CVR Energy Inc (CVI) 2011 Q3 法說會逐字稿

Greetings and welcome to the CVR Energy third quarter 2011 conference call. (Operator Instructions). It's my pleasure to introduce your host, Jay Finks, Director of Finance for CVR Energy. Thank you, Mr. Finks. You may begin.

Good morning, everyone. We very much appreciate you being here for our CVR Energy conference call this morning. With me today are Jack Lipinski, our Chief Executive Officer; Ed Morgan, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer. Prior to discussing our third quarter 2011 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 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 2011 third quarter release that was filed with the FCC yesterday after the close of the market. With that said, I'll turn the call back over to Jack Lipinski, our Chief Executive Officer. Jack?

Thank you, Jay. Good morning all. Thanks for joining us. As you know, from our filings and new releases yesterday, we have a lot to talk about.

First, Ed and I will review the earnings we reported after market close yesterday. Then I'll talk about our turnaround that we're just completing and then we'll spend time putting some color on the acquisition of the Gary-Williams Energy Corporation and it's Winnewood refinery in Winnewood, Oklahoma.

Let me start with our third quarter earnings. Obviously we're pleased with these numbers. These were produced even as we answered a major turn around at the refinery at the end of September.

Our consolidated net income was $109.3 million, or $1.25 per fully diluted share, on net sales of $1.35 billion. Adjusted net income was $137.4 million or $1.57 per fully diluted share.

Typically, adjustments including FIFO, major turn around expense and other items. Ed will provide you more detail on the numbers during his remarks.

Today our consolidated businesses had approximately $898 million of cash and cash equivalents,and cash invested in excess working inventory has added an additional $37 million at the end of the third quarter. Cash on balance sheet has increased nearly $110 million since our last investor call.

Let me start by talking about our petroleum business, which is our largest segment. We had operating income of $179.8 million on net sales of just under $1.3 billion. Much adjusted EBITDA for the petroleum segment was $232 million. And comparatively, that was $62 million a year ago. For the third quarter, we processed 112,880 barrels a day of crude, and total throughput was just a little over 116,000 barrels a day.

These numbers are a little bit lower than what we produced last year, and there are a number of reasons. During the quarter, as you heard on our last investor call, we had some operational issues with our CCR, which hampered our crude throughput in the quarter. And more importantly, we reduced crude rate at the end of September to manage inventories as we began shutting down units in preparation for our turn around. Again, overall, we're pretty pleased with the way the quarter turned out.

We continue to see the NYMEX 2-1-1 crack spread, significantly above historical levels. During the quarter, they averaged $33.92 a barrel and that compares to a little over $9 a barrel a year ago. Today the NYMEX 2-1-1 crack stands a little over $25 a barrel, and on top of that, we enjoy a positive product basis of almost $3 a barrel.

In the third quarter, we realized an average refining margin of $25.03 per throughput barrel. And again, just to put some color against last year, that was $9.84 last year same quarter.

As you know, we're a 100% WTI based refiner and we continue to capture the difference in price between Brent and WTI crude in our margins. The Brent TI relationship will continue to define our market. Today, or actually at the close of business yesterday, the spread was just under $17 a barrel. This year, we have seen it range from a low of $3.29 to a high of $27.88.

During the quarter, we did see heavy crude differentials tighten and as a result we processed fewer heavy barrels during the period. Early in the year, heavy sour differentials were above $20 a barrel, and that's against WTI. They averaged $14.09 during the second quarter, and today they are slightly above $11.

We have also seen a tightening of the sweet sour spreads, and that's the difference between WTI and WTS. And also, we ran fewer heavy barrels, not only because of the price differential but as we entered turn around, we wanted to minimize inventories of heavy and intermediate stocks.

I'd like to mention our expanding gathering business. In the third quarter, we sent another record with total leased crude volumes, averaging 36,700 barrels a day. These fairly-priced, locally gathered barrels are important to our refinery economics in Coffeyville,and become even more important as we expand our refining footprint with the pending acquisition of the Winnewood refinery. And I'll talk more about that in a minute.

About the turn around. Toward the end of September, again we began lowering crude rates in preparation for our turn around and actual maintenance work began in the first week of October as scheduled. Remember from our prior calls, this is a bifurcated turn around with about two-thirds of all of the work being accomplished this fall and the remainder will be completed in the first quarter of 2012. The turn around proceeded well. All units have been turned over as of this morning to operations for a restart.

But during the restart on our CCR, we experienced a major mechanical problem with our recycle compressor,which is going to delay us from recovering to full crude rates for ten to 12 more days. This was completely unexpected, especially following maintenance. And previously indicated that we would run between 90,000 and 95,000 barrels a day for the fourth quarter. We expect that now to be more in the range of 80,000 to 85,000 barrels a day. We should have the compressor repaired, it's in the shop right now, and the refinery back at full -- at rate by -- hopefully by the end of next week.

There are always a few surprises in a turn-around. We did expect to find work and we did. As a result, the first phase of our turn around will cost about $62 million as opposed to our original forecast of about $54 million. Don't forget that we do expense our turn around costs as they are incurred, so when you look forward to our next two quarters, we'll be running not only fewer barrels but have increased expenses as well.

Talking about nitrogen fertilizers, I'll be brief because CVR Partners CEO Byron Kelly has already given you the details during his conference call earlier this week, I hope you folks listened in. The fertilizer segment had a net income of $37.5 million, on net sales of $77.2 million. And Ed will give you further details on these numbers as well.

Last week, CVR Partners announced a third quarter distribution of $0.572 per common unit payable on November 14th, to unit holders as of record of November the 7th. Those of you who listened to Byron's call heard that these results give us confidence in our original IPO guidance of $1.92 per unit, which we have reaffirmed. Now also recall that we own approximately 77% of the common units in CVR Partners, so therefore we will receive a proportional amount of distributions when they occur.

We continue it see stability in the ag markets. We're sold out of UAN in Q4 at an average net back above $330 a ton. Our booked first quarter 2012 sales are above $350 a ton, and again that's on impact basis. Ed, I'll turn the call over to you and then we'll talk about the Winnewood acquisition we announced last night.

Thank you, Jack, and good morning everybody. Just to recap some of the financial results. At the consolidated level was $109.3 million, or $1.25 per diluted share, versus $23.2 million, or $0.27 per diluted share in the third quarter of last year. Adjusted earnings per share were $1.57 versus $0.29 per diluted share last year.

We do believe and still -- that the adjusted earnings are a meaningful metric for analyzing the performance in our business, and will provide a better comparison to the market expectations. In the third quarter, these adjustments, in calculating adjusted earnings, included FIFO inventory accounting, unrealized gains or losses on the derivatives, turn around expenses and share based compensation.

The first being related to the increase or decrease in inventory values realized under first in, first out, or FIFO, inventory accounting. In the third quarter of 2011 we released an unfavorable FIFO impact of $15.8 million after tax or $0.18 per share.

Secondly, we had an adjustment to net income, on an unrealized derivative loss of $6 million after tax, or $0.07 per diluted share. At the end of the quarter, the Company had 2,000 crack spread contracts in place that we originated in the second quarter in support of turn around activities.

The third after tax adjustment to net income was turn around expenses of $4.8 million, or $0.07 per share. We had previously guided the parking the market to expect after tax turnaround costs of $1.8 million. But due to the advanced turn around preparation at the end of September, these additional costs fell into the third quarter.

Our final adjustment relates to share based composition, of which $1.5 million after tax, or $0.02 per share was the impact in the third quarter. In addition to these adjustments, our quarterly results were also impacted by our turn around event and related inventory management. In the quarter, we decided to limit sales of our current production over the last two weeks of September to support our rack business during the turn around in October. The deferment of the sales had a negative impact to our third quarter refining contribution margin equal to $8 million.

Having realized these sales our adjusted earnings per share would have increased by $0.09 per share on a pre tax basis. In support of what Jack said about our fertilizer business, we reported in the third quarter adjusted EBITDA of $43.3 million, and net income of $36.3 million, or $0.50 per common unit.

We also announced a distribution of $0.572 per common unit, payable on November 14, to unit holders on record as of November 7. Moving to capital expenditures. The third quarter 2011 totaled $25.7 million versus $6.2 million for the same period in 2010. The majority of the increase year over year is related to our UAN expansion at the nitrogen fertilizer plant in our Cushing tank farm project.

Our total 2011 capital spending forecast is expected to be $156 million, of which $36 million is related to the UAN expansion. Of the total, $108 million is budgeted for the petroleum business, which does include $17 for the Cushing, Oklahoma, tank farm. We do expect to placing crude oil into the new Cushing tanks at the end of the first quarter in 2012. The UAN expansion projects continues on schedule to be completed in the fourth quarter of 2012, and we have also initiated the construction of a 10,000 ton storage tank in Phillipsburg, Kansas, to expand our fertilizer distribution logistics.

We also expect to expense in 2011 approximately $62.2 million at the refinery in connection with the turn around undertaken last month. The overall cost for our turn around is up slightly versus our previous guidance, primarily as a result of necessary additional repairs identifiable only throughout turn around process.

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

All right. Thank you, Ed. And now let's talk about Winnewood. At the time we announced earnings last night, we also announced the acquisition of Gary-Williams Energy Corporation and its refinery in Winnewood, Oklahoma. And that was for a purchase price of $525 million plus working capital. We intend to close on this deal by year end. Posted on our website, you can find a presentation in the investor relations section giving additional information about this acquisition.

These are quality refining assets that represent a highly complementary acquisition for CVR Energy. The strategic financial and operational attributes of the transaction are compelling and will drive shareholder value both in the near term and for years to come. With 70,000 barrels a day of crude throughput capacity, the Winnewood refinery provides an immediate and meaningful increase in the scale and stability of our operations.

Once completed, CVR Energy will have more than 185,000 barrels a day of refining capacity at two major locations, serving Group Three and Pad Two. It will let us take even greater advantage of our growing crude oil gathering business in the region, as well as our crude storage position in Cushing. And we'll be able to benefit from the continuing production from domestic shale oils, and -- sorry, we're getting a little bit of feedback -- and we'll be able to benefit from production from domestic shale oils and Canadian crudes, which are forecast to be produced in more larger volumes.

We'll immediately realize increased operation cash flow, which is additive to the already impressive cash flow being generated at the Coffeyville refinery. The transaction is expected to be accretive to analyst estimates for EPS by more than 25% in 2012.

Diversification of our asset and customer bases should also reduce any tendency toward a single location discount that some investors have factored into their valuation of CVR Energy stock to date. We'll accomplish this transaction through a combination of existing cash and approximately $250 million in additional debt financing.

This acquisition makes operational sense. We will capitalize on CVR Energy's operational expertise, and the bench strength of our employee team. We believe there are opportunities at Winnewood for a number operational improvements, much as we saw when we acquired the Coffeyville refinery six years ago. We expect the combination of the businesses to result in expanded opportunities for our employees as well, to grow their careers, and result in greater retention of both Coffeyville and Winnewood's best employees.

In short, I'm excited about this acquisition and hope most shareholders will be as well. Acquiring Winnewood represents exactly what we have been saying we have been looking for. It's accretive to earnings and builds shareholder value. It's located in Group Three where the Brent TI spread is an advantage, and it's a high quality asset that complements our existing business. We look forward to implementing Gary-Williams into our family of companies.

Okay. With that, operator, we'll take questions.

Thank you. (Operator Instructions.)Thank you, our first question is from Jeff Dietert of Simmons. Please state your question.

Good morning.

Good morning, Jeff.

Congratulations on the acquisition. I know when you purchased Coffeyville, you implemented a hedging program, and there was significantly more debt associated with the Coffeyville acquisition in a different structure, but are there any plans to hedge a portion of this to lock in the economics?

There actually has been discussions, and we likely will place hedges. Not sure how much at this point. Certainly, this is attractive, and the current margins are attractive. but yes, the short answer is yes. We will hedge a portion of it. Not nearly as large or as long as what we had originally done to support the credit facilities, our debt facilities, when we acquired Coffeyville or Coffeyville resources at the time.

Got you. You also mentioned that the previous owner had spent a fair amount of capital on the assets. Could you talk about what they have done? I believe there's an upgrade to capacity and perhaps more than that, and do you see the opportunity for future investment in this asset?

All right, well, a couple of things about the asset. Gary-Williams spent well over $100 million over the last few years. They are compliant on both ultra low sulphur and ultra low gasoline -- ultra low sulphur gasoline. They completed an expansion, and they added a sour crude train. So now the plant, which used to be basically a sweet crude plant now can produce -- or it will consume probably 25% or 30% sour going forward.

We will look, using our current logistics to get the proper blends between both plants. We do have synergies between the plants. At Coffeyville, if you look at some of the prior investor information we put out, we have surplus capacity in our coker and our hydro treaters. So while Winnewood produces asphalt, if the asphalt market gets soft, we have the ability to coke that.

We do expect to find pretty much the same thing we did at Coffeyville. There will be some low hanging fruit, there will be some investments we can make, and these are small. We're not looking to do a major investment. Frankly, our five-year plan going forward estimates that the total CapEx over five years including sustaining and environmental is in the range of $180 million to $190 million. $30 million to $40 million a year. So we're not planning on any major expansion.

We'll parlay the excess capacity that we have at Coffeyville into exchanging feed stocks and blend stocks. The Winnewood plant does have a continuous catalytic reforming unit, not a semi-regen, which is a big advantage. They have a rose unit, which makes asphalt production easier, and we're able to accommodate different crudes and still make spec products. They've got a great management team in place, and again, kudos to the folks at Gary-Williams. They have really turned this into a really nice plant.

Very well, thank you, Jack, and congratulations.

Thank you.

Thank you. Our next question is from the line of Ed Westlake with Credit Suisse. Please state your question.

Good morning, Jack and Ed, and congratulations on finding a refinery on a multiple that's cheaper than CVI's on an trailing basis.

We said we were going to do it, and we did.

Can you talk a little bit about the process? Did you approach them? Did they approach you, were there other bidders involved in looking at the assets?

Well, as far as other bidders, this was not an auction process. It was a private sale. We believe there were other people in the process somewhere along the line, and don't know exactly who they were or what. But the fact of the matter is, I guess it was back in April we started looking at the asset seriously, and frankly, over the years, we have been talking to them on and off. If you go back to 2006, a deal was never consummated, but this has been a long time in coming. We have been very familiar with the asset, simply because of our looking at it for so long. Frankly, the actual deal was pretty much put to bed only about two weeks ago.

Yes. And just maybe on the specific details around the EBITDA. So you gave a 12 month trailing average of $261 million. Unless I'm doing the math wrong, on one of your slides, you sort of say about $193 million of EBIT going forward, you add back $40 million DD&A and you get sort of $233 million, and that's including the synergies on the forward crack. It seems like the last 12 months, relative to the next months, things would actually get better on forward cracks than they were historically, so is there anything else we're missing in terms of that slight decline in EBITDA that you're projecting?

Yes, there's a turnaround at Winnewood next year.

Right. Okay.

So you're going to lose 30 to 40 days of operation while the whole plant comes down, plus the costs.

Okay, and so when is that? And how long do you think?

I believe it's third quarter. Yes, third quarter, it's third quarter next year.

Great. Okay, thanks very much.

Our next question is from the line of Joe Citarrella with Goldman Sachs. Please state your question.

Thanks. Jack, from a high level, when Winnewood closes, and likely here to be incremental to your free cash flow generation, can you speak to how -- what your latest thoughts are around uses of free cash flow when it closes and kind of into 2012, and lest we get too far ahead of ourselves, is this it on the refinery acquisition side? Are you contemplating or looking at anything else potentially, and I guess that would also extend into logistics assets and how you're thinking about acquisitions there.

Number one, we want to absorb this one first. Okay? I've said it, and I'll say it again, we always look at everything that comes on the market. And we don't always buy. It took us six years to get the right one, we believe we got the right one, so I wouldn't say that we're in the market for another refinery right now. We -- I've said it before, what is the proper amount of cash to keep on our balance sheet. And I said that number was $150 million to $200 million of cash is what we would like to keep. Probably having the second refinery, I would might like another $50 million or so just to keep in our back pocket for the unexpected. Beyond that, uses of cash, I will be in discussions with our board of directors on the proper way to use the strong cash to the benefit of our shareholders.

Any thoughts on priority between buy-backs or dividends or how you thinking about things there?

No, I'll let Ed talk to our debt to capital ratio that we have always been targeting. Paying down a little debt, and obviously looking at dividends or stock buy backs is going to be something that's going to be part of the discussions with the board. But, Ed would you like to comment on our debt to cap?

Yes, really just, Joe, just to kind of follow up, this transaction really doesn't change our leverage scenario at all. We entered the quarter under one times, and this, I think this on a pro forma basis has us in that same spot as of September 30. As Jack said, we would like to pay down some debt, kind of lower that debt to capital. We're targeting something just south of 30% over the long-term, and we're still not there yet. But we target being there in 2012.

But again, we have a share-holder friendly board. We have been cautious on what we have been doing. We -- and I trust my board will do the right thing as we look forward what to do with the strong cash flow that we expect to have at CVR Energy.

That's very helpful. Thank you.

Thank you, our next question is from the line of Sam Margolin with Global Hunter Securities. Please state your question.

Hey guys, good morning.

Good morning, Sam.

I was just wondering if Winnewood comes with any gathering assets or any incremental EBITDA generation maybe on the midstream side? You guys had talked in your analyst day earlier this year about reaching a level of critical mass, and I think it was around $50 million in midstream EBITDA when you would start to think about monetizing those. Not that you need any balance sheet support, but just something else down the road, if there was any incremental additions with this?

Well, the Gary-Williams company does have a Louisiana crude purchase and resale operation which is somewhat like gathering, but it'sbasically, it's leased but it's immediately sold. We will roll that into our business portfolio. The location in southern Oklahoma is perfect for our gathering business. The further south we go into Oklahoma, the more difficult it was to get the crude to Coffeyville. Now we can expand our gathering footprint even further, much further, and utilize those facilities there, and there is even an opportunity on our fertilizer business to use our Winnewood location to expand the footprint of our fertilizer marketing directly out of Winnewood.

Yes, that's the other thing I was going to ask. Does it cut into your third party? Is there a coker there? Does it cut into your third party coke purchases and keep it all internal?

No. I mean, there's no coker at Winnewood. They're an asphalt refinery, and they make about -- it's in our presentation, roughly about 10% heavy oils as asphalts.

Great. And just lastly, still no plans for retail expansion, right? That's --

Not right now, retail very often becomes a necessary outlet for a refinery in an area where other opportunities reside. the interesting thing about this acquisition is, our customer base is very much different. Our largest customers are not the largest customers from Gary-Williams refining. So we're -- it's a very nice situation in that we'll have a footprint, largely in the area of Oklahoma City and Winnewood, that does not cause any issues with the customer base that we have up at Coffeyville and north.

Okay, great, thanks a lot, guys, and enjoy the weekend.

Thank you.

(Operator Instructions.) Our next question is from the line of Chi Chow with Macquarie Capital. Please go ahead with your question.

Great, thanks. Gentlemen, good morning.

Good morning.

Just a couple of more questions on Winnewood. Maybe Ed was referring to this earlier. But is there going to be a step up in DD&A from what you show on your slides?

Yes. Yes, we'll be able to step up basis and DD&A will go up.

Any sort of level you're thinking about there?

Yes, kind of -- trying to think of the best way to answer this, Chi. It's definitely not in the presentation, I mean it -- but we're a private Company, it will change a little bit. I think Jack talked about a capital spend that equates to about $30 million to $40 million a year, so typically you see your sustaining maintenance capital in support of your D&A. Just kind of give you a sense of the range. I mean it could probably easily double.

And again, we're trying to be somewhat cautious until we actually close on this facility, and we own it. There will be significantly more information coming out as we get to closing.

Okay, and along those lines, can you give us any sort of idea on operating expenses at the plant and what we can expect?

The operating expenses per barrel are actually slightly lower than Coffeyville. But then again, they're less complex. If you recall, Coffeyville's complexity is about 12.9 and this is 9.3. On a complexity barrel it's slightly higher because have higher economy of scale at the Coffeyville footprint. But overall, it's in the same range, sub $4 a barrel.

Okay, great. You mentioned the turnaround at the plant, third quarter of next year, do you have an estimated cost?

The initial indication is around $60 million. But again, this is -- once we actually close on the facility, we will take the turn around team that we have at Coffeyville and combine the two, and take a closer look and probably have something better in the first quarter.

Okay, thanks. Jack, that was $60 million, six zero, you said?

Six zero.

Got it. Okay. And then finally, you talked about potential UAN opportunities with the plant in place. Can you explain that further?

Sure, it's logistics. If you recall when we took UAN public, one of the things that Byron and his team are currently working on is expanding the amount of storage off-site from the Coffeyville nitrogen fertilizer facility. And there is a price change. If you noticed, I mentioned prices earlier. Fourth quarter, we're at $330 million, our current book, and the first quarter is $350 million. Actually, much earlier in the year, in June, when the prices are at their lowest, and when the fertilizer producers take fill orders, you can end up with $50, $60, $70 price differentials, or more, between what you can sell in June and what you could realize if you were able to hold those tons until the actual application season.

By looking at the storage there or building new storage, we can expand CVR Partners' off-site storage of fill UAN. So they can capture the margin there. That's just part of the business plan at Partners, but actually having a location that is rail accessible. And again, when we own it, having control of the facility makes it an interesting opportunity. Not huge, but just another thing. We chase the pennies and nickels and eventually put them together and make dollars.

Those are important. Okay, thanks, Jack, appreciate it.

Thank you.

Thank you, our next question is from the line of Mike Beall of Davenport. Please go ahead with your question.

Good morning. When you look at the Winnewood on an long-term basis in terms of what you were willing to pay, and you did provide some pro forma data, but I was just curious as to -- and maybe we should talk in terms of WTI Brent spread. What are your sort of long-term assumptions about, say, that spread that you incorporated into your decision making in buying this?

Okay, if you were to look mid-cycle at Winnewood, it would remain profitable and low cash at mid-cycle cracks. Now if you -- and if you follow, cracks has expanded almost dollar for dollar with the Brent WTI spread. So if you were to take -- if you were to say, and I've said this before, and this is one man's view, this is my view of where I think Brent and WTI will equilibrate, it will equilibrate to the cost to transport mid continent shale oils and other oils to the Gulf Coast, and I believe that will be somewhere between $3.50 and $4 a barrel. So if you were to simply add $4 a barrel to mid-cycle run rates, this refinery runs approximately 25 million barrels a year. So a couple of assumptions. If the crack spread goes to my $4 Brent TI, $4 times 25 million is $100 million of incremental EBITDA over historical mid-cycle cracks. Is that helpful?

Yes, and you say at mid-cycle, this particular operation was break-even? Did I hear you say that?

Oh, no, it was profitable in float cash.

Yes. Okay, thank you.

Thanks.

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

Again, I would like to thank everyone for joining us today to discuss our earnings call and the acquisition of Gary-Williams. Thank you.

Thank you all.

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