CVR Energy Inc (CVI) 2016 Q2 法說會逐字稿

Greetings and welcome to CVR Energy's second-quarter 2016 conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Jay Finks, Vice President of Finance. Thank you. Please go ahead.

Thank you, Brenda, and good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy second-quarter 2016 earnings call. With me are Jack Lipinski, our Chief Executive Officer, and Susan Ball, our Chief Financial Officer.

Prior to discussing our 2016 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, or 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 measures, are included in our 2016 second-quarter earnings release that we filed with the SEC this morning prior to the open of the market.

With that said, I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

Thanks, Jay. Good afternoon, everyone, and thanks for joining our call. Hopefully you had the opportunity to listen to the CVR Partners and CVR Refining earnings calls earlier today.

This morning, we reported CVR Energy's second-quarter consolidated adjusted net income of $17.1 million or $0.20 per diluted share, which compares to $72.1 million or $0.83 per diluted share in the second quarter a year ago. Susan will provide you more details on the financials reported this morning. We also announced today a quarterly cash dividend of $0.50 per share, which will be paid on August 15 to stockholders of record on August 8.

Let me talk a little bit about our business segments. First, petroleum. CVR Refining's 2016 second-quarter adjusted EBITDA was $84.7 million, which compares to $194.3 million a year ago. CVR Refining's total crude throughput for the second quarter was approximately 203,000 barrels a day.

Coffeyville processed 128,000 barrels a day of crude, while Wynnewood ran about 75,000 barrels a day of crude. As a result of forecasted weaker Nymex crack spreads, increased RINs expenses, and cash set aside for future operating needs, CVR Refining did not declare a distribution this quarter.

Now turning to the nitrogen fertilizer business, as I mentioned on our last earnings call, we achieved a significant milestone in the second quarter with the acquisition of Rentech Nitrogen Partners LP. With the addition of the East Dubuque facility, CVR Partners has expanded its geographic market, broadened customer relationship, and diversified feedstocks. I'm very pleased with the progress of integrating East Dubuque with CVR Partners and I want to thank all our employees for their continued hard work and dedication.

CVR Partners announced a 2016 second-quarter adjusted EBITDA of $29.1 million as compared to $36.1 million in the second quarter a year ago. CVR Partners also declared a 2016 second-quarter cash distribution of $0.17 per common unit. CVR Energy owns approximately 34% of the common units of CVR Partners and therefore will receive a proportional amount of the distribution.

Let me turn the call over to Susan to talk more about the financials. Susan?

Thank you, Jack, and good afternoon, everyone. Net income attributable to CVR Energy stockholders was $28.4 million in the second quarter 2016 as compared to net income of $101.9 million in the second quarter of last year.

Adjusted net income for the 2016 second quarter was $17.1 million or $0.20 per diluted share as compared to $72.1 million or $0.83 per diluted share in the second quarter 2015. We believe adjusted net income is a meaningful metric for analyzing our performance, as it does eliminate impacts of non-cash or other unusual items inherent in our business and provides a more transparent view of some market expectations.

The adjustments to net income during the 2016 second quarter to derive adjusted net income were favorable impacts as a result of our accounting under first in, first out, or FIFO, inventory accounting of $46.2 million; a loss on derivatives not settled during the period of $9 million; major scheduled turnaround expenses of $8.7 million; loss on extinguishment of debt of $5.1 million; and expenses associated with the Rentech Nitrogen Partners acquisition of $1.2 million.

The adjustments for the 2015 second quarter were a favorable FIFO impact of $36.4 million; gain on flood insurance that was recovered of $27.3 million; gain on derivatives not settled during that period of $15.9 million; major scheduled turnaround expenses of $2.1 million; and share-based compensation of $1.9 million. These gross adjustments to net income are reduced for the portion that is attributable to the noncontrolling interest and are further reduced for the net tax impact associated with them.

As a reminder, CVR Energy does own approximately 66% of CVR Refining. And effective with the acquisition of Rentech Nitrogen, CVR Energy's ownership percentage was reduced from approximately 53% to 34% at April 1, 2016, in CVR Partners.

The second-quarter 2016 effective tax rate was approximately 33% as compared to 23% in the second quarter 2015. The effective tax rate is higher in 2016 really due in correlation of our projected pre-tax levels for the year. And expected credits generated, as that's applied to year-to-date income.

I will now turn to the specific performance of our two business segments impacting our overall quarterly results. As Jack mentioned earlier, CVR Refining's adjusted EBITDA for the 2016 second quarter was $84.7 million as compared to $194.3 million in the same period in 2015. The decrease in adjusted EBITDA over the period was primarily driven by lower realized refining margins, increased RINs expense, and lower crude throughput during the 2016 second quarter.

In the second quarter 2016, CVR Refining's realized refining margin adjusted for FIFO was $9.56 per barrel as compared to $17.22 in the same quarter of 2015. The Nymex 211 crack spread averaged $15.98 per barrel in the second quarter of 2016 as compared to $23.85 per barrel in the same period of 2015.

The Pad 2 Group 3 211 crack spread averaged $12.64 per barrel in the second quarter of 2016 as compared to $18.91 in the second quarter of 2015. RINs expense on a per-barrel basis was the significant driver in the realized refining margin, being close to $3 less than the group crack in 2016 second quarter.

Now turning to the fertilizer segment, CVR Partners' financial results for the second quarter of 2016 is the first reporting period to include the operations of the East Dubuque facility. As such, this has a significant impact on the year-over-year comparability.

As mentioned earlier, CVR Partners' second-quarter adjusted EBITDA was $29.1 million as compared to $36.1 million in the same period last year. I would note that the adjusted EBITDA of $29.1 million for this year's second quarter was negatively impacted by the net inventory valuation and deferred revenue purchase price accounting adjustments related to CVR Partners' acquisition of Rentech Nitrogen Partners of approximately $13 million.

The decrease in adjusted EBITDA, excluding East Dubuque over the period, was primarily driven by lower pricing for UAN and to a lesser extent ammonia. Partially offsetting the decrease for the period was lower pet coke expenses and reduced direct operating expenses due to lower net utility cost.

The Partnership, as Jack mentioned, announced a 2016 second-quarter distribution of $0.17 per common unit, with approximately $12 million to be paid to public unitholders and approximately $7 million will be paid to CVR Energy.

Our cash position remained strong as we ended the quarter with cash and cash equivalents of approximately $691 million on a consolidated basis, including approximately $76 million at CVR Partners and $159 million at CVR Refining. As such, CVR Energy held cash of $455 million as of June 30, 2016.

Total consolidated debt as of June 30 was approximately $1.2 billion as compared to $673 million as of March 31, 2016. This increase was due to CVR Partners completing a $645 million senior secured note offering, which matures in 2023. The notes bear an annual interest rate of 9.25.

The net proceeds of approximately $629 million were used to fund the tender offer made for the Rentech Nitrogen $320 million secondly notes that were assumed through the acquisition as well as to pay related fees and expenses. Remaining net proceeds from offering then were actually used to terminate a $300 million term loan facility with Coffeyville Resources, our wholly owned subsidiary. This term loan was entered into at the time of the Rentech acquisition.

CVR Energy has no debt, exclusive of the debt that resides at CVR Refining and CVR Partners. CVR Refining debt approximates $579 million at June 30, whereas CVR Partners is approximately $650 million.

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

Okay, thank you, Susan. And you know, normally we just generally jump into Q&A at this point because pretty much everybody, we hope, would have listened to both earnings calls before. But you are --it's such an important issue for our refining subsidiary that I'm going to go through and repeat what I said on the earlier call about our view and my view on RINs. So buckle your seat belts. Here we go.

RINs continue to be an egregious tax on CVR Refining and have become their single-largest operating expense, exceeding labor, maintenance, and energy costs. This year, RINs will roughly double the cost of our labor.

Since 2013, CVR Refining has spent nearly $500 million on RINs, and estimated RIN exposure in 2016 will be approximately $200 million to $235 million. CVR Refining cannot pass along its RINs expense because it is competing with third-party [racks] with exempt lenders who have no RINs obligation.

We believe the basic tenants of the RFS are not being met due to the misplacement of the point of obligation. As a result of not placing the point of obligation on the appropriate party, renewable fuel blending is not reaching the levels envisioned by Congress and the cost of RINs have skyrocketed.

Exempt lenders, large retailers, and integrated refiners with substantial distribution and marketing arms are choosing to retain their RINs revenues as profits. They should be investing these profits from RINs in renewable fuel blending and distribution infrastructure.

We believe renewable energy has a place in the market, but we also believe the manner in which the renewable fuel standard operates today is broken. Everyone should clearly understand that we support the goals of the RFS.

Our fertilizer subsidiary, CVR Partners, provides nitrogen fertilizer to the ag market. In fact, our refineries and fertilizer plants provided fuels and nutrients in support of agriculture long before the RFS. Over the last 11 years, CVR Refining has invested approximately $1.4 billion in its two refineries to expand fuel production, improve safety and efficiency, all with the goal of making these plants competitive during periods of low margins. CVR Refining achieved what they set out to do.

When these capital spending decisions were made, CVR Refining assumed that they would be competing in an open, transparent market with a level playing field for all participants. The EPA's implementation of the RFS has upset the market balance, transparency, and fairness by favoring one group over another.

The RINs market represents one of the largest unregulated commodity markets in the United States. The market is not transparent. Anyone can own a RIN and the owners can hide behind the cloak provided by EPA. They are free to sell or not sell RINs and they can manipulate the market and not be identified.

Fundamentals don't support RIN prices nearing $1. Today, ethanol is $0.15 to $0.20 over the price of gasoline. With a few pennies for the transaction cost, a D6 RIN, which is an ethanol RIN, should cost $0.20 to $0.25, not $1. The difference in price is speculation.

If any private or public company would have distorted market conditions so one group received windfall profits and another faced uncertainty, they would have been investigated by the FTC and sued by every state attorney general. However, as of today, there have been no such investigations.

I call on the FTC and CFTC to investigate this uncontrolled contrived market. And if I were the Inspector General of the EPA, I'd be looking into this as well.

So thank you for listening to my comments again. And operator, at this time, I'll turn it over for questions.

(Operator Instructions) Jeff Dietert, Simmons.

Thanks again for your RINs commentary.

As I'm sure you wanted me to repeat it, having heard it before.

You make your points well. I get to thoroughly understand them. It's good. You've been very successful buying assets in the bottom of the cycle at reasonable prices. And we've kind of got a little margin environment here that could set up some reasonable prices. And there's speculation of assets for sale in the Gulf Coast, Western Canada, West Coast US, Rockies.

Could you talk about your appetite in this environment at CVI as really the acquisition vehicle. What regions are most attractive? Does the RIN situation influence or discourage you from trying to buy additional assets? Just kind of give us an overview in the current environment how you're thinking about M&A.

Obviously, I've talked to my Board and I've talked to our major shareholder. And in this kind of environment, yes, we are not a seller. We're buyer. We are very cautious because you need to make sure that the asset you are buying is just not someone else's distressed asset.

In that, if you believe that you are going to be in a RINs environment like we are, we need to make sure that the facilities that we purchase will cover their current and potentially anticipated RINs expenses should they go up. I'm very hopeful that this RINs issue will be resolved when everybody understands it.

But yes, we are looking. There is nothing much -- well, obviously, there's nothing in the group and not much in the midcontinent that is available. We would certainly look in the Rockies. We would certainly look in the Gulf Coast.

You've probably heard me say this before. I had enough brain damage years ago running a West Coast refinery to last me a lifetime. So I am just a little bit gun shy of walking into California with all their regulations and everything else, which makes the RINs debacle look like a Christmas party.

So we are looking. The short answer is we are looking at everything. We are just analyzing it. We have the resources through CVI and through IEP. And doing joint ventures to do a substantial acquisition.

And just to point out to everybody, when we did the bridge loan for CVR Partners, that was a bridge loan done both by CVR Energy and IEP. So I've been talking for years that we would do things that were mutually beneficial and the proper acquisition would be mutually beneficial.

Any comments you can make to help quantify the potential size of a potential acquisition, given that really the debt is held at your MLPs, not at the CVI level? And just the capabilities of funding at the CVI level.

Well, you know, again, CVI has no debt. Has cash. If you bought an asset, you can obviously lever it up 1 or 2 times or whatever is appropriate and for debt. And then we always would have, depending on how it worked out, if we were to drop down from one entity to another into our MLP, that would be a source of cash back up to CVI and that could be done in units as well as cash.

Good. And maybe talk about the dividend and the priority for paying a dividend. Is it influenced by the distributions from the MLPs? And is that something you would consider forgoing if there were an attractive acquisition that came about?

Well, obviously, if it would positively impact the equity more than paying a dividend, we would absolutely look at that. The reason we have chosen not to cut the dividend at this point is we have excess cash up at CVR Energy, CVI.

We do -- we are supporting a $250 million growth capital revolver down at CVR Refining and there are some other cash needs. But there's still a lot of cash sitting on the balance sheet out there. So it's a balancing act, and quite honestly, we talk about this weekly. What are we going to do? What are we looking at? What are we interested in?

And then in the market, how do you go and find an asset and how things would work out. You know, the capital markets have gotten better, but they are still a long way from where they were a year ago.

Yes. Thanks, Jack. I appreciate your comments.

Thank you and this concludes today's question-and-answer session. I'd like to turn the floor back over to management.

Thank you, Brenda. I'd like to thank everyone for listening to our conference call today. As a reminder, this call along with CVR Refining and CVR Partners will be available for replay over the next 14 days. If you'd like additional information, you can visit our website, cvrenergy.com, or contact investor relations for additional information. Thank you.

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