Par Pacific Holdings Inc (PARR) 2014 Q3 法說會逐字稿

Welcome to the Par Petroleum Corporation third-quarter 2014 earnings call. My name is John a will be your operator for today's call.

(Operator Instructions)

Please note that the conference is being recorded. I will now turn the call over to 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 earnings call for the three and nine months ended September 30, 2014. By now everyone should have access to the earnings release for the third quarter.

A copy of our earnings release was filed this morning with the SEC. We anticipate that our quarterly report on Form 10-Q will be filed later today. This call is being recorded and a replay will be available for seven days.

Before we begin we'd like to remind everyone that comments made today by management may contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that involve significant risks and uncertainties which could cause actual results to differ materially from the results discussed in these forward-looking statements. 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 next turn to our Chief Executive Officer, Will Monteleone. Will?

Thank you, Brice. Good morning, ladies and gentlemen.

At this point you should have our earnings release and slides. Our 10-Q will be filed later today.

As communicated previously 2014 is a transition and building year for the Company as we reestablish our presence in the Hawaii market, upgrade management information systems, create a team capable of executing on our business plan and most importantly position for a profitable 2015. I will reiterate our perspective shared on prior calls but on a normalized basis we believe the Hawaii business in the aggregate can generate $2 to $4 per barrel of operating income per barrel throughput at the facility. Recapturing on-island sales, much of which is already contracted for 2015, and improvements in the global crude markets underpin our outlook.

In addition to the earnings release we included several slides on key markets we would like to reference during the presentation. These slides reference benchmark crack spread indexes as well as a history of Alaska North Slope pricing relative to Brent.

I would emphasize the Singapore 4:1:2:1 slide as most relevant to the changing Hawaii marketplace. However, there are aspects of both the diesel and gasoline markets that still have West Coast pricing influences. We would currently suggest a 50% weighting to each as most representative of the Hawaii market environment.

During the third quarter we saw steady improvements in overall market conditions from the June lows as demonstrated by both the Singapore and San Francisco benchmarks. However, our results were negatively impacted by higher feedstock costs and operating expenses. As I referenced on our second-quarter conference call there is a lag in feedstock improvements flowing through our financials.

To provide a sense of this each crude cargo we consumed during the third quarter was committed to approximately 90 days prior which largely predated recent improvements in the crude markets. To reiterate some of the changes we have seen in the broader market include the term structure of the Brent market shifting from backwardation to contango during the month of July which we expect to improve our overall cost of supplying the refinery beginning in the fourth quarter.

Two, crude differentials to Brent have compressed globally providing improved options for light grades sourced out of West Africa, the Middle East and Asia Pacific. And three, incremental Canadian and Mid-Continent production is pushing into the West Coast changing the dynamics of Alaska North Slope trade patterns.

As part of this rebalancing of Alaska North Slope trade flows during 2014 we shifted a portion of our slate towards ANS which tends to have more seasonal pricing which is why we reference the slides driven both by lower production during summer months on the North Slope and better gasoline margins on the West Coast during driving season. Our third-quarter results reflect higher ANS differentials and as depicted in market slides included in the earnings distribution we have seen improvements in ANS differentials as we head into the winter months consistent with typical seasonal trends for the market.

During the quarter we had both planned and unplanned outages that drove both higher expenses and the need to purchase refined product to meet contractual obligations. We had a 5-day unplanned crude unit outage in July followed by a 14-day planned outage for maintenance on our reforming and visbreaking units during August which resulted in reduced throughput. In addition we performed repair work on our cogeneration facility during the period.

The incremental operating expenditures associated with project-specific maintenance activities was approximately $6.5 million during the quarter. The refinery ran well in September and is currently processing crude in the 70,000-barrel-per-day range.

During the quarter we also incurred $3.3 million of acquisition costs associated with Mid Pac. In addition G&A expenses included approximately $1.2 million that were primarily associated with establishing process improvements and strengthening internal controls and $1.8 million of accelerated vesting of restricted stock associated with the separation of certain employees. In total the costs we are specifically calling out totaled $12.8 million during the quarter.

Looking forward our current line of sight additional on-island demand adds approximately 10,000 barrels per day which would result in a approximate 20% increase from the current base. At a bare minimum these volumes represent an uplift of at least $6 a barrel which is the general freight estimate for exporting barrels off the island. These additional volumes meaningfully increase the efficiency of the plant, reduce our exports and increase the Company's profitability.

Another factor that drives our outlook is the benefit we received from lower absolute crude pricing reducing our cost of internally consumed fuel. Given the location of the refinery and the current Hawaii energy landscape we internally consumed a portion of the purchased crude to both heat the plant as well as run our cogeneration unit. We estimate every $10 per barrel decline in crude prices reduces our operating expenses by $700,000 per month.

Turning to the pending acquisition of Mid Pac, as you are aware we received a second request from the Federal Trade Commission and are working diligently to provide our response. We have dedicated substantial resources to responding to the commission's request and based on the current status of the review we expect the acquisition to close during the fourth quarter of 2014 or the first quarter of 2015.

Now I'd like to shift focus and spend a few minutes on Piceance Energy. Piceance Energy continues to perform well and has continued to increase production from 47 million cubic feet equivalent in the second quarter to 52 million cubic feet equivalent in the third quarter primarily through completing previously drilled wells.

The previously announced one-rig program commenced in the third quarter and we look forward to the results from the Company's pad drilling program and don't expect new wells to contribute to production until 2015. We continue to evaluate as well as our partners in the venture whether the previously discussed $10 million capital infusion will be required.

We are also evaluating accelerating our drilling program to further develop the numerous high return undeveloped locations. During the third quarter of 2014 Piceance generated revenue of $21 million versus $15 million for the third quarter of 2013, an increase of approximately $6 million and generated operating income of $1 million which included approximately $10 million of DD&A expense versus an operating loss of $2 million for the third quarter of 2013 which included $7 million of DD&A expense. The change in operating income was largely driven by higher natural gas volumes and prices.

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

Thank you. (Operator Instructions) Andrew Shapiro, Lawndale Capital Management.

What effects do you see going forward from Chevron's decision to sell the Kapolei refinery in Hawaii? Could this be an opportunity for Par to regain some of the business you lost to Chevron or do you see these things as independent of each other?

From a policy standpoint we really can't comment on the impacts or Chevron's intent as it relates to the announcement they have made. What is in the public domain at this juncture is that they have retained an investment bank and they have commenced a potential sales process.

And at this juncture I think it is too early to speculate on what their ultimate position will be based on the feedback they received from their sales process. But I will say that as I have referenced previously growing our on-island marketshare and reducing our exports is very important to the underlying profitability of our business.

Okay. And you have previously said that you were aggressively pursuing other outlets for your products. After the exploration and nonrenewal of the Hawaii Energy contract -- the Hawaii Electric contract -- can you update us on what avenues you are pursuing or what is available to you to pursue and what success you have had and what plans you have going forward to make up for that lost business?

Sure. I think even including the loss of the Hawaii Electric Company contract we still view that our on-island sales will be up over 10,000 barrels per day next year which is over a 20% increase. So that's one part of the equation.

The other part is the discussion about what alternatives we have for the bottom of the barrel. And as I discussed on one of our prior calls the alternatives that we have are to buy a more sour crude slate or a heavier crude slate that would not produce low sulfur fuel oil and would be a cheaper feedstock alternative for us. And therefore we would lower our overall feedstock costs and ultimately not be required to meet the stringent requirements necessary to produce low sulfur fuel oil which is a very difficult product to manufacture.

Okay. I'll back into the queue pursuant to instructions but I have more questions.

[Bob Dada, Parker/Dada]

Could you help me out a little bit and address more from a 50,000 foot view of the Hawaii market and just generally with energy prices being as high as they are there and I believe for instance kilowatt prices for energy are in the $0.40 range whereas in the Midwest they are in the $0.05 range. And it just appears that is driving a lot of renewables both on the transportation and the energy side and how it is that you talk about growth when it's just going to Hawaii, seeing all the wind and the solar and all of that and how that impacts your business going forward?

Sure. I think the overall renewable agenda that has been embraced by the state is clearly making inroads especially on the electricity generation side. And ultimately the state is looking at its policy future and the need for having reliable infrastructure and generation capacity that isn't necessarily subject to whether the wind is blowing or whether the sun is shining.

And so they still have a need for a base level of generation capacity that is going to be callable regardless of the weather patterns. So I still believe that there is a need for ultimately some requirement for consistent generation capacity on the island. And as it relates to other renewable penetration I still think if you look at the EIA data on the island you still have especially on a Oahu over 85% of total generation is still from fossil fuel.

Right. I guess what I'm saying is I just also as an analyst see the other side of that when you read about the biodiesel plant there and the -- to meet the ongoing intermittency aspect of it you see all the money that HECO or Hawaiian Electric is spending on storage for example.

These numbers are quite large and I'm sure that the island or the energy policy there has try to reduce their dependence on fossil fuels. And since you are the supplier of fossil fuels and I hear you saying that you plan to increase your sales that runs contrary to what the state and what the Electric Company is saying. So I am trying to figure out who is telling the truth here.

Yes, I still think there's a need for transportation fuels on the island. And jet fuel is a primary requirement that I think despite where we sit from a technology standpoint theory has not been a I would say a technology that is scalable at this point in time to provide the volume of jet fuel that is necessary to feed both the military as well as the tourism business in Hawaii.

And then as it relates to I will say both the road diesel as well as gasoline, there is a major requirement that still exists ultimately. And I think whether there is absolute growth in those markets is not necessarily what is relevant but I think it is really regaining and reestablishing what our prior market presence was on the island rather than absolute volume growth in Hawaii that we are counting on.

Okay. Thank you very much.

(Operator Instructions) Andrew Shapiro, Lawndale Capital.

You recently amended your credit agreement with BNP Paribas I think to increase your credit line from $50 million to $85 million until yearend at which time I think the terms called for it to be reduced back down. Can you give us some color on why this was done and what the intended uses are on the money? And in light of I guess a delayed closing on the transaction if it is tied to that what the prospects are I guess of an extension at all?

Sure. The BNP Paribas agreement is really used within our Texadian subsidiary. And the rationale for increasing that was we have begun to acquire cargoes of Canadian crude and needed to expand the credit facility and ultimately expect to begin delivering additional Canadian barrels to Hawaii.

So the increase in that was really on a temporary basis to facilitate a cargo that we had identified. And longer term I think we feel that we have established a good relationship with Paribas, believe that we have avenues for growing the Texadian business but will require additional capital. And most of the trade credit facilities tend to be shorter term in nature rather than provided on a committed basis.

Okay. And in terms of you may be needing additional available capital and other plans to grow your pretax income to use up the huge NOL here how much cash is left over from the rights offering? And more importantly in your NOL change-of-control calculations in light of the fact the larger shareholders took down their pro rata share of new shares approximately, because I know it is not so exact, what percentage of ownership shift is available in terms of raising new money to grow the Company and make additional acquisitions of pretax income before you hit the wall with the NOL change-of-control tests?

Regarding the NOL we still -- we closely manage that at the Board level and we feel like we have adequate dry powder within the change percentage to facilitate our growth objectives. I think that it is an important fact that we do manage and we are very closely monitoring it but I think that almost under any circumstance that we are evaluating a reasonable sized acquisition we feel like we've got enough dry powder to pursue it.

As it relates to the cash position today within the Company or at least as of September 30 was roughly $97 million. And ultimately we feel like we will have adequate capital and liquidity in place to deal with both closing the Mid Pac acquisition as well as managing the business on a go-forward basis.

Okay. And with respect to the comment about the Board's managing the level you feel you have enough room and all can you be a little more specific? Do you have 20% shift in control, 10% shift in control, something smaller, something larger? Just in general where are we at?

I think it is difficult for us to be specific on that number just given that it is something that I think is going to move. And I think I understand that that is something you would like to know but I think it is something from a Company policy standpoint that we shouldn't be disclosing.

That you shouldn't disclose the percentage room left on your NOL?

Ultimately it is something that we need to manage as a Board and disclosing it publicly isn't in the Company's best interest.

Janet McGurty, Platts.

Hi. Thanks for taking my question.

Could you give me again the total outlook for throughput at your refinery that you gave earlier? I didn't catch it.

There was really no outlook provided. My comment was that the refinery ran well during September and that it's currently processing about 70,000 barrels per day.

Okay, great. Can I ask you do you see the crude breakdown between heavy and sour staying the same or do you see that you are going to be running more heavy? I guess you are taking some Canadian barrels now?

I think our crude slate is really going to be dictated by market outlook and where the prices are. Obviously there's tremendous amount of change happening in the world today. We are seeing lighter grades become more competitively priced and ultimately we will make our decision based on our best alternative.

Okay, so are you still talking with Pemex? Are you still taking some barrels from Mexico?

We still have ongoing dialogue with Pemex and are forming a good relationship with them.

Good. And this is my last question. Do you have anything planned for turnarounds in the end of this year or early next year?

No.

Okay, great. Thanks again. Bye-bye.

John Segal, Highbridge.

Good morning. Couple of questions. I guess I am limited to a couple here.

I wanted to touch back to the benefit that you articulated from the decline in crude. My understanding is that the crew that is going through the income statement today was crude that was purchased prior to the stepdown in Brent, is that a fair statement?

It's really not necessarily the absolute price per se that was a stepdown. But it was really the differentials were put in place relatively 90 days prior.

Okay. And then you had articulated that a $10 move in crude would be worth what to the Company?

Basically $700,000 per month in reduction in operating expenses based on the fuel that we are consuming inside the plant to heat the units as well as provide electricity and steam through our cogeneration units.

Got it. But that's not -- I guess I just wanted to make sure -- that's $700,000 of operating expense benefit? That doesn't capture the fact that for instance at least what we see on our Bloomberg screens the crack spreads for most of your products are moving very much so in the Company's favor. Is that right?

Yes, as it relates specifically to our operating expenses we'd see that decline. And other changes in the market and some of the improvement in overall crack spreads that we are observing kind of starting at a June low and moving up higher are in addition to that benefit that we see from lower crude prices.

Okay so you are talking about a sort of an $8.4 million benefit on the OpEx side. Let me ask just one more question on the crack spread side and the reason I ask is because if I look at the way the securities are trading right now they are trading as if Par is long oil when at the end of the day in many ways you are short oil. So if you could at least give some color to how crack spreads that you are realizing in October -- if you don't want to quantify it -- but give some color at least directionally to whether or not they are improving the way a third party would expect them to improve based on what we are seeing in the markets?

I think on a macro level the market shift that I would say began in July when you saw the Brent market shift from backwardation into contango and you have seen lighter grades in the world that would trade at a substantial premium to Brent on a differential basis have begun to compress and that is giving us additional alternatives. Now my comment regarding the 90-day lag has to do with if you roll back from the third quarter best case scenario the barrels that we consumed during September that we're rolling through our financial statement were fixed or committed to during the June timeframe.

So that was frankly quite a different period in time and the reality is that those shifts that are occurring are broadening our feedstock alternatives and ultimately that's a positive for us. As it relates to just the broader market in crack spreads that we are observing if you look at the slides that were attached you can see kind of a continued uptrend in the Singapore marketplace. And ultimately as I referenced on prior calls the Singapore jet crack spread is a particularly relevant index for us given that we have a high concentration of jet fuel sales.

And ultimately in October and November we have seen I would say improved levels from the June lows. But if you look at the history it is not I would say at the very high end of what people have seen historically.

So ultimately that is a benefit for us at the moment. Does that help?

To understand, from a third party's perspective I think if I just look right now it certainly helps but I see a jet crack of candidly $18 on my screen. I see crack spread's that would suggest that the asset is now positioned to the extent that throughput is there despite having to export some barrels off-island to generate real cash flow.

So I guess the question I would have is can you give any color into the month of October and whether or not you saw a change in the assets cash flow? Because I think it is more than just the differentials that you are discussing, it is also the actual spread itself between a refined product and the feedstock is blowing out to the asset's favor.

I can't provide any specific commentary on October. But I will say that the market has continued to move in our favor from a overall available crack spread to us. And in general the feedstock timeframe that will begin to roll through our financials reflects a better period in time.

Because you start to get into the July timeframe that I have previously referenced and you simultaneously get some of the benefit that I previously referenced on Alaska North Slope pricing and the relationship between Alaska North Slope pricing on a seasonal basis to Brent. So you have both of those factors that are at play that were not applicable during the feedstocks running through our third-quarter financial statements.

Very helpful. Thanks, Will.

(Operator Instructions) Adam Michael, Miller Tabak.

Good morning, Will. Thanks for taking my question. I was going to see if you could kind of walk through some of the uplift numbers one more time.

I caught the 10,000-barrel-a-day uplift at $6 a barrel and based on your comments it sounds like that is going to be coming at the expense of maybe you produce less low sulfur fuel oil and more of the gasoline jet fuel and diesel fuels. And I just wanted to try to understand that dynamic and when I look at the operating loss for the quarter if I pull out the one-time charges it looks like it is minus about $2 a barrel if I did my math right.

I think your goal is to get to $2 to $4 a barrel of operating income. What is the timeframe on reaching that goal and how do we get there?

Yes, I think the biggest piece of making the step-change improvement does start with the increase in on-island sales. And ultimately a 20% increase is a material increase for us and it is going to phase in over time based on the current contract arrangements. As we have referenced previously the recently won Defense Logistics Agency, our military contract kicks in in the fourth quarter and then as we get into Q1 of 2013 we begin to see incremental volumes from additional gasoline customers and ultimately also new jet sales start to flow through on a full-year basis as well as incremental diesel sales.

So that 10,000 barrels a day is a big part of the overall story and then ultimately the feedstock question remains the next piece of the equation that drives improvement for us. And one of the things that is hard to necessarily quantify is that incremental gasoline sales it opens up our crude options. We can buy lighter barrels and have a home for the gasoline range molecules that we manufacture rather than exporting them.

So ultimately that is a major change in the available options that we have and ultimately the Alaska North Slope market continues to be a competitive alternative for us. Challenging for us to make the low sulfur fuel oil with Alaska North Slope crude given its sulfur content; however, given its pricing we are less sensitive to necessarily needing to manufacture that product. So those two pieces move the needle for us as we look forward.

Okay. That's actually helpful. And if I am kind of looking forward I see throughput has trended around that 70,000 barrels a day level for the last three quarters. Is that a good level -- call it 73% utilization -- is that a good level to model going forward?

We certainly have capacity within the facility and that is one of the major opportunities that exist for us. But we will balance and run at the most optimal level to meet our on-island requirements and ultimately balance our exports. So my current view would be that that is a reasonable perspective based on our current demand profile.

Okay, but it sounds like there is physically nothing that would limit you from increasing that utilization level if market conditions warranted?

Correct.

Okay. Thanks, guys.

I will now turn it back over to Will for closing comments.

Great. In conclusion, the Hawaii business position is improving based on additional on-island sales and general increases in opportunities for feedstocks in the global market. Piceance Energy continues to execute its strategy of developing its low-cost natural gas assets.

While the third-quarter results were costly our views regarding the earnings power of the Hawaii business remain at $2 to $4 a barrel of operating income per barrel throughput is an achievable steady-state. As communicated in our prior conference calls 2014 will be a year of transition and building for the Company as a foundation for earnings and cash flow growth are built for 2015 and beyond.

Thank you, everybody.

Thank you, ladies and gentlemen. That concludes today's call.

Thank you for participating. You may all disconnect at this time.