CVR Energy Inc (CVI) 2014 Q3 法說會逐字稿

Greetings, and welcome to the CVR Energy third quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jay Finks, Investor Relations for CVR Energy. Thank you, sir. You may begin.

Thank you, Kevin. Good afternoon. We very much appreciate you joining us this afternoon for our CVR Energy third 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 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 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 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 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 third quarter earnings release that we filed with the SEC this morning, prior to the open of the market. With that said, I will turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

Hey, thanks, Jay, and thank everyone here on the call for joining us. Hopefully, you have had the opportunity to listen to the CVR Partners and CVR Refining third quarter earnings calls earlier today.

Today we reported CVR Energy's third quarter consolidated adjusted net income of $37 million or $0.43 per diluted share, as compared to $5.2 million or $0.06 per diluted share in the third quarter of 2013. Susan will provide you more details on the financials reported this morning. We continue to return cash to our shareholders through special and recurring dividends. On July 17, we declared a $2 special dividend paid on August 4, and we also announced today a quarterly cash dividend of $0.75 per share, which will be paid on November 17 to the stockholders on November the 10th. This will bring our 2014 cumulative cash dividends paid or declared to $4.25 per share.

Let me talk little bit about each of our business segments. For petroleum, this morning, CVR Refining released their third-quarter results. The 2014 third quarter adjusted EBITDA was $129.9 million, as compared to $33.9 million a year ago. CVR Refining also declared a third quarter distribution of $0.54 per common unit.

CVR Energy owns approximately 66% of common units of CVR Refining, and therefore receives a proportional amount of the distributions from CVR Refining. CVR Refining' s total crude throughput for the quarter was approximately 176,400 barrels a day. Coffeyville processed approximately 96,500 barrels of day of crude, and Wynnewood processed approximately 79,900 barrels a day of crude.

Turning to fertilizer. This morning, CVR Partners announced a 2014 third quarter adjusted EBITDA of $21.1 million, as compared to $28.2 million in the third quarter of 2013. CVR Partners declared a 2014 third quarter cash distribution of $0.27 per common unit. As CVR Energy owns approximately 53% of the common units of CVR Partners, we will receive a proportional amount of that distribution. I will now turn the call over to Susan, who will talk about the financials in more detail.

Thank you, Jack, and good afternoon, everyone. Net income attributable to CVR Energy stockholders was $7.9 million in the third quarter of 2014, as compared to $44 million in the third quarter of last year. Non-controlling interest was 30 -- $13.4 million for the third quarter of 2014, as compared to $34.2 million in the same period a year ago. As Jack mentioned, adjusted net income for the 2014 third quarter was $37 million, as compared to $5.2 million in the third 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 third quarter to derived adjusted net income were adjustments related to the increase or decrease in our inventory values, that are realized under the first in, first out or FIFO inventory accounting method, and certain net impacts associated with our derivatives.

We adjusted for the quarter's realized unfavorable FIFO inventory impact of $52 million, and our net derivative gain of $25.7 million, which was further adjusted by the current period settlements on derivative gains of $38.2 million. The adjustments for the third-quarter 2013 were a favorable FIFO impact of $54.3 million, and our net derivative gain of $72.5 million, which was further adjusted by the current period gain settlements of $33.7 million. These gross adjustments to net income are reduced for the portion that is attributable to the non-controlling interest, and then are further reduced for the net tax impact associated with them.

Our income tax rate approximated 16.5% for the 2014 third quarter, as compared to approximately 27% in the prior year period. As noted on our previous calls, our overall effective tax rate is lower than the expected statutory rate, primarily due to the reduction of income associated to tax, subject to tax associated with the non-controlling interesting in CVR Refining' s and CVR Partners' earnings, as well as the benefits related to the domestic production activities deduction and state income tax credits. We currently estimate the full year effective tax rate will approximate 24% to 25%.

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 third quarter was $129.9 million, as compared to $33.9 million in the same period 2013. In the third quarter of 2014 CVR Refining' s realized refining margin adjusted for FIFO was $13.16 per barrel, as compared to $8.21 in the same quarter of 2013.

Crude throughput rates for the third quarter 2014 were approximately 176,400 barrels per day, as compared to approximately 161,000 barrels per day in the same quarter last year. As of September 30, CVR Refining had open commodity derivative positions of 9.8 million barrels at an average fixed price of $28.45 per barrel. The open commodity derivative positions were comprised of approximately 89% for distillate crack swaps, and 11% for gasoline crack swaps. Of the open positions, 5.1 million barrels will be settled in the fourth quarter of 2014, and are at an average fixed price of $27.25. The remaining 4.7 million barrels will settle during 2015 and 2016.

As discussed earlier, CVR Refining announced a 2014 third quarter distribution of $0.54 per common unit, with $27.1 million to be paid to the public unit holders, and $52.6 million that will be paid to CVR Energy. CVR Partners' third quarter adjusted EBITDA was $21.1 million, as compared to $28.2 million in the same period last year. The decrease was primarily associated with lower sales volumes and lower realized prices for UAN in the third quarter of -- in the third quarter of 2014, as compared to the prior year's third quarter.

The Partnership announced a cash distribution of $0.27 per common unit for the third quarter of 2014. Of the $19.7 million to be paid, $9.2 million will be paid to the public unit holders, and CVR Energy will receive $10.5 million. CVR Energy ended the quarter with cash and cash equivalents of approximately $793.1 million on a consolidated basis, including $68 million held at CVR Partners, and $359.2 million at CVR Refining. As such, CVR Energy held cash of $365.9 million as of September 30, 2014.

Total consolidated debt, including current portions as of September 30 was approximately $675.3 million. CVR Energy has no debt, exclusive of the debt that resides at CVR Refining and CVR Partners. CVR Energy has a strong consolidated balance sheet, with both business segments continuing to be positioned well for growth opportunities. With that, Jack, I will turn the call over to you.

Okay. Thank you, Susan. As discussed earlier on the CVR Refining call, CVR Refining' s Board gave management approval to proceed with the installation of the new hydrogen plant natural gas pipeline to be constructed at the Coffeyville refinery. The capital costs of this project is approximately $122.5 million, and the project is estimated to be operational in the second quarter of 2016.

The addition of a hydrogen plant will allow the refinery to increase its liquid volume recovery, provide hydrogen for two environmental requirements. One is for MSAT, which is benzene saturation -- removing benzene from gasoline, and the other is the anticipated Tier 3 rules, which will remove additional sulfur from gasoline. So by installing this plant and the associated equipment with it, we expect to generate hydrogen, and not have to generate hydrogen from one of the existing units in the refinery.

The -- this plant will also be able to supply approximately 5 million cubic foot of a day of hydrogen to CVR Partners, where they will use the hydrogen, and fill out their synthesis loops. So it's a win for both of those companies. The IRR of this project exceeds 30%, so it is pretty good return on capital.

To finance this project, on October 29, CVR Energy entered into an amendment of the intercompany credit facility with CVR Refining, by increasing the facility to $250 million from $150 million. This basically functions as a growth CapEx revolver. It is not intended to be a permanent facility, but as growth occurs at the subsidiary and income is generated, the sub will take -- will either take on debt, or sell units or do something to replenish the revolver if needed. But as long as CVR Energy does not require the cash, that gives us lots of optionality. I would like to thank each of you for joining our call today. And, operator, I would like to open it up for questions?

Thank you.

(Operator Instructions)

Our first question today come from Ed Westlake from Credit Suisse. Please proceed with your question.

Thanks for all the color this morning on the CVR out call. It is lunch time, I forget -- there has been so many calls this morning. But the one intriguing comment was around the Wynnewood refinery, and obviously the scoop, and seeing additional barrels there. Just maybe if you could run through, how you would fit some of those barrels as that play takes off in the spring, which is sort of quite exciting into your refineries, what sort of prices you think you might achieve relative, say to TI?

In general, these -- there -- we don't disclose individual discounts. But every barrel that we do gather is delivered after all costs below WTI. And depending on which barrels they are, they could be anywhere from $1 to $3. In general, we think we are capturing right now somewhere between $1 and $2 a barrel, for each barrel gathered. And what makes it very interesting for Wynnewood is, we are rapidly increasing our ability to offload crude at Wynnewood.

This play literally, I mean, I almost wish [Carmageddon] moved the plant five miles further west, so we would be drilling our own wells. But we are just outside the play, but this is literally in our backyard. And if you look back to December of 2011, we virtually had no gathering in Wynnewood. And today, we do up to 18,000 barrels a day, and it's growing rapidly.

So over time, some of these plays will be supplied by pipelines, gathering more. But as the play continues, we do everything by truck. We have well over 150 trucks today. I believe we are approaching 180, even with contract trucks. And that is the largest growth area of our business right now.

And some of the -- because of backwardation this year, pretty much took a lot of blending out of Cushing It didn't pay to store crude, so therefore some of the blending disappeared. Right now, we see the market not necessarily flat, it's still slightly backwardated.

But that also took some of the pressure off of pricing for gathered crude, because the blenders then found themselves having to pay the backwardation. So it has basically improves our capture. I am not going to say by huge amounts, but directionally, it's the right way to go. But we are improving our capture, and improving our volume on that business.

What about -- sorry.

Go ahead.

Sorry. I was going to say what about the, I guess, the ability then to push forward a little bit with the logistics type of vehicle? Perhaps backed by some of the assets that you obviously have at the refineries? But then some of the logistic assets that you could build, to basically help that oil get to Cushing, into your storage and infrastructure around that?

Yes. That's exactly our plan, and we had hoped to have been further along. But like I mentioned, when we have a lot of pressure for blending in Cushing, the capture on gathered barrels was reduced. But recently, with not only the increase in volume, but increase in capture, we are doing much better.

And there are other things that we will be able to drop in. For example, it is not huge, but there is a new natural gas pipeline we are putting, in conjunction with this hydrogen plant. Either those kind of assets, we have wholly-owned assets, pipeline assets in our gathering business right now. We have a lot of storage, and throughout Wynnewood, Coffeyville and our gathering business, as well as Cushing. So that is part of our plan, Ed. I just don't have an exact time frame right now. I would rather underpromise, and overdeliver.

Okay. Thanks very much.

Thank you.

(Operator Instructions)

We have reached the end of our question and answer session. I would like to turn the floor back over to management for any further closing comments.

Thank you, Kevin. I would like to thank everyone for listening to our conference call today. As a reminder, our conference call along with CVR Refining and CVR Partners will be available for replay over the next 14 days. Please visit our website, CVRenergy.com or contact Investor Relations for additional information. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.