bit of money for a 35,000 or 37,000 barrel a day refinery. Right now I don't see very much M&A in the market. I think if you own a mid-com refinery you like what you're getting. I'm not interested, and I said it before, 'm really not interested in moving to the coast.

I like the Brent TI spread -- we'll just have to see where that goes. And one of our focuses is going to be on growing our MLP. And the other focus is obviously in our gathering business which ultimately can provide a significant amount of enhanced value for our shareholders.

Yes but I guess within the context of your cash position, those are not dramatic acquisitions are they?

Nothing -- right now there's not a lot that's -- those of you that have bit on this call for couple years with me, know we kick every tire that's out there. But we are also very conservative in the way we approach things. So you're not going to see us going out over our skis to pay any high multiples for any assets right now.

Jack we can see some reasons here at Deutsche why the Brent WTI spread could actually widen in the coming months? You seem to be saying, those would be things like the restart of various Canadian productions subtleties -- you know the potential for WTF and using refineries to go down. Other bits and pieces that might widen out the spread. You seem to be saying that we are at a peak here and that we're likely to narrow which I guess is in line with the future strip, what would you add on your views on that?

Again, I'm reading the strip and I wish I had a crystal ball. Because we would be certainly in the market if my crystal ball was right. We believe they'll stay at these kind of levels certainly until pipeline capacity comes to remove some of the congestion. I do not believe Cushing congestion is the only story.

I really believe that we can see prolonged or even higher spreads, just simply because crude is near $100 a barrel. There are new technologies, you're going to see shale oils, you're going to see conventional drilling, you're going to see anything increase. And my view is ultimately, I think long-term, the Brent TI spread will remain at pretty significant levels. I'm not sure I'm smart enough to suggest that it's going to be $30 or $40 or drop to $10, but what we are seeing right now is we are seeing increased production.

We're seeing increased interest in us gathering barrels for numerous parties, and what that tells me is productions increase. So you know it depends on how many pipelines will get built. And everybody and their dog wants to build a pipeline to take Cushing crude to anywhere else other than Cush. So at some point some of those will get built.

I have a feeling that some of these peripheral projects will not be subscribed enough to justify spending a lot of money to build a pipeline from Cushing to anywhere else. So I'm not saying in my comments, I know where we're at today, I believe we are going to stay this way probably for two years. My crystal ball does not go out any further. Talk to me next year on this conference call, I have a better view.

Sure I will. And I guess what you're saying there is that you're not going to hedge or do a big swap, for example?

No, we have a very small amount of spreads on around our turn around, in the low $20 a barrel range, but they're not significant. We did that just as a way, I think it's about 15% for a non-turnaround launch, just put a floor underneath the turnaround periods but we're not hedged anything beyond that.

Understood Jack. Thanks as always.

Thank you.

Chi Chow from Macquarie.

(Operator Instructions)

Gentlemen good afternoon. Seems like the turnaround expense for this fourth quarter, it went up. Was it $54 million is that what you mentioned? It seemed like it was $45 million last time. What changed?

Actually Chi, the turnaround for the year will be -- incurred for the entire year will be $54 million. Last quarter we gave some guidance over the course of the quarters in the year that would be $46 million in the fourth quarter only. Just a couple dollars of shift to here or there, but the end total, nothing has changed on the turnaround costs. They will also be $70 million would include the $16 million we plan on spending in the first quarter of 2012.

Okay. And Ed, I guess from a policy standpoint, why do you include turnaround expense in your special items and adjust that out?

We try to make it more comparable to what the peer group does, Chi. As you know, most of the group historically has capitalize and amortized those costs over a four or five year term.

Okay. So in the fourth quarter we would expect that $46 million to kind of show up as an adjustment then?

That is correct.

Second question here, it looks like your diesel yield is very high, you've got a nice split between gas and diesel. Any thoughts going forward on trying to kick that yield up any higher on diesel?

I mean we are running -- what you saw a little bit in the quarter primarily was we are running a little bit heavier crude's. Running through the coker making more dustlet and we ran fewer outside feed stocks, which is typically gasoline, natural gasoline. So that's why we always use a 211 as the metric by which we judge ourselves. And don't forget we also had our CCR down for a period in there which also reduced gasoline output.

All right.

So all in all from crude we don't quite make 50-50 but it's pretty close to making 50-50 diesel out of crude. Now we have other seed stocks and the like.

Yes, so any projects here maybe contemplating to kind of even boost that even higher going forward?

You know were going to be doing some work during the turnaround to improve fractionation on certain units, improved heat recovery, improved rounds. Which directionally increased (inaudible) recovery.

Okay great thanks Jack I appreciate it.

Thank you.

Steven Carpal with Credit Suisse.

Hello gentlemen this is actually Brian on for Steven. Earlier you made a comment discussing the potential for reducing debt as a way of enhancing shareholder value. I was just wondering if you could clarify that at all or provide any information on if you're looking at any of the particular shoes of bonds?

You know, as you're aware, we have the opportunity to repay 10% of our first lien in December. I think it would be a fair statement to say that we will make that payment come the end of the year. Beyond that, that would be discussions with our Board, everything on the table.

So nothing has been fixed and cast in stone, but what we're doing is we're just looking at all the options available to us. Effectively, the company is paying just shy of 10% interest on it's set.

On the bonds?

On the bonds, Yes, sorry. Under our bonds. So it's just something you have to look at.

I appreciate it thank you very much.

Thank you.

Kathryn O'Connor with Deutsche Bank.

Hi guys. Do know off the top of your head what the restricted payments capacity you have right now is?

Yes it's approximately $200 million.

$200 million. So I guess as you're taking into account all the different usage of cash, how do you think about using that restricted payments capacity before doing a refinancing? Or then the opposite way to do it I guess would be to do a refinancing and then carve out a certain amount or keep a certain amount of restricted payments capacity to say special dividends going forward. How do you think about that in terms of thinking about strategies for the refi along with strategies for the cash?

I mean all of this is up in the air. Certainly the is the only place we could pay dividends would be from the RP basket. So that started out as $50 million when we issued -- when we closed on the bonds and it increases by 50% of the bulk income going forward.

So you know as far as re-financings and the like, frankly that's just all part of the multiple discussions that were going to be addressing with our Board. I'm not saying were doing it, we may not.

Kathryn one other thought, we also take into consideration the make whole premiums depending on where these bonds are trading right now, and those could be pretty substantial depending who quotes it. All of that is thrown into the mix and looking at the best return on yield so to speak.

I guess I guess when you're talking about the make whole's I think you -- by next year you'll be able to call the first lien paper, but you would still have to wait to do the second lien paper. Would you guys consider doing sort of a blended thing where you look at taking out the first lien -- that first call, and then maybe doing a tender for the second lien so you can redo the cap structure at the same time so it would be more efficient?

That's a great idea, we will certainly add it to our list Catherine. (laughter).

Okay. Can you just update us on what the cost of the storage tanks are going to be at Cushing?

At Cushing it's just below $25 million. And again the first time you build you have infrastructure piping comps and the like. The acreage that we have will support up to 6 million barrels of total storage, I'm not saying were going to do that. But just for clarity, were not limited to the million barrels, but the first $1 million costs you more than the subsequent storage would.

So I guess are you trying to say that you can do more than that. So if you wanted to do say like another -- say you wanted to double it another six what would that cost you?

Probably $21 million, $22 million.

Okay. Okay and then the last thing is just around the gathering again. I mean you've been able to increase it quite a bit and it seems like the new opportunities are sort of opening up what the high end of the range could be for gathering. I mean in your mind, how quickly -- I know you're saying it's a focus, but in reality based on the new sources of crude that you're seeing locally, how fast could it grow and could you eventually supply your entire -- you know your entire feed stock for right around you?

I don't know if we'd ever get there, but certainly I'd expect us to be able to build this business by 3000 and 5000 barrels day per year. And if certain new fields come on, it could even grow faster than that.

Ultimately I think somewhere between 45,000 and 50,000 before we have to build new lines into our existing infrastructure. You know what we're effectively doing when you get into the Oklahoma barrels, these are WTI look-a-likes, they're actually better quality than WTI and the whole goal is to bring in a crude that has some discount over finding value. So that's our goal here. I'm not sure we will ever 100% cover all our needs.

And if you did, if we got to the 45,000 to 50,000 level and you had to spend money to increase your gathering lines, I mean what kind of order of magnitude would that be?

Again it's new pipelines over 40 or 50 miles of territory. I'm not sure it would be an overpowering expense, but we take it one step at a time. When we get close to that next plateau that's it will start focusing on it.

Okay great thanks a lot.

Thank you Kathryn.

Mr. Finks, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

I'd like to thank everyone for joining us this afternoon. If you have any further questions, don't hesitate to give me a call. Thank you.

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