Par Pacific Holdings Inc (PARR) 2014 Q2 法說會逐字稿

Hello and welcome to the Par Petroleum Corporation second-quarter 2014 earnings call. My name is Joe and I will be your operator for today's call. (Operator Instructions). Please note that this conference is also being recorded.

I will now turn the call over to Mr. Brice Tarzwell, Senior Vice President and Chief Legal Officer of Par Petroleum. Mr. Tarzwell, you may begin.

Good morning and welcome to Par Petroleum's earning call for the second quarter of 2014.

Before we begin, we would like to remind everyone that management's comments today may contain forward-looking statements. These forward-looking statements address expectations, estimates, and projections that may involve significant risks and uncertainties, which could cause actual results to differ materially from the results discussed.

Information about the risks we face and the uncertainties associated with Par Petroleum's forward-looking statements can be found in the Company's annual and quarterly reports filed with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements.

We will next turn to remarks from our Chairman and Chief Executive Officer, Will Monteleone. Will?

Thank you, Brice. Good morning, ladies and gentlemen. At this point, you should have our earnings release and our 10-Q will be filed later today.

As I communicated on our conference call two weeks ago, our second-quarter results were negatively affected by the compression in crack spreads beginning in mid-May, but particularly during June. Not readily apparent in the headline numbers disclosed in the press release, we did see improvements in our profitability during April and May; however, these improvements were more than offset by the deterioration in crack spreads, particularly in the distillate portion of the barrel during June.

Beginning in the middle of June, concerns regarding Iraq drove Brent prices to spike by approximately $7 a barrel over the course of two weeks, while refined product prices on the West Coast and Singapore lagged. Our largest product exposure is jet fuel, with a heavy weighting towards the Singapore marketplace.

During the quarter, the Singapore jet crack, measured as spot Singapore jet less Brent, compressed from $12.47 a barrel in April to $8.83 a barrel in June. As a point of reference, for the full-year 2013, the Singapore jet crack averaged $14.16 a barrel. We have seen this market indicator improve in July with the average returning to the $10.57 per barrel range and continuing to improve to $13.02 a barrel during the month of August thus far.

To give you a sense of the importance of this indicator, every $1 barrel move in the jet crack affects our annual profitability by between $6.5 million and $7.5 million.

During the quarter, we also incurred almost $2.5 million of acquisition and integration costs. If you break down these costs, approximately $900,000 were associated with the Mid Pac transaction, with the remainder associated with integrating the Hawaii operations.

In addition to these acquisition and integration costs, we incurred over $1 million of general and administrative expenses that we view as nonrecurring in nature that were primarily associated with establishing SOX compliance, integrating SAP, or stabilizing the information systems post cutover.

Turning toward the Hawaii business, in addition to improving crack spreads across the distillate portion of the barrel, there are several positive changes occurring. One, we are seeing a change in the term structure of the Brent market, shifting from backwardation to contango during the month of July, which should improve our overall cost of supplying the refinery going forward. We have seen backwardation increase our crude costs by an estimated at least $3 million year to date.

Two, we are also observing crude differentials to Brent compress globally, providing improved options for light grades sourced out of west Africa, the Middle East, or Asia-Pacific.

Three, we have received our first cargo of crude from Mexico during the month of July and are looking at expanding that relationship going forward.

And four, in July we regained access to the Kauai jet market, which reopens an additional channel of distribution for the business. We estimate the foregone profits from the Kauai jet business totaled approximately $4 million year to date.

The above items are short-term fundamentals that we see impacting the balance of the year. However, given the length of the supply chain in Hawaii, it takes a longer period of time to realize the benefits of these changes in our financial results.

Over the longer term, we continue to see opportunities to grow the Hawaii business into a sustainable, efficient part of the Hawaii economy. Winning back on-island market share remains a top priority, and here are the following ways we're going to achieve the objective.

One, the Mid Pac acquisition will add approximately 4,200 barrels a day of on-island gasoline sales or approximately 25% of our gasoline range production year to date.

Two, we are bidding on jet/diesel military contracts with volumes beginning October 1, 2014, which could add up to 5,000 barrels a day of incremental demand. Of note, we have already won some spot business with the military beginning in the third quarter and are well positioned to win at least a portion of the annual contract volume.

Three, as we have shifted to a North American oriented crude slate, we are producing more fuel oil and are reviving our marketing efforts to sell bunker fuel to the many oceangoing vessels passing through Hawaii.

And four, the wholesale gasoline market contract cycle begins shortly, with volumes to be awarded starting January 1, 2015.

Our current line of sight additional demand will add approximately 10,000 barrels per day of demand, which would result in a 20% increase from the current base. These additional volumes meaningfully increase the efficiency of the plant, reduce our exports, and increase the Company's profitability.

Unrelated to on-island sales recapture, we are evaluating several cost-cutting measures and high-return capital projects to allow us to reduce our distribution and terminalling costs, including building a truck rack at the refinery and improvements to the pipeline and tank farm systems.

Turning to the pending acquisition of Mid Pac, we recently received a second request from the Federal Trade Commission and are working diligently to provide our response. We continue to expect the acquisition will close during 2014.

Now I'd like to shift focus and spend a few minutes on the other components of the business, starting with our upstream assets. Piceance Energy continues to perform well and benefited from increased gas prices, such that the previously planned capital infusion will be deferred until 2015 and may not be required at all. The previously-announced one-rig program is commencing in the third quarter and we look forward to the results from the Company's pad drilling program.

Important to note, virtually all reserves booked in the 2013 year-end reserve report do not reflect the economies of scale associated with pad drilling. If successful in its efforts, we would expect to see improved economics in the year-end 2014 reserve report, all else remaining equal.

In addition, we continue to observe offset operator successes in the Mancos formation and note the majority of the Company's acreage has rights to the Mancos. No undeveloped locations from the Mancos are booked in the Company's reserves as of year-end 2013.

During the second quarter of 2014, Piceance generated revenue of $21 million versus $16 million for the second quarter of 2013, an increase of approximately $5 million, and generated operating income of $2 million, which included approximately $9 million of DD&A expense versus an operating income of $2 million for the second-quarter 2013, which included $4 million of DD&A expense. The change in operating income was largely driven by higher natural gas volumes and prices.

Now let's turn to Texadian, our petroleum logistics business focused in Canada and the lower 48. During the second quarter, Texadian's revenue was $29 million, compared to $27 million for the second quarter of 2013. And segment operating income was approximately $1.3 million, which included approximately $508,000 of DD&A expense, versus $2 million (sic - see Press Release - "$2.2 million") of operating income for the second quarter (sic - see Press Release - "second quarter 2013"), which included $533,000 of DD&A expense.

The majority of the quarter's profitability was generated early in the quarter as we captured profitable movements of crude sourced during the first quarter, but not delivered until the second.

In conclusion, putting each of the pieces of our Hawaii strategy together and pro forma for the Mid Pac acquisition, we believe we can create a Hawaii business capable of generating $2 to $4 per barrel throughput of operating profit over time, with upside as we push rates up in the plant to maximize profitability.

Within this earnings profile is a significant base of earnings from our retail distribution channel, which we believe is worthy of a higher multiple than the typical refiner, given the relative stability of the earnings stream. Higher multiples for these types of businesses is also verified by our recent M&A activity in the space.

So I would encourage each of you as you build your models and some of the parts analysis to take into account the fact -- that fact, as well as several others.

One, the value of our stake in Piceance Energy is largely a function of our portion of the PDP PV-10 and the value of the numerous high-return undeveloped locations.

The value of Texadian, our North American crude logistics and marketing business, is largely a function of its difficult-to-replicate logistics positions, moving Canadian heavy crude into the Mid-Continent.

Three, on a consolidated basis, the value of the inventory and AR position, net of current liabilities, is in excess of $70 million as of June 30, 2014.

And four, the Company's unrestricted $1.3 billion NOL carryforward, as well as a Board of Directors and management team highly focused on unlocking value inside our existing assets, as well as new opportunities to further monetize the NOL.

While the second-quarter results were below our objectives, we have successfully cut over all systems to operate the facility from a predecessor, opened up new crude markets, and begun to recapture market share on the island. As communicated in our prior conference call, 2014 will be a year of transition for the Company, as a foundation for earnings and cash flow growth are billed for 2015 and beyond.

This concludes my prepared remarks, and at this time, I would like to turn it back over to the operator for Q&A.

(Operator Instructions). Andrew Shapiro, Lawndale Capital.

Questions on the new acquisition. You say that you're working through the regulatory process. You have the second information request. There was always a time deadline for the first request in terms of when and if they had to come up with a second request. Is there similarly a time deadline and was the information they asked for within your realm of expectations to tackle?

The time frames underneath the second request are less concrete, and ultimately the scope of their requests at this point -- we recently received it, so we are in the early stages of processing it. And I don't think at this point we can comment specifically on the duration, except that we do expect that we will move quickly through it and still believe that we can close the acquisition by the end of this year.

Okay, and in the event the regulatory authorities have a problem with this, is there any form of a break fee or any other kind of liability for the Company, other than the sunk cost of the due diligence and processing?

No, both parties agreed to accept the HSR risk, and so there is no breakup fee on either side to the extent that we have a larger regulatory issue, other than the sunk cost and transaction costs that we've incurred.

Okay, and are you still looking for this deal to become immediately accretive to take advantage of the NOL? In particular, on the last call, which wasn't too long ago, you highlighted $6 to $10 a barrel of transport savings, plus about $5 million or so of then identified operational synergies. Have any other advantages or quantification come since the last call?

No, those numbers are still valid, and obviously, our statement on the accretive nature of the transaction assumes that it is closed by January 1, 2015, and we get the full-year benefit of those volumes in the Mid Pac business and underneath the Par umbrella for that full fiscal year.

(Operator Instructions). Andrew Shapiro, Lawndale Capital.

Thanks. A few follow-ups, since it didn't seem like there was anyone else there. The reduction in the value of the contingent payments due on the Hawaii Independent Energy acquisition that resulted in a gain, is that the results of Hawaii Energy not hitting the seller's projected operating performance?

Effectively, we have to fair value the earnout potential, and therefore I think it's accurate to say that for the 2014 time period that we don't anticipate making an earnout payment, given the results.

Okay, and when does the contingent liability and measurement run its course?

It is every calendar year, and I believe -- hold on one second. It is a three-year term and ultimately it's measured on a calendar-year basis.

Okay, so three years from (multiple speakers)

So 2015, 2016 basically.

2015, 2016 okay. What effects did the Company see from recent -- the two big storms in Hawaii? Might this have any negative impact that will show in your third-quarter numbers or was the effect minimal?

There was a significant amount of preparation that went into the storms, and I would say the team in Hawaii did an excellent job planning contingencies and ensuring that we did everything we can to ensure that the neighbor islands were well supplied.

We really didn't have any significant impacts to the business, other than slightly reduced rates for a couple days, but no damage or significant damage to any of our assets on the islands. So, thankful for that, and the team in Hawaii did an excellent job.

Okay, I have a few more questions. I will back out into the queue; come back to me, please.

Okay.

[Edward Collarli], Arbiter Partners.

I just wanted to make sure. If the acquisition doesn't close before the first, do you still get those contracted volumes?

We have a contingent supply arrangement with the target, and so in the event the acquisition isn't in place by January 1, we do feel like we would be able to supply them under that arrangement.

Okay, thank you.

Rob Stuckey, Barclays.

With regards to the acquisition, it seems more a function of how many gas stations will you be able to keep versus the deal not going through. Is this an accurate assessment? And in the case we do have to sell some gas stations to complete the acquisition, can you talk a little bit about the asset value underlying those assets?

Difficult for me to speculate on what the FTC would require in the event that we would need to make any divestments. Ultimately, I think the underlying value that you are referencing likely has to do with the fee owned real estate, and ultimately that's in excess of 20 stations, primarily in Oahu, and we think that is an excellent long-term advantage and a source of value for us in this deal.

Thanks.

[Jenin McGurdy], [Platz].

I was hoping you could help me with your rates at your refineries. You said you were slightly reduced for a couple of days because of the storms. What is that going to do for your rates for the quarter, your average throughput?

Shouldn't have any material impact.

Okay, and can you just tell me in the third quarter how you are running your crude slate between light and heavy? What percentage?

We don't disclose that level of detail on a forward-looking basis (multiple speakers)

Okay, that's okay. And then, my third and last question is about Mexico. Do you have a contract with them? And if so, could you tell me a little bit about how much you're taking and the delivery schedule?

I would say we're in the early phases of working with our counterparties at Pemex, and it would be too early to discuss the current state of that relationship, but --

(multiple speakers). You did take one -- you did take a delivery this quarter, right?

Correct.

Okay, great. Thank you so much.

Andrew Shapiro, Lawndale Capital.

A follow-up from an earlier person's question. What islands do you have retail crossover on with your 76 and Tesoro stations?

Effectively on the Big Island, on Hawaii, Maui, and Oahu.

On all three, okay.

On all three. We have no stations on Kauai.

Okay. And if you -- could you summarize, combined on any of those particular islands, any particular large market share that is created by the deal where there may be FTC risk?

No, I don't think that would be appropriate.

Okay.

At this juncture.

And lastly, do you have any early indication on if all the shareholders plan to exercise their rights and to what extent people might oversubscribe, since the deadline is coming up and people have been sending in their irrevocable notice?

I think it's still a little early. I think we still have the support of our two largest shareholders, Whitebox Advisors and Zell Credit Opportunities Fund, and at that point, I think it's still a bit too early.

Thank you. At this time, I show no additional questions. Thank you for your participation and you may now disconnect. This does conclude the call.