Par Pacific Holdings Inc (PARR) 2014 Q4 法說會逐字稿

Greetings and welcome to the Par Petroleum Corporation fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Brice Tarzwell, Chief Legal Officer. Thank you, sir. You may begin.

Good morning and welcome to Par Petroleum's earnings call for the 3 and 12 months ended December 31, 2014. With us today are Joseph Israel, President and Chief Executive Officer; Chris Micklas Chief Financial Officer; Will Monteleone, Senior Vice President Mergers and Acquisitions; and Christine Thorp, Director Investor Relations.

A copy of our earnings release was filed with the SEC yesterday and we anticipate that our annual report on Form 10-K will be filed later today. This call is being recorded and will be available for 90 days.

Before we begin, we would like to remind everyone that comments made today by management may contain forward-looking statements. These forward-looking statements may 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 statement.

We next turn to our President and Chief Executive Officer, Joseph Israel. Joseph?

Thank you, Brice. And good morning, everyone. This is my first quarter as a member of the Par family and I am very happy to be here. Will and the team should be very proud of their achievements and the Company's position following a year of transition. We are all excited regarding our path forward and Par's future.

After my opening remarks, Chris will review our numbers in more detail. Then we will open up the call for your questions.

Strong $47 million adjusted EBITDA for the fourth quarter concluded a challenging but successful year for Par. In 2014, we focused on building the company. After taking over the transition services from Tesoro, hiring people, and repositioning ourselves in both the cooled oil and refined product markets, our operations have reached steady-state in the fourth quarter.

For the quarter, improved Singapore and West Coast products markets gave us an $8.22 a barrel 4-1-2-1 crack spread on a Brent basis, $1.06 per barrel more favorable than the 2014 average and $2.57 a barrel more favorable than the fourth quarter of 2013. In addition, the fuel and crude price environment has significantly supported our retail pricing as well as our contractual distillate and fuel oil pricing due to the time lag effect.

Our product export volume fell to less than 17% of our total sales in the fourth quarter compared to a 22% average for the year. This decrease is consistent with our focus to grow on-island sales.

The oversupplied global crude markets supported our Brent minus $2.79 a barrel mid-Pacific blending mix during the quarter, which was $1.12 a barrel more favorable than the 2014 average and also $1.12 a barrel more favorable than the fourth quarter of 2013. In addition, our crude pricing in the fourth quarter benefited from the contango in the market.

On the cost side, it is important to note that we had approximately $3 million to $4 million of fuel burn cost saving in the fourth quarter due to the lower crude price environment. Hedges are already in place to reduce our 2015 energy cost by approximately $50 million versus 2014 on the same pricing basis.

Moving onto the first quarter of 2015, market conditions continue to be favorable. The estimated 4-1-2-1 crack spread for the first quarter is $9.03 a barrel and the estimated mid-Pacific blend index is Brent minus $2.04 a barrel. Our estimated refinery throughput for the first quarter is in the 75,000 to 78,000 barrels per day range.

Now that we have systems, adequate controls, and a strong team in place, it is time for us at the Company to move onto the optimization and growth phase. Operations excellence, on-island sales, and cost [to refine] are also [coincidence] with potential low-hanging fruits.

In operations excellence, safety and compliance performance will obviously remain our top priority. There is nothing more important than sending every employee home the same way they arrive to work. In addition, by adopting industry best practices, benchmarking, and adjusting on the process, tools, and resources, we should expect gradual refinery performance and supply flexibility improvement by year end.

For on-island sales, on January 1, 2015, we began supplying Mid Pac with approximately 4,000 barrels of gasoline per day. We continue to work with other customers such as the big boxes, airlines, and utilities on supply opportunities with the objective to support refinery optimization over 75,000 barrels per day throughput on continuous basis. This will obviously improve our efficiency and cost profile.

We anticipate closing the $107 million Mid Pac acquisition on April 1 and expanding our integrated [recommit tool] in Hawaii by 86 outlets. Our existing retail operations have demonstrated a 24% year-on-year growth in fuel volume sales and we are very excited to explore our capabilities under the larger combined company.

In 2014, our Piceance investment contributed approximately $3 million to Par's earnings. The low cost profile and location advantage allowed Piceance to compete and generate positive returns, even with a total (technical difficulty) million BTU natural gas price environment. To leverage this competitive position and capture additional growth opportunities, Par has agreed to invest an additional $28 million in Piceance as a part of Piceance's multi-year capital program.

And now I will turn the call over to Chris to review our fourth-quarter numbers in more detail. Chris?

Thank you, Joseph. In the fourth quarter, net income was $32 million or $0.84 per share compared with a net loss of $51 million or a loss of $1.66 per share in the fourth quarter of 2013. Full-year 2014 losses were $47 million compared with a loss of $79 million in 2013.

Adjusted EBITDA for the year was a loss of $9 million compared with a loss of $31 million in 2013. Fourth-quarter 2014 adjusted EBITDA was a positive $47 million, an improvement of $78 million compared to a loss of $31 million in the fourth quarter of 2013.

Our press release provides a reconciliation of the adjusted EBITDA calculation, including the following fourth quarter 2014 impacts: a $2 million inventory adjustment as a result of falling crude prices; $3 million in acquisition and integration expenses stemming from our pending acquisition of Mid Pac; a $3 million increase of the contingent consideration owed to Tesoro under the earnout provision of the purchase agreement for our Hawaiian refining business; and $2 million in earnings generated from our equity interest in Piceance Energy.

During the fourth quarter, we generated $25 million of cash and were able to repay $25 million of outstanding debt. At year end, our cash balance totaled $89 million, net debt was $47 million, and total liquidity was $191 million.

It is important to highlight that at year end, our working capital debt included a partially financed cargo receivable of $27 million. Once this receivable was paid by our counterparty in early 2015, we paid off all our remaining revolving debt.

Lastly, the anticipated closing of Mid Pac on April 1 will be financed with a combination of new debt issued by Mid Pac at closing and cash on hand. Going forward, we expect to see a reduction in the overall acquisition and integration expenses as well as corporate overhead as we optimize our businesses and our operations.

Now I will turn the call back to Joseph.

Thanks, Chris. In summary, as mentioned by the Company in the past, 2014 was a transition year and it has concluded on a strong note. Growth-oriented, integrated refinery marketer, with a $1.4 billion NOL of tax loss carryforward assets. As we continue to optimize operations, we will use our growth platform, focusing on integration and duplicating the business we already have.

And now, Antonia, we are ready to take questions.

(Operator Instructions) Adam Michael, Miller Tabak.

Let me start by saying congratulations on a fantastic quarter. It certainly looks like you guys reached an inflection point and you certainly exceeded our expectations.

My first question would be when we are looking at the throughput increase in Q1, is that evenly -- is that kind of like -- should we assume that is a proportional split between the different products at the refinery yields? And are any of the -- it sounded like the -- if I heard you correct, the Mid Pac volumes that you expect from that acquisition have not started to show up and that was a July 1 when we should start to see those numbers. So if you could clarify that, I would appreciate it.

Yes, Adam, and good morning and thank you for your interest. The 75,000 to 78,000 barrels per day throughput for the first quarter is actually our new line going forward. This is what we expect -- where we expect to be going forward.

Just to remind you, the Mid Pac supply piece actually started on January 1, so we've added 4,000 barrels a day of gasoline sales, with additional on-island sale growth that we had in other places. We are reaching an optimization point, over 75,000 barrels per day, and we should expect this optimization point to increase as we capture additional on-island sales.

Okay. That's helpful. And a second question regarding the Company's leverage to lower oil. Can you provide some additional color on the current hedging strategy as far as operating costs go and how the Company is looking at the low oil environment and how to lock in some of those lower operating costs?

Yes. I would be happy to do so. So the first thing that came to mind and we mentioned it in our prepared remarks and in our earning release. Since we burn fuel in the refinery while most other refineries burn natural gas, because it is available in their operations, the cost of crude is a significant driver in our energy costs. So when crude is going down from $100 to $50 a barrel, it is directly reducing our operations cost in the same ratio.

So when we saw back in January the low price environment and we saw the potential of locking a 12-month strip, we went ahead and did it based on the 50% fuel burn and volume. And we did it for the entire year -- actually going through the first quarter of next year. So 50% is already locked.

And what we capture is what the market gave us. There was a curve around $60 a barrel, plus minus say, $5 a barrel, just the comparable for the year, and this will be basically our max crude price for fuel burn for the rest of the year. This is a significant improvement to where we were in the past and in 2014.

We actually mentioned the $50 million saving, just if 2015 will end up in the same price average like 2014 was. So of course, as long as it stays lower, like today, our cost savings should be much more significant than that. And we think continue in the first quarter.

Okay. That's very helpful. And then last question, if I could. It sounds like drilling costs have come down in the Piceance and the economics in the slides that were Form 8-K'd look pretty attractive, even at the current strip.

Can you comment on just a general strategies on acquisition opportunities? Do you see them being more in the upstream or downstream side of things going forward?

Yes, I appreciate the question, Adam. Piceance is an equity play for us with a significant upside. Basically creating volume by increasing the reserve base is what we are after.

It is a legacy asset that came to us after the Delta bankruptcy process. It gave us positive earnings, since we switched to Laramie Energy as the operator. We like the operator and they have a track record and they are experienced.

And this new program will actually allow us to go to the next level with a much more efficient well profile, low-cost advantage, a location advantage, and realize all these returns that are presented in the presentation. So we are happy to have it. It is a big upside for us and I'll let Will talk more about it. Go ahead, Will.

Good morning, Adam. I think as you pointed out, the slides that were Form 8-K'd regarding the reduction in drilling completion costs as well as the improvements in EURs that we have seen really provide a compelling return on capital that we are infusing into Piceance. And ultimately, this gives us comfort, both with the other equity participants as well as the operator.

And this emanated from the smaller program that we commenced during July of this year and we saw the costs come down significantly and recoveries increase as well. So I think we are pursuing this investment to maximize the overall net asset value of Piceance and we believe this will generate an attractive return to our shareholders.

Okay. Thanks, guys. That's it for me.

John Segal, Highbridge Capital.

I guess I have a series of questions. The first is we have seen a pronounced widening or benefit in California cracks in the recent periods. I was just wondering if that is translating this month to the business. That would be the first question.

The second is I just want to make sure I am clear. The fourth-quarter earnings, which, by the way, were absolutely tremendous, did not include the benefit of Mid Pac yet. Correct? But the first quarter, even though the acquisition has not closed, will have those volumes to our benefit. I will stop there and then I have two others.

Okay. I will start with the West Coast. You are exactly right. The West Coast is doing pretty good, especially starting mid-February. The refineries' outages created some positive pressure on product pricing, which we are benefiting from.

There is about a 20% sensitivity for us to the West Coast. The 80% is coming from the West -- the Singapore market, which is also doing pretty good. So we told you the market conditions continue to be favorable in the first quarter. And we are around $11 a barrel on the index aspect between 4-1-2-1 and the core differential, which is pretty close to the fourth quarter. So we are happy with that and we will continue to monitor the fair market.

The gasoline inventories are extremely low, so there is still some place for upside in the West Coast. It is not over yet.

On your other question, the fourth quarter didn't reflect any Mid Pac contribution yet. It started only on January 1 on the supply side, with additional 4,000 barrels per day. We are expecting the supply side to give us close to a $2 million, $2.5 million a quarter.

So you can expect this to play in the first quarter. And as we close next to the next quarter, we should get the other benefits through the synergies, which are huge, around -- especially around transportation costs. And then just the retail operations at Mid Pac. And it is a EBITDA contribution to the Company.

And the $2 million to $2.5 million that you just quoted, Joseph, what is that? Is that EBITDA?

This is our EBITDA basis for the quarter, so look at about $10 million just coming from the --

The volumes.

On-island sales instead of [try-A] export.

Okay. Very helpful. Then I guess the other two questions I have is can you talk about market share? Given the importance of selling volumes on-island, can you discuss market share gains that you continue to win?

If you have -- I don't know if you have broken this out publicly or not, but sort of what the on-island -- and I may have misunderstood the beginning of the call -- on-island versus off-island sales are?

And then finally, I guess I was pleasantly surprised to hear about the retail growth of 24%. So as retail becomes a bigger piece of the Company's pie, do you intend to provide more transparency into those operations and their profitability? Thank you.

You got it. I will start from the second question. Marketing with 31 stores over locations hasn't been a segment for us. We looked at our businesses: [Hawaii] Operations, now with additional 84 outlets, we will start reporting and tracking our original operations in much more detail and track new records and be transparent with the market. It is very important and it is going to drive our earnings going forward and it is going to give us the diversification we will need as a refiner.

To your first question, the market share, we don't like to talk about market shares from this angle. I can tell you, this refinery, five, seven, eight years ago, used to run 80,000, 85,000 barrels per day.

And this is how you want to run the refinery. This is where it gets the most efficient. You get the best yields, the best [day] operation expense performance, and this is where we want to get.

So Mid Pac only the beginning. So we are up from 68,000 barrels, 69,000 barrels to the 75,000 barrels on continuous basis and we have a lot to chase. The island is still short jet fuel. So there was room there.

The big boxes are out there as really important on our radar screen and some couple of other later opportunities. The higher we go, the more efficient and competitive we will be.

Thank you. Great job and thank you.

(Operator Instructions) Andrew Shapiro, Lawndale Capital Management.

Somewhat a follow-up with this last gentleman and market share. Have you seen any increase in business come your way, given the uncertainty surrounding the other refinery -- the Chevron refinery on the island? And what effects do you see going forward from their decision to sell the Kapolei refinery?

It is hard to go into this point. Chevron continues to open the refinery, as far as we know, and life continues. So we don't see any significant change or any change I can even report this morning.

Do you see it to be an opportunity in the event it is taken over by a financial buyer?

An opportunity in what way?

Well, if it is taken over by a financial buyer, it might be a run with a little bit of a more focus on economics and profitability versus the losses that Chevron may have been absorbing in there. And thus, you would have a more rational competitor?

I don't know about that. Chevron is an extremely rational competitor. Chevron is a very, very good company. Chevron has a lot of synergies on both sides, on the crude and the product side. They could bring all kind of Vietnamese and Asian crude and run the refinery in many ways that the others won't have any access to.

And then when it comes to the intermediates, they can play between their other refineries and get the synergies on a higher [lever] basis. I don't know if we will have any more efficient operator in the island than Chevron, to be honest with you.

No, exactly. That is the point I am making is that if a financial buyer was to come in here, they would have to, in order to maintain profitability, probably tighten or loosen up the market for us to have some expanded profitability. And I was wondering if you saw that. You somewhat have concurred by discussing all the synergies Chevron has to make them a tougher competitor for you.

Yes. So again, we haven't seen anything yet, right? Chevron on continues to operate. Life is normal, but I take your point. This is a potential scenario and time will tell.

Okay. The Hawaiian governor launched a task force that did a few reports. And the final task force report that came out regarding the refinery industry there talks and discusses the move towards renewable energy, especially on the electricity production avenue inside of the state and other movements towards sustainable energy. Describes potentially the long-term decline in demand on-island that would potentially result in support for only one refinery.

Do you -- are you aware of that report and do you concur about that issue? And what are you doing to position ourselves that we are the survivor of the two refineries when the market shrinks?

Yes, let's separate green and LNG, because they are not the same. I will start with the LNG. I think you are referring a little bit on the LNG in your remarks.

LNG has been a hot topic in Hawaii for a many, many years. And there is a reason it hasn't developed to any real (inaudible). It's just so hard to justify such a huge investment. Hundreds of millions of dollars to put an infrastructure in such a small market, which is so far, for many energy resource, you can even think about.

We as a refiner, we cannot just live by this assumption. What we need to focus on continues to be -- continue to focus on our efficiency and be competitive and be a part of the long-term energy solution for the state, whatever it is.

And regarding the green, greens are everywhere and they -- and we can blend with that and we like the green operation as well. And we work that direction in any way possible.

But you know, the market will end up with the right economics around the energy solution for the market. And I believe the refinery will continue to be a part of it, like it is a part of any other market in the world. So we have no concerns about it; we just need to focus on our efficiency and look forward.

Eric Ward, Becker Drapkin Management.

Congratulations on the quarter. Historically, you have talked about achieving $2 to $4 per barrel in EBITDA as a longer-range target. Is that something that you feel is still reasonable?

Yes. So you are talking about the $2 to $4 a barrel on a net margin level, which is a EBITDA level, which is a good indication for where we think our profitability is in midcycle environment. Now define midcycle three, five years average.

This is post, say, Mid Pac. So multiply it by the barrels, you are talking about $75 million EBITDA for a year. I would just add that for me, all the operations improvements that we have going will be in addition to that. So whether it is going to be a $0.50 or $1 or $1.50, time will tell.

But this is where we are going to work really hard in the next 6 to 12 months and these are the low-hanging fruits that I referred to in my prepared remarks. And there is a reason they are considered low-hanging fruits.

Look at this refinery in the last two years. It went through a sale process and then it went through a long shutdown and a long startup. And the focus for most of the year hasn't been really operations excellence. There were other things on the priority list. Catching up with people, catching up with positions.

But here is a refinery that, in the last two years, they stayed a little bit behind. This is pretty clear that we have some opportunities. So I would have this dollar a barrel, call it for now, on your 224 and this is probably where our midcycle profitability is.

I think just to -- since we are introducing here the benchmark, the indexes to the market, let's define a midcycle. If you look at 4-1-2-1 in the last 3 years, it was $8 a barrel and we define how we calculate it in our Form 8-K. There was another $0.17 a barrel discount to Brent on the co-differential side.

So I don't want to get too analytic, but call it $8.17 is probably a good midcycle. So we are talking about 11 fourth quarter, 11 first quarter. I hope this give you a little bit flavor about what we consider favorable market conditions now.

Great, that's helpful. Thank you.

Edward Collery, Arbiter Partners.

I was hoping you guys could try to quantify the impact you saw in the quarter from the lagged or contractual pricing of refined products?

Yes. Great question. And this is not unique to Par Petroleum. All refineries talked about the benefit of the falling crude price in the quarter, because you don't get to $37 a barrel crash on crude every quarter. So it has been a significant impact across the board for refiners.

And I want to clarify a little bit this benefit for us, because we want to be transparent for the market and we want you guys to be able to predict our results and being able to model us in the future. I would tell you that in the fourth quarter, that positive impact on earnings from a falling crude price has been somewhere between $15 million to $20 million from the EBITDA level.

And it came from the retail and you saw retail benefiting across the board in the fourth quarter because the natural lag and the pricing between the Street and the [rack level]. But the other component, which was even more significant, was the [oilness] level.

When we sell jet fuel to military and airlines, when we sell fuel oil and distillate to utilities, there is a one-week to one-month contractual lag between when you price it to when they take it. So of course, when there is such a lag in the falling price environment, this will translate to a gain for the refinery.

I like to say that we change our sales mix at the end of the year and we are now one-third less exposed to this time lag just driven by selling less fuel oil. So the utilities and our exposure on the way up is going to be lower.

Great.

Did I answer your question?

Yes, that's great. Thank you very much.

At this time, I would like to turn the call back over to management for closing comments.

Okay. Thank you, Antonia. In closing, I would like to thank our employees for their dedication and hard work in 2014. Thank you for your interest in Par and your participation today. Thank you, all.

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