CVR Energy Inc (CVI) 2014 Q2 法說會逐字稿

Greetings and welcome to the CVR Energy second-quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jay Finks, Director of Investor Relations. Thank you, Mr. Finks, you may begin.

Thank you, Kevin. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy second-quarter 2014 earnings call. With me are Jack Lipinski, our Chief Executive Officer, and Susan Ball, our Chief Financial Officer.

Prior to discussing our 2014 second-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 outlook, 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 these 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, except to the extent required by law.

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 2014 second-quarter earnings release that we filed with the SEC this morning prior to the opening 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 thank you for joining our earnings call. I hope you had the opportunity to listen to the CVR Partners and CVR Refining second-quarter earnings calls that were held earlier today.

On July 29, CVR Refining experienced a fire at their Coffeyville refinery. For our call today, Susan and I will first address our second-quarter results, so that in my closing remarks I can discuss the incident at Coffeyville.

Today, we reported CVR Energy's second-quarter consolidated, adjusted net income of $75.1 million, or $0.87 per diluted share, as compared to $124.5 million, or $1.43 per diluted share, in the second quarter of 2013. Susan, will provide more details on the financials here shortly.

We continue to return cash to our shareholders through special and recurring dividends. On July 17, we declared a $2 per share special dividend to be paid on August 4 to stockholders on record of July 28.

We also announced today a quarterly cash distribution of $0.75 per share, which will be paid on August 18 to stockholders of record on August 11. This brings our 2014 cumulative cash dividends paid or declared to $3.50 per share.

Now let me address our individual business segments. This morning CVR Refining released their second quarter results. The 2014 second-quarter adjusted EBITDA was $192.9 million, and that compares to $250.6 million a year ago. CVR Refining also declared a second-quarter distribution of $0.96 per common unit.

CVR Energy owns approximately 66% of the common units of CVR Refining and, therefore, receives a proportional amount of distributions from CVR Refining. CVR Refining's total crude throughput for the second quarter was approximately 212,000 barrels a day. Coffeyville processed approximately 131,700 barrels a day of crude and the Wynnewood processed approximately 80,300 barrels a day of crude.

Regarding our fertilizer segment, this morning CVR Partners announced a 2014 second-quarter adjusted EBITDA of $25.7 million, and that compares to $44.1 million in the second quarter of 2013. CVR Partners declared a 2014 second-quarter cash distribution of $0.33 per common unit. CVR Energy owns approximately 53% of the common units of CVR Partners and will receive a proportional amount of CVR Partners' distributions.

Right now, I'll turn the call over to Susan to talk about the financials in more detail and then she'll turn it back to me.

Thank you, Jack, and good afternoon, everyone. Net income attributable to CVR Energy's stockholders was $83.7 million in the second quarter of 2014, as compared to $183.4 million in the second quarter of last year. Non-controlling interest was $60.3 million for the second quarter of 2014, as compared to $88.3 million in the same period last year. Adjusted net income for the 2014 second quarter was $75.1 million, as compared to $124.5 million in the second quarter of 2013.

We believe adjusted net income is a meaningful metric for analyzing our performance as it does eliminate the impact of non-cash and other unusual items inherent in our business and provides a more transparent view as to market expectations. The more significant adjustments to net income during the 2014 second quarter to derive adjusted net income were adjustments related to the increase or decrease in our inventory values that are realized under first in/first out or the FIFO inventory accounting method.

We realized a favorable FIFO inventory impact of $24.3 million, and our net derivative gain of $35.9 million, which was further adjusted by the current period settlements of $33.9 million. These adjustments for the second quarter of 2013 were a favorable FIFO impact of $24.2 million, and our net derivative gain of $120.5 million, which was further adjusted by the current-period settlement at that time of $14.7 million. These gross adjustments to net income are reduced for the portion that is attributable to the non-controlling interest and is then further reduced for the net-tax impacts associated with the adjustments.

Our income tax rate declined to approximately 24% during the 2014 second quarter, as compared to approximately 27% in the prior-year period. As noted on previous calls, our effective tax rate is lower than the expected statutory rate, primarily due to the reduction of income that is subject to tax associated the non-controlling interest in CVR Refining and CVR Partners earnings, as well as benefits related to domestic production activities deduction and state income tax credits.

Overall, our reduced results, period over period, were driven primarily as a result of reduced refining margins in the petroleum segment and lower realized UAN prices in the fertilizer segment as discussed on both of our subsidiaries calls earlier today.

I will now turn to the specific performance of our two business segments impacting our overall quarterly results. CVR Refining's adjusted EBITDA for the 2014 second quarter, as Jack previously mentioned, was $192.9 million, as compared to $250.6 million in the same period in 2013. In the second-quarter 2014, CVR Refining's realized refining margin, adjusted for FIFO, was $13.96 per barrel, as compared to $19.18 in the same quarter of 2013.

Driving this decrease was overall lower NYMEX 2:1:1 crack spreads and a negative Group 3 product basis. This overall decrease was partially offset by the increased crude throughput for the second quarter of 2014, as compared to the second quarter of 2013. Crude throughput rates for the second quarter of 2014 approximated 212,000 barrels per day, as compared to approximately 193,000 barrels per day in the same quarter last year.

As of June 30, CVR Refining had open commodity derivative positions of 15.8 million barrels at an average fixed price of $27.82 per barrel. The open commodity derivative positions were comprised of approximately 81% for distillate crack swaps and 19% for gasoline crack swaps. As discussed earlier, CVR Refining announced a 2014 second-quarter distribution of $0.96 per common unit, with $48.3 million to be paid to the public unit holders and $93.4 million to be paid to CVR Energy.

CVR Partners second-quarter adjusted EBITDA was $25.7 million, as compared to $44.1 million in the same period last year. The decrease was primarily associated with lower realized UAN prices in the second quarter of 2014, as compared to the prior year's second quarter. Partially offsetting the overall decrease were higher UAN sales volumes in 2014.

The Partnership announced a cash distribution of $0.33 per common unit for the second quarter of 2014. Of the $24.1 million to be paid, $11.3 million will be paid to the public unit holders and CVR Energy will receive $12.8 million.

CVR Energy ended the quarter with cash and cash equivalents of approximately $998.7 million on a consolidated basis, which included $78.5 million held at CVR Partners and $420 million at CVR Refining. As such, CVR Energy held cash, on its own, of $500.2 million as of June 30, 2014.

As of July 28, the consolidated cash and cash equivalents were approximately $1.1 billion, which included $86 million at CVR Partners and $457 million at CVR Refining. Excluding the cash at our two subsidiaries, we held cash of $513 million.

In the last week of June, CVR Refining completed a second underwritten offering, which generated approximately $164 million in net proceeds. The proceeds have been used to redeem an equal number of common units from CVR Refining's, which is a wholly owned subsidiary of CVR Energy.

On July 24, the underwriters exercised their option to purchase an additional 975,000 units, which generated approximately $24.6 million in net proceeds and no change in units outstanding. As a result, CVR Refining continues to have 147.6 million units outstanding of which approximately 34% is owned by the public and 66% is owned by CVR Energy.

Total consolidated debt, including current portions as of June 30, was approximately $676 million. CVR Energy has no debt exclusive of the debt that resides at CVR Refining and CVR Partners. We have a strong consolidated balance sheet with both of our business segments positioned very well for continued growth.

With that, Jack, I will turn the call back to you.

Okay. Thank you, Susan. As I mentioned earlier, on July 29, CVR Refining experienced a fire on its isom unit at the Coffeyville refinery. The fire was extinguished in less than an hour and the isom unit itself suffered limited damage.

However, the refinery was shut down subsequent to the fire being extinguished due to issues with its distributed control system. The fire damaged data and power cables leading to a critical data center at the plant.

CVR Refining is currently evaluating the damage and estimated cost of repairs. Based on preliminary assessment in the damage, it is currently anticipated that the refinery could be down for approximately four weeks from the time of the incident.

During the down time, it's CVR Refining's intention to accelerate some of the planned maintenance for 2014. CVRR had planned a seven-day shutdown of the number two crude unit and number two vacuum units for decoking and unit cleanups. That work will be accomplished while the plant is down.

Also during the current down time, it is planned to pull forward certain activities originally slated for the facility's scheduled maintenance turnaround in the fall of 2015. This includes certain utility systems that can only be worked on when the entire facility is down.

Clearly, and more importantly than the damage caused by the fire, was that four employees CVRR were injured and subsequently transported to a Tulsa hospital, they remain hospitalized at this time. Our focus is to continue to provide support and assistance to our injured coworkers and their families. All of them remain in our thoughts and our prayers.

Clearly, this incident is not indicative to CVR Refining's focus on safety. CVRR remains steadfast in its commitment to providing a safe environment for employees across their entire company.

To the credit of CVRR employees, some significant safety achievements were reached during this year's second quarter. In May, employees at the Wynnewood refinery celebrated 1 million man hours without a lost-time injury.

This follows their January achievement of one year without an OSHA recordable injury. In June, employees at the Coffeyville refinery surpassed two years without an OSHA recordable injury and also recorded 2 million man hours without a lost-time injury in April.

Clearly, this latest incident overshadows those remarkable results. Again, CVRR is committed to providing a safe workplace for everyone.

I'd like to thank each and every one of you for joining our call today. I do recommend that you go back and listen to the recording of our earlier calls, which can be found on the websites of CVR Partners or CVR Refining.

Operator, with that, I'll turn this over to you for questions.

Thank you. At this time we'll be conducting a question-and-answer session.

(Operator Instructions)

Our first question today is coming from Jeff Dietert from Simmons. Please, proceed with your question.

Good afternoon, Jack.

Hey, Jeff.

We talked about Coffeyville a fair amount on the CVRR call, the CVR Refining call, so I might shift. One of the things you've done, historically, is invested in multiple refineries within the CVR Refining portfolio and to diversify some of the one-asset risk.

I was curious what the potential looks like for acquiring additional refineries, and maybe dropping them into CVR Refining or maybe CVR Refining buying them directly? What's that market look like? Is that a significant focus of Management at this time?

Acquisitions, in general, are a major focus, just like organic growth. We have a number of projects, particularly in the refining subsidiary, that are very, very attractive going forward. We intend to continue to invest there.

CVR Energy is basically an entity that has no debt and, as Susan told you, has about $500 million of cash. We are constantly looking for accretive acquisitions. We believe that at some point in time there will be assets that will come up that will fit our bill, and that we'll be able to acquire them either at CVRR, or CVR Refining.

I can't pinpoint you to anyone right now, but there is -- we've gone through a very high cycle on cracks and we're now down into the more normal range of what we can expect longer term. When that happens, you tend to see assets come up for sale. I can pretty much guarantee we're going to be in the mix.

Is it the intent to find something within the existing footprint, something that's synergistic with Wynnewood and Coffeyville? Or could it be something outside the current footprint? What criteria do you look for, for attractive acquisitions?

I think the footprint has changed, well, the market has changed. The Gulf Coast refiners are no longer distressed compared to the MidCon. MidCon refiners are doing well. If you look at where we operate in PADD II Group 3, there are only six refineries.

The likelihood of us -- we'd be happy to, but it's a pretty tight group. You have the mid continent, you have the Rockies, you have the Gulf Coast, which now will have access to crude's that are much more favorably priced. They have export opportunities.

I've said it before. I'm somewhat reluctant to look at the West Coast, particularly California, just because of the regulatory and business environment there. Right now, the East Coast doesn't exactly excite me, especially with the specter of crude exports.

So, we will be seeing pressure in Europe for those refiners. I believe European refiners will continue to shut down or consolidate, and the US will become the exporter of products for at least the Atlantic Basin. My view is, anything in the Gulf Coast, anything in the MidCon and the Rockies would probably be our sweet spot.

Okay. You would exclude not only California but the Pacific Northwest as well just from a regulatory environment perspective? Or is the potential for taking cheaper crude's into the Pacific Northwest make that market a little bit more interesting?

It makes that market a lot more interesting. There's been moves afoot by Washington and Oregon to start with similar cap and trade or at least rhetoric of all the things that are going on in California. California, as you know, has their basically cap and trade policy, they have the low carbon fuel standard.

Ultimately, a lot of this will spread across the US. You don't want to be somewhere where it hits you first. Washington probably worries me less than California, and East Coast is just logistically a problem until some way, shape or form somebody can figure out how to get a crude pipeline to them.

You've got variable distribution refining and fertilizer businesses. Do you see traditional midstream assets as a potential step forward for the Company?

Well, yes, and we've said this on other calls. We are growing our gathering business. We said publicly that we have $30 million to $35 million in discernable EBITDA. We think we have to be a little bit north of that to spin our own logistics MLP.

The interesting thing about having CVR Energy as a parent is that we can actually buy something that has one and then drop ours into it or vice versa. We are looking at midstream, clearly looking at midstream, we're clearly looking at refining. That's in our wheelhouse.

Great. Thanks for your comments.

Thank you, Jeff.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Management for any further or closing comment.

Thank you, Kevin. I'd like to thank everyone, again today, for joining and listening to our conference call. If you need further information, please visit our website, CVREnergy.com or contact Investor Relations. Thank you.

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