CVR Energy Inc (CVI) 2012 Q3 法說會逐字稿

Greetings, and welcome to the CVR Energy third-quarter 2012 conference call. At this time all participants are in a listen-only mode. A 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 you host, Jay Finks, Director of Finance of CVR Energy, Inc. Thank you, Mr. Finks, you may begin.

Thank you, Doug. Good afternoon. We very much appreciate you joining us this afternoon for our CVR Energy third-quarter 2012 earnings call. With me are Jack Lipinski, our Chief Executive Officer; Susan Ball, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.

Prior to discussing our 2012 third quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. 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, 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, including reconciliation to the most directly-comparable GAAP financial measures are included in our 2012 third-quarter earnings release that we filed with the SEC yesterday after the close of the market.

Without that said, I'll turn the call back over to Jack Lipinski, our Chief Executive Officer. Jack?

Thanks, Jay. And good afternoon, everyone, and thanks for joining our third-quarter 2012 earnings call. First, I'll provide a brief recap of the third quarter financial results. And then talk a little bit about operations. Susan will then provide more detailed color around the numbers reported yesterday. And I'll finish with some closing remarks. On October 1, we filed a registration statement with the SEC that anticipates placing our refineries and logistics assets into a publicly-traded MLP. As a result of this filing, I will not discuss any issues surrounding the potential IPO today.

For the third quarter, consolidated net income was $208.99 million, or $2.41 per diluted share. On an adjusted basis, adjusted net income was $260.2 million, or $3 per fully diluted share. Like prior quarters, we adjust net income for the impact of FIFO, major turnaround expenses, the impact of unrealized gains or losses, and other one-time expenses. Susan will discuss these more broadly in her remarks.

Some of the primary drivers of our earnings this quarter were strong crack spreads, our access to price-advantaged crude, high operating throughputs, and strong business fundamentals that drive our fertilizer segment. In the third quarter, the NYMEX 2-1-1 crack spread averaged $32.78 a barrel. With the Brent WTI spread averaging $17.58 over the quarter. During the quarter we realized strong product basis. The PADD II Group 3 product basis was a positive $3.87 per barrel on a 2-1-1 basis, as compared to $1.25 in the same quarter last year. As a result, our overall realized refining margin, adjusted for FIFO, remained strong at $33.44 a barrel, as compared to $27.55 a barrel in the same quarter last year.

Let me talk a little bit about our business segments. First I will start with petroleum. Within this segment, we ran more than 190,000 barrels a day of crude in the third quarter. We ran 124,600 barrels a day at Coffeyville. And 67,900 barrels a day at Wynnewood. In our last call, I provided throughput estimates and I'm happy to report that actual crude throughputs were above the high end of those estimates at Coffeyville, and just below the top market at Wynnewood.

Looking forward to the fourth quarter, we estimate total throughput for the plants to be in the range of 148,000 to 158,000 barrels a day for the fourth quarter. We expect Coffeyville to run between 115,000 and 120,000 barrels a day. And Wynnewood to run between 33,000 and 38,000 barrels a day. The decrease in Wynnewood's crude throughput is a direct result of the major turnaround that we are in right now.

Like most mid-continent refiners, we continue to benefit from attractively priced crudes. Our consumed crude oil discount to WTI for the third quarter was $4.38 a barrel, as compared to $2.57 a barrel in the third quarter of 2011. Our gathering system continues to perform admirably. We gathered 47,500 barrels a day in the quarter. On August 31, we entered into an amended agreement with Vitol Inc. Vitol now provides crude oil intermediation for both plants. That being Wynnewood and Coffeyville. The term of this agreement was extended to December 31,2014, and will automatically renew for successive one-year terms unless either party provides notice of non-renewal at least 180 days prior to expiration.

For the third quarter, we had approximately 4.9 million barrels hedged. Which was comprised of gasoline cracks, heating oil cracks, and 2-1-1 hedges. We had 1.5 million barrels of gasoline cracks hedged at an average price of $16.79 a barrel. 1.4 million barrels of heating oil cracks hedged at an average price of $28.02. And 2 million barrels of 2-1-1 cracks hedged at $25.79 per barrel. Our realized hedge losses for the quarter on these hedges were $53.2 million, as compared to a minimal gain a year ago.

I would like to talk a little bit about our turnaround out Wynnewood. We began our turnaround in late September and originally estimated about 45 days to complete. We now estimate 50 to 55 days to complete. The delay was largely due to the loss of steam at the plant due to a boiler explosion which occurred on September 28. As you know, there were two fatalities in this incident. And we're working closely with OSHA to investigate this incident and make sure it does not happen again. And we continue to do our own investigations, as well. We expect our overall turnaround expenses to be somewhere between $100 million and $105 million. We had given guidance of about $100 million before. Because of the delay in bringing the plant up, we are just experiencing some additional cost.

Let me talk a little bit about nitrogen fertilizer. You might have listened to the CVR Partners call earlier this morning where Byron Kelley provided comments. On October 26 CVR Partners declared a third-quarter distribution of $0.496 per common unit. Please recall that CVR Energy owns approximately 70% of the common units of CVR Partners. Therefore, CVR Energy receives a proportional amount of distributions from CVR Partners.

The third-quarter adjusted EBITDA for Partners was $39 million, as compared to $43.4 million in the prior year. We also do a biannual turnaround at the fertilizer plant. We brought our plant down for scheduled turnaround on October 3 to perform maintenance activities to maximize operational efficiency of the plant. And in this year's turnaround, we also installed critical equipment and tie-ins related to our UAN plant expansion. The UAN expansion continues and remains on target for completion by the start of 2013. We continue to see good opportunities in demand for nitrogen fertilizer. The recent increases in corn price and this year's drought conditions have created an environment that should support strong fertilizer demand moving forward.

At this point I would like to turn the call over to Susan to talk about the financials. Susan?

Thank you, Jack. And good afternoon, everyone. At the consolidated level, our net income was $208.9 million in the third quarter of 2012, or $2.41 per diluted share, versus $109.3 million, or $1.25 per diluted share, in the third quarter of last year. Adjusted net income per share was $3, as compared to $1.57 per diluted share last year. And, as we've previously mentioned on calls, we do view the adjusted net income as a meaningful metric for analyzing our performance, as it eliminates the impact of unusual accounting impacts inherent in our business, and other unique activities and events. It provides more transparency for a better comparison to market expectations.

In the third quarter our adjustments in calculating adjusted net income were the FIFO inventory accounting, unrealized gains or losses on derivatives, turnaround expenses, share-based compensation and integration expenses associated with our acquisition of the Wynnewood refinery. Our first adjustment is related to the increase or decrease in our inventory values that are realized under the first-in first-out, or FIFO, inventory accounting method. In the third quarter 2012, we realized a favorable FIFO impact of $30.9 million, adjusted for tax, or $0.36 per share. Secondly, we had an adjustment to net income on our unrealized derivative loss of $70.1 million, again after-tax, or $0.81 per diluted share. We also adjusted for the turnaround expenses, net of tax, of approximately $6.9 million, or $0.08 per share. Other adjustments include share-based compensation expense of $4 million, again adjusted for tax, or $0.05 per share. And, finally, an adjustment associated with the integration efforts of the Wynnewood refinery of $1.2 million after-tax, or $0.01 per share.

The third quarter was a record quarter for our petroleum segment. Which did post a realized refining margin of $33.44 per crude oil throughput barrel. Which is adjusted for the favorable FIFO impact, as compared to $27.55 per barrel in the third quarter of 2011. Which also is adjusted for an unfavorable FIFO impact. Coffeyville's refining margin adjusted for FIFO impact was $33.56 per barrel in the third quarter of 2012, as compared to $27.54 per barrel for the same period a year ago. Wynnewood's adjusted refining margin was $33.07 per barrel in the third quarter of this year.

Direct operating expenses, excluding turnaround expenses, per barrel of crude oil throughput for the petroleum segment was $4.39 in the third quarter of 2012, as compared to $4.48 in the prior year. On a refinery-by-refinery basis, Coffeyville's adjusted direct operating expenses was $4.13 in the third quarter of 2012, as compared to $4.49 in the same period a year ago. Wynnewood's direct operating expenses, excluding the turnaround expense, per barrel of crude oil throughput was $4.81 for the 2012 third quarter.

Turning to the fertilizer segment. As Jack previously mentioned, our fertilizer business in the third quarter reported adjusted EBITDA of $39 million. And also announced distribution of $0.496 per common unit payable on November 14 to unit holders of record on November 7. Capital expenditures for the third quarter 2012 totaled $39.9 million, versus $25.7 million for the same period in 2011. The majority of the increase year over year is related to the UAN expansion at our nitrogen fertilizer facility. Our total 2012 capital spending forecast is estimated to be $250 million to $270 million, of which $160 million to $165 million is estimated for the petroleum business, and $90 million to $105 million is estimated for the fertilizer business.

We ended the third quarter with cash and cash equivalents of $988 million, or $808 million excluding $180 million at the CVR Partners entity. Under our asset-backed credit facility, we have $373 million availability, which excludes $27 million of issued standby letters of credit. On October 23, we closed on the offering of $500 million, 6.5% senior secured notes due 2022. We used the proceeds of the offering to refinance the outstanding first lien senior secured notes due 2015, which extended our debt maturity profile and lowered our weighted average interest rate. We retired $323 million or 72.2% of the aggregate principal amount of our 2015 notes on October 23. The remaining aggregate principal amount of $124.1 million will be redeemed on November 23, 2012. We obviously continue to have a very strong balance sheet.

With that, I will turn it over to Jack.

Okay, thank you, Susan. Just looking a little bit at the fourth quarter, we continue to see very strong NYMEX crack spreads, due in large part to the wide Brent-WTI spread. Seasonally, as you would expect, in the group we're starting to see weakening of our product basis, it's not unexpected, it happens every year. But what we're seeing also is a widening of crude differentials. We're seeing heavy Canadians trade out in the high 20s to low 30s below WTI. We're seeing Midland WTI trade currently at a little over $6 under Cushing WTI and just recall, we have 40,000 barrels a day of capacity out of the Permian Basin, so that's a direct advantage to Wynnewood. We have 25,000 barrels a day of space on the Keystone pipeline right now. We have another contracted space of 10,000 barrels a day on Spearhead and 8,000 barrels a day of shipper status. So, what we're seeing is widening differentials of Canadian grades. And we're using that to our advantage.

We're really proud of our results for this quarter. These achievements cannot have been obtained without the help of all our employees, their dedication and hard work. And we want to congratulate them, as well.

And with that, operator, I'll turn it over for questions.

(Operator Instructions)

Jeff Dietert, Simmons.

Congratulations on your record quarter. As you mentioned, there our a number of differentials that blown out. And I was curious if you could give us an update on just how much Canadian heavy you can use? I know you've got almost 43,000 barrels a day of pipeline capacity out of Canada. Can you use all that for Canadian heavy? Or is some of that Canadian heavy and some of it other Canadian crudes?

What we generally do is we use the entirety of our Keystone 25,000 barrels a day capacity for Canadian heavy. And then what we do is we use our Spearhead capacity for light sours, LSP, light sour blend, [mydales], you name any of the other grades that are out there. What we find is that about 25,000 barrels a day at Coffeyville gives us the right mix of heavy gas oil production to balance our cracker and everything else. So we typically target about 25,000. We could probably run a little more, but what we find is we could actually run more barrels of the lighter sours. And economically on an incremental basis they actually generate more money for us.

And you've got the flexibility to take some of the light sours on to Wynnewood now, correct?

That is correct. We balance are system. Rather than just running as we did just around Coffeyville, we take great pains to optimize our system about which grades go where, what gathered crude goes where. And blending everything up to optimize both plants.

So, yes, one of the home runs of Wynnewood was the prior owners never really had direct access to Canadian crudes. Any Canadian that came in was purchased at Cushing. So, a lot of the profit was taken out of it. We direct Canadian crude, particularly something like an LSB or the like, to Wynnewood directly. And we balance between the plants. We've actually moved feedstocks back and forth between the plants. And both plants have been running at very high utilization levels.

Got you. And I believe the transport rate on the basin pipeline from the Permian is about $0.50. So you're keeping the majority of the advantage when Midland blows out the way it is. $6.50 for WTI Midland, almost $7 for WTS. And you are capturing the majority of that differential. Is that correct?

Don't forget, this goes into Cushing and then back to the plant. And the round number is roughly $1, all-in. Something just at or below $1 all-in delivered cost. And one of the things about the way we operate our pipelines is, remember, none of the Spearhead barrels or Keystone barrels come to the plants directly. They go to Cushing. And we maintain 4 million barrels of storage in Cushing. So, even while Wynnewood was down for turnaround, we continued to buy Permian Basin crude and just store it because we had capacity in our storage at Cushing.

Got you. Did you ever think you would make more money in a quarter than you made annually from 2005 to 2010?

Look, I've been in this business a lot of years. I can remember making $35 million from my system back in the middle '90s, and that was a 500,000-barrel system. There's people talk about the golden age being a couple years ago. I'm not sure if that is correct anymore. I think we're in the golden age.

Thanks, Jack.

(Operator Instructions)

Chi Chow Macquarie.

You've got this nice problem of this mounting pile of cash. So, any latest thoughts on the use of the cash balance going forward?

No. Right now that's obviously a subject of discussion with the board at CVR Energy. But our focus has been, obviously, to operate the Company as best we can. We've been spending a fair bit of time, as I mentioned, filing our prospectus. And I'm not going to comment about that. But our direction has been to get ourselves ready for the next level. I'm certain at some point this will come up for discussion at the board of CVR Energy.

Right. Has the board talked about any target yield at the CVI level on the dividend?

No, not yet. Again, we will be having board meetings here shortly. I'm not sure if that will be a subject of discussion or not. But we do have a fair bit of cash up at the parent.

Yes, you do. Okay. So, on the crude gathering system, what is the ultimate volume upside, do you think, on your system there?

We're at about just shy of 50,000 barrels a day. Within reason we could probably go up another 15,000 or 20,000 barrels a day before we start overreaching. Unless we get to the point where we start building our own logistics systems. And that's not out of the question. Don't forget, the Mississippian line just sits to the west of us. Everywhere we turn around, there is more crude picking up. Wynnewood has the ability -- we actually started a new division down at Wynnewood with trucks. And we're putting in a new terminal down there, a maintenance facility. So we're spreading our hub even wider.

The nice thing about having the gathered crude, it is there every day. It generally looks like WTI and it delivers under WTI in cost. So, it's a nice, steady benefit. The logistics part of that business could be poised for growth as we go forward. Just look at all the Mid-Continent crude around us.

Right. Again, the discount to Cushing, could you remind us what that is on the gathered barrels? And also, are you talking about organic growth projects now on the logistics side going forward?

Going forward that is something we will be looking at. It's obvious that there's a lot of crude production around us. We could either take the crude to Cushing and resell it, or we could take it home. We're ideally located. Right now this year, because of increased costs, I believe our delivered cost of crude is somewhere between $1.50 and $2 a barrel under WTI.

We had a fair bit of pipeline maintenance that went against those numbers. And the way it basically works is there's a posted price. And then we take all our costs -- or the gathering business and the transportation business takes all their costs out of it. What's left is still a discount to WTI as it delivers to the refinery. And we consolidate that delivered cost of crude into our financials.

Okay, great. Thanks, Jack. Appreciate it.

(Operator Instructions)

Stephen Carpel, Credit Suisse.

Maybe, first, can you talk about some of the Wynnewood projects that you foresee over the next year? And what kind of yield you can get from some of those? Obviously you've talk a bunch about the slam dunk ones.

There's one project of significance. And that is, the Wynnewood refinery, as purchased, had a hydrocracker on site. But over the years the prior owner chose not to put the capital in or the hydrogen capacity to run it as its original design as a full conversion hydrocracker.

We have a project that is estimated to cost somewhat less than $50 million, in round numbers $45 million to $50 million, that we will begin working on next year. And that would include putting in a hydrogen plant and converting some of the equipment back into its original configuration. And that would end up with a yield shift of about roughly 2% to 3% gasoline into distillate across the whole refinery. Plus incremental liquid volume yield just because of volume slough from hydrocracking. It's a very good project, if you pick off one, that's it.

If you just look back at the Wynnewood acquisition, refining's a technical business and what we did was, the plant did not have a large staff of process engineers and technical staff. And we brought our folks down from Coffeyville in Houston and started looking at Wynnewood. And if you go back to our original economics when we bought it not quite a year ago, we assumed that it would run 63,000 barrels a day. And that over a two-year period we would be able to get our rates up to about 66,500 barrels. If you noticed last quarter, we were at 67,900 barrels.

So we've already surpassed what we thought would take two years. We've seen numerous small projects everywhere we turn around. Just like balancing crude towers. We were able to increase our yield of jet fuel by almost 1,000 barrels a day. And that was like a no-cost project. So, we're still deep into it. We obviously will have other projects. Nothing major, nothing really big. But the biggest one right now is probably this hydrocracker, which we are going to get behind shortly.

I don't quite want to say it's related, but if I think about projects, and just doing the math, onto the previous question on the crude gathering system, it's $2 a barrel at 50,000. It's pretty good numbers. I don't know, is it $30 million, $40 million in cashflow that the gathering system as a standalone generates. And there's obviously some other logistics assets on-site. So what's the latest thought, two-fold, with maybe spinning out a separate MLP, the logistics business? And then, separately, another question, of course was about the cash and maybe using some of that cash to augment that business and making that more standalone?

All right. Your first question goes to our registration statement. And I would refer everyone to what we've publicly filed with the SEC. And in the future, if everything goes according to Hoyle, CVR Energy will become a GP Holdco effectively. And drop downs are always a possibility. I'm not saying they are a probability, I'm just saying that's some possible uses of cash.

And then, finally, maybe just a bigger picture one. You talked about the differentials out of Canada and out of the Bakken, what you're seeing in terms of the pipeline supply. And I suppose the talk is that they are basically over-full and differentials are here for a while, as they are. So curious to what your outlook is?

All right. You can go and look at Bentek which estimates $10 to $20. You can look at Goldman, which says $8 for next year and $7 going forward. And that's an increase from where they were before. And I'm just quoting analysts, so I hope nobody shoots me for quoting their numbers. If you look forward on any rational basis, there is going to be an enormous amount of crude supply coming on.

And you are going to see a sawtooth. As people put in the logistics to take the crude away, you will see softening in the differentials and then the production will overtake it. Our view is that long-term we believe that WTI Brent will probably be in the range of $7 to $12 a barrel. And there is a secondary market. And that is basically you have Cushing WTI versus Brent. Then you have oilfield versus Cushing. The ability to grow our gathering system into areas where crude is going to even be further discounted than WTI because of logistics and other reasons. Our location is prime for being able to take advantage of that.

The other side of that is, out of Canada, some of the heavy crude out of Canada, obviously it's widened out a bit, too. Same general thesis there?

Yes. Canada, as expected, has grown and continues to grow. And you're starting to see a shift, too. Don't forget, some of the large Chicago area refineries are converting to heavy Canadian, which is going to put more pressure on the lighter crudes. And at the same time, you have Canadian crude just in overall growth. 200,000 barrels a day a year is pretty much what most people are expecting. So, when you just look at the flow of crude, pretty much it's all got to go by Cushing to get south.

Thanks.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Listen, everyone, again, thank you for joining us. Appreciate you spending time with us. And we look forward to seeing you here in the future on future calls. Thank you again. Appreciate it.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day