CVR Energy Inc (CVI) 2012 Q2 法說會逐字稿

Greetings and welcome to the CVR Energy second quarter 2012 conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to introduce your host Jay Finks, Director of Finance. Thank you, Mr. Finks. You may begin.

Thank you, Latonya. Good afternoon. We very much appreciate you joining us this afternoon for our CVR Energy second quarter 2012 earnings call. With me are Jack Lipinski, our Chief Executive Officer, Frank Pici, our Chief Financial Officer, and Stan Riemann, our Chief Operating Officer.

Prior to discussing our 2012 second quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under Federal securities law. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, and expects and similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures include a reconciliation to the most directly comparable GAAP financial measures are included in our 2012 second quarter earnings release that was filed with the SEC yesterday after the close of the market. With that said I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

Thank you, Jay. Good afternoon, everyone, and thanks for joining our second quarter call. First off, I'll provide a brief recap of our financial results and then I'll talk a little bit about our operational results. Frank will then provide more detailed color around the numbers we reported yesterday and then I'll finish as always with some closing remarks.

For the second quarter, consolidated net income was $154.7 million or $1.75 per fully diluted share. On an adjusted basis, adjusted net income was $223.1 million or $2.52 per fully diluted shares. Like prior quarters, we adjust net income for the impact of FIFO, first in, first out accounting, major turnaround expenses, the impact of unrealized derivative gains or losses, and other one-time expenses. Frank will discuss more broadly the adjustments to net income in his prepared remarks.

Some of the primary drivers of our earnings were strong crack spreads, our access to price-advantage crudes, high operating throughputs at our refineries, and strong business fundamentals that drive our fertilizer segment. In the second quarter, the NYMEX 2-1-1 crack spread averaged $29.27 per barrel, with the Brent-WTI spread averaging just over $15 a barrel for the quarter. As a result, our overall realized refining margin, adjusted for FIFO, came in at $27.07 per barrel as compared to $25.90 per barrel in the same quarter last year.

Let me talk a little bit about our Petroleum business. Within this segment, we processed more than 190,000 barrels a day of crude in the second quarter. That was just a little over 121,000 barrels a day at Coffeyville and just a little over 69,000 barrels a day at Wynnewood. On our last call I had provided some estimates for throughputs of the quarter, and I'm really happy to report that we came in above the high end of those estimates at Coffeyville and just below the top mark of those numbers at Wynnewood.

Actually during the month of June, Coffeyville set a new record by processing 125,900 barrels a day accrued to the month. We attribute these high processing rates of Coffeyville to the completion of the successful turnaround in March and the continued efforts on the part of our operating and technical staff.

Looking ahead to the third quarter, we're currently running about 124,000 barrels a day at Coffeyville and just over 70,000 barrels a day at Wynnewood. Aside from a planned turnaround, which is going to begin in late September at Wynnewood, we have no other major maintenance expected for the quarter.

By the way, on that point we would expect to start bringing Wynnewood down for its turnaround during the last week of September. We estimate the total crude throughputs for the plants to be in the same ranges I had estimated last quarter, range of 179,000 barrels a day to 188,000 barrels a day in total. That would be about 113,000 to 118,000 at Coffeyville and 66,000 to 70,000 at Wynnewood.

I'd like to take the time to remind you that during the turnaround at Wynnewood, we will be down for approximately 45 days. Our new estimate for the time for this turnaround is approximately 45 days and we expect to incur approximately $100 million in expense. This is a higher number than we had estimated in the past, but because we've been within inside the tent now for about six months, we see opportunity to do additional maintenance work at the refinery while it's down, which will help us with reliability in throughputs, as we go forward over the next four years.

Like most midcontinent refiners, we continue to benefit from attractively priced crudes. You all know that we have access to Canadian crudes through our Keystone and Spearhead connections. With the acquisition of Gary-Williams Energy and the Wynnewood refinery, we actually picked up pipeline space, about 40,000 barrels a day that now gives us access to the Permian Basin and basically Midland WTI and WTS directly.

It's been an interesting run this past quarter as Midland crudes became discounted. We were able to take advantage of that. And using our Spearhead line, we were able to bring in price-advantaged crudes into Wynnewood. It's part of all the overall synergies we've been working toward. We're pretty happy with where we're heading.

On July 10 of this year, CVR Energy and the union representing approximately 65% of our employees at Wynnewood agreed to a new three-year collective bargaining agreement, which is now set to expire in June of 2015. We continue to grow our gathering system. During the quarter, we gathered approximately 46,000 barrels a day, and that's a year-over-year increase of about 30%.

Talking little bit about fertilizer. Last week, CVR Partners declared a second quarter distribution of $0.60 per common unit. Recall that we own approximately 70% of all the common units, therefore CVR Energy will receive a proportional amount of that distribution. We continue to see good opportunities and demand for nitrogen fertilizer. The recent increases in corn price brought about by this year's drought condition have created an environment that should support strong fertilizer demand going forward.

At this point, let me turn the call over to Frank and let him talk about the financials. Then I'll come back with some closing remarks and then we'll take your questions. Frank?

Thanks, Jack, and thanks, everybody, for the call this afternoon.

A few things regarding net income. As Jack mentioned, our net income was almost $155 million or $1.75 per diluted share. If you convert that to an adjusted net income -- and I'll give you the main components -- that number changes to $223 million or $2.52 a share and that number compares to $1.44 in the second quarter 2011.

The main adjustments to get to that adjusted net income were we added back an unfavorable FIFO adjustment, FIFO inventory adjustment, of almost $64 million or $0.72 a share. These are all after-tax numbers, by the way. We had an unrealized hedging gain that we backed out of, a little over $28 million or $0.32 a share. We had a share-based compensation adjustment, accrual adjustment, of about $29 million that we've added back or $0.32 a share and a few other smaller items. But those are the primary items to get you from our reported net income to the adjusted net income numbers, and that, I think, is much more representative on an adjusted basis for comparability purposes.

If you take a look at a couple of our key performance indicators, our realized refining margin, adjusted for FIFO again, for the second quarter was $27.07. That's for our combined refining operations, both plants. If you look at it on a per refinery basis, our Wynnewood margin, again excluding FIFO, was $25.23 a barrel and at Coffeyville, that number was $28.02 a barrel. Again, very strong refining margins.

Looking at direct operating expenses, at Wynnewood we showed a $4.30 per barrel direct operating expense, and if you exclude what is now some minor turnaround expenses, that number drops to $4.06.

At the Coffeyville refinery, the direct operating expenses were little over $4.00 -- $4.03 a barrel. Excluding turnaround, it drops to about $3.94 a barrel. Looking at corporate expenses, our G&A for the quarter was $72 million versus $18 million in the second quarter of '11. The two main components of that increase were share-based compensation again which increased subsequent to our ownership change with the Icahn Group and also some defense-related costs that were accrued in the quarter. Those are primary items for the increase.

We normally make a statement about our hedging. Our realized hedging losses for the quarter were $8.1 million. If you look at that on a per barrel throughput basis, that's about $0.44 a barrel of decreased realization. Going forward for the second half of this year, we've got about 8 million barrels hedged at an average crack spread of $22.44 a barrel. In 2013, that number drops further, a little over 5.5 million barrels hedged at $23.96 a barrel, so our hedging positions are much lower as we go through time at this point.

If we take a minute and talk about CVR Partners, they continue to perform very well. They had adjusted EBITDA of $44 million, very close to the same quarter from last year. They also announced a $0.60 distribution per unit to be paid August 14, and they reaffirmed their annual distribution guidance of $1.65 to $1.85 per unit. That number includes the negative impact of about $0.25 because they'll have a turnaround in the fourth quarter as well, so that's (technical difficulties) factored in.

Taking a look at capital spending for year-to-date 2012, we spent a total of $105.2 million. A little over $62 million of that is in the petroleum segment including $46.4 million for sustaining maintenance capital and $16 million for discretionary projects, primarily related to the Cushing tank farm expansion that was completed in the first quarter. In the fertilizer segment, the CapEx number to date is a little over $39 million, with the majority of that being about $37.6 million related to the UAN expansion there.

In looking at the full year for capital expenditures, we're still looking at a total of somewhere between $300 million and $315 million, including $195 million to $200 million in the petroleum segment. That's basically split evenly between the Coffeyville and Wynnewood refineries, and another $30 million that includes for other projects, including the Cushing expansion I mentioned a minute ago. On the fertilizer segment, we'd expect that CapEx to be in the range of $100 million to $110 million, again, with the UAN expansion being the primary driver for that number.

I guess the last thing I'd mention would be the cash and debt position of the Company and again, it continues to be very strong. We had a total cash position, consolidated cash, at the end of the second quarter of $693 million. That was up from $388 million at year-end 2011. Our debt levels remained about flat between those two periods, at about $852 million. So you can see how our net debt position went down. Our liquidity continues to be very strong, increasing as we've gone through the year.

With that, Jack, I'll turn it back to you.

Thank you, Frank.

As you can imagine, we're pretty happy with our second quarter results. We continue to see strong crack spreads going into this quarter. Our operations continue at almost record levels at both plants, so we're looking forward to a good third quarter as well.

A couple of other items. On July 26, the Company announced the end of the 60-day sale process which actually ended on July 23, whereby Icahn and its affiliates were required under the agreement to prevent a tender for the Company to go through a sale process. That sale process concluded without a bona fide offer. As Carl had indicated, his intent is to continue to run the Company.

We've had a pretty good run here. We're very happy with Wynnewood. We still see a lot of low hanging fruit. There's a very high expectation in the Company that there are going to be bigger and better things as we fully integrate Wynnewood into our system.

As always, all our achievements couldn't have been done without the hard work and dedication of all of our employees. And I'd like to take just a special word of thanks to Frank. Frank is going to be leaving us here. He has done a remarkable job for us. I thank him, and so does everybody else on the team and wish him the best. Susan Ball will be coming on as our Chief Financial Officer when Frank leaves. Frank, thank you very much.

Operator, with that, I'll take any questions you have.

(Operator Instructions)

Jeff Dietert, Simmons.

It's Jeff Dietert with Simmons & Company. Jack, congratulations on a very strong operating quarter. I think it's especially impressive given the distractions that have gone on in the first half of the year, but really outstanding performance. I know you've grown the business and expanded Coffeyville over time, and growth has been a big piece of your strategy, in addition to strong operations. And I just wanted to get a feel for where you are now as far as looking forward. Obvious focus on operations, but what are your thoughts on capital projects as well?

We're not going to get out over our skis on big capital projects. I'll give you some forward view, and this is Jack's view of the world. On a go-forward basis, you should expect the Company to have, across both refineries and its transportation and gathering businesses, somewhere in the range of $75 million a year or so of sustaining capital -- maintenance capital. We will have something because of Tier 3 gasoline, benzene reduction, all the other environmental -- something on the order of $40 million or $50 million a year of environmental capital. Round numbers, we're looking $125 million, $135 million a year of fixed capital.

Beyond that, every year at Coffeyville we have found opportunity upon opportunity to do a high rate of return projects, and I'm talking thresholds of 30% or 35% IRRs. We're starting to see that at Wynnewood as well. One of the reasons we increased the amount of cash allocated to the turnaround was -- we saw a lot of opportunities to do maintenance work, which will actually improve operations.

At Wynnewood, one of our projects that we will look at going forward on is, when we acquired Wynnewood, it had a hydrocracker, which was being operated as a hydrotreater. We do need additional hydrogen and some additional capital to convert the unit back to its original configuration. And we would expect that project to be somewhere in the range of $45 million to $50 million, all in. But it has an exceptional rate of return, so you might see us moving ahead with doing something like that.

But you're not going to see us doing major CapEx like we did at Coffeyville. If you take a look over the last seven years, between the capital projects and sustaining capital and the like, we've put in well over $700 million into Coffeyville, and it's showing up in its results. We don't expect anything like that at Wynnewood.

I don't know if that answers your question but -- .

Yes, that's great, Jack. Could you talk about your hedging strategy? Are you anticipating putting additional hedges on, or what is your strategy there?

Right now, we do look at putting hedges on opportunistically. We put a larger-than-usual number of hedges on with the Wynnewood acquisition because, at the time, the Board did want us to put those hedges on. Right now, we're seeing somewhat of a unique phenomena where the cracks keep rolling up to you, but they're severely backwardated. The cracks today, NYMEX 2-1-1 is approaching $32 on top of a very substantial group basis. In the last few days, because of refinery problems in Chicago, and I guess now at Tulsa, we're starting to see pretty rapid changes in that basis to our favor.

When you have these kind of severely backwardated situations, we're very cautious about hedging. It's been rolling up to us, and we do a one-off. There's no set strategy, but if we see an aberration in the market where we think we can lock something in, we'll obviously go ahead and do it.

Thanks for your comments, Jack.

Thank you, Jeff.

Chi Chow, Macquarie Bank.

Chi, how are you? I'm having trouble hearing you, Chi.

That any better?

Much better.

Sorry about that. You talked a little bit about Wynnewood on the timing of the hydrocracker conversion. Can you say anything about the timing of that potential project? And also, what sort of other operational crude slate changes you might have made at the plant, versus how the prior owners operated it?

What we're looking at is, this is the hydrocracker project. Obviously, it needs some permitting, but it would probably be like a 2014-type project. Take a little while to permit, and then build out the plant. It doesn't require a lot, a big hydrogen plant, rather small. But there's some work, so over the next 18 months to two years, we expect to have that in.

We're doing many, many changes at the plant. This plant did not have a big technical staff. It was fairly thinly staffed, and they did a remarkable job with what they had. And what we're finding is, by bringing in our people from Coffeyville and other areas just applying the technical expertise, we're overturning rocks and just finding money everywhere we turn around. You can see it in its crude rate. We bought this facility believing we would run it at 63,000 barrels a day, and if we were lucky, we'd get to 66,000, and here we are over 70,000 already. That's just application of technical expertise.

As far as the crudes, Wynnewood -- because of its prior owners, and really a lack of ability to bring Canadian crudes or even Bakken crudes directly to the plant, [some] was pretty limited to what it could run. What we're doing right now is we have about 18,000 barrels a day of shipper space on Spearhead. We have 10,000 of contract space, but right now about 18,000 shipper space. And we're bringing Canadian crudes, LSBs, and other crudes down to Wynnewood, along with bringing in the Permian Basin crudes, which has taken Wynnewood from a plant that typically delivered its crude, even though some of it was sour at $0.40 to $0.50 over WTI, to something like $2 under WTI today.

Now, the Midland crudes have tightened recently, but what we look forward to is having a permanent discount there just by the way we're buying crudes and accessing crudes. Don't forget, we have 4 million barrels of storage in Cushing. We can access all sorts of Canadian grades. We can swing crudes between the refineries. Basically what we've been able to do is just reduce the cost of crude acquisition without changing the quality very much as an input to Wynnewood.

That's great. Thanks for all that detail. It certainly seems like things are working well at the plant.

On the Canadian crudes, I think you mentioned on the last call that you've seen Gulf Coast refiners starting to compete for the Canadian heavy barrels at Cushing. Is that still the case, and has that activity from the Gulf Coast players ramped up at all?

All we know now is, when we were talking last time, it's basically that the only thing that's going down Seaway are light crudes right now. There was a bunch of heavy crude put into Cushing with the anticipation it would come out, and then Seaway came up light, not heavy. So, I understand they're working on that right now, and over time, and with the Seaway expansion, I would expect to see more Canadian finding its way down that way.

Okay. Great. And then one final question on your expenses. Maybe it's a question for you, Frank. Any further costs here in third quarter associated with the proxy matters or the Wynnewood acquisition that flow through in 2Q?

There may be a little bit of cost on the Wynnewood acquisition, but there shouldn't be anything of any significance on the proxy matter at this point.

In Q2, or flowing into Q3?

Flowing into Q3, right? Yes.

Okay. Great. Appreciate it.

(Operator Instructions)

Ed Westlake, Credit Suisse.

Actually, this is [Rick Ashedvani]. Just a quick question on your cash flow that you're generating. If you're not really going to be putting a lot into your CapEx projects to a large extent, what do you exactly plan to do with all that extra cash?

Now that the 60-day sale period is over, and it's just very recent we've been going through this. This is going to be a pointed discussion with our new shareholders.

Okay. And I guess the same discussion will be about how to deal with the minority shareholders also?

We're a fully public company. Obviously, if there was a distribution today, it'd have to be pro rata.

Okay. Would the discussion of looking into converting your assets into an MLP structure, is that something you could make a comment on?

We saw that Northern Tier went out and Calumet had been out there before, but it's not escaped us since UAN or CVR Partners was the first true variable distribution MLP that had a GP with no IDRs. We were the guys who invented this one. Obviously, if it made some sense, we would take a look at it. We're very interested in seeing where NTR falls out though; they're trading at a fairly high yield. But money talks, so it's not saying we're going to do it, but certainly we'd be foolish not to look at it.

Okay, thank you.

Thanks.

(Operator Instructions)

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

All right. Again, thank you everyone for joining us. It's the continuation of the CVR Energy saga. It's a little over seven years since we've been associated with the Company and it's kept us interested, and still keeps us interested. It's a great asset and great set of people to work with, and a great set of investors. I thank you all for joining us, and you have a good day. Thank you.

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