Par Pacific Holdings Inc (PARR) 2015 Q1 法說會逐字稿

Greetings and welcome to the Par Petroleum Corporation first-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Christine Thorp, Director of Investor Relations. Thank you. You may begin.

Thank you, Jessi and good morning, everyone. Welcome to Par Petroleum Corporation's first-quarter 2015 earnings webcast and conference call. Joining me on the call today are Joseph Israel, President and CEO; Chris Micklas, Chief Financial Officer; Brice Tarzwell, Chief Legal Officer; and William Monteleone, Senior Vice President of Mergers and Acquisitions.

Before we proceed, I 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 periodic reports filed with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.

Today's call is being recorded and will be available for replay following this call on the Investor Relations section of our website. I will now turn the call to Joseph Israel.

Thanks, Christine. Good morning, everyone and thank you for joining Par Petroleum's conference call. After my opening remarks, Chris will review our numbers in more detail. Then we will open up the call for your questions.

This morning we reported Par's first-quarter adjusted EBITDA of $22.4 million. Results were driven by favorable market conditions, record high refinery throughput and sales volume for our Company. On-island sales continued to be our main business focus and including the Mid Pac supply agreement as of January 1, we sold over 60,000 barrels per day on-island in the first quarter compared to 50,000 barrels per day in the first quarter of 2014. In addition, in the first quarter, favorable market conditions supported 22,000 barrels per day of exported product for a total of 82,000 barrels per day sales volume compared to 66,000 barrels per day in the first quarter of 2014.

Refinery outages in the West Coast and Asian demand growth even through a soft-patch environment in the first quarter of 2015 have supported Mid Pacific refining margins, improved Singapore and West Coast product market gave us $9.09 per barrel, 4-1-2-1 crack spread on a Brent basis in the first quarter of 2015, $2.25 a barrel more favorable than the first quarter of 2014.

The oversupplied global crude market and specifically the increased North American crude production gave us a Brent minus $2.42 a barrel Mid Pacific differential during the quarter, which was $1.73 a barrel more favorable than the first quarter of 2014.

Progress continues across the board with safe refinery operations and higher efficiency. As expected, our increased throughput profile at 75,000 barrels per day in the first quarter has supported lower direct production expense of $4.12 per barrel compared to a $4.64 per barrel full-year 2014 average. Hedges are in place for 74% of our internally consumed fuel until March of 2016 with annual cost savings of approximately $20 million at 2014 crude price environment.

Our refinery yield has shifted from 33% fuel oil production in the first quarter of 2014 to 21% in the first quarter of 2015. Our distillate production went up from 38% to 45% and gasoline production increased from 24% to 27% between the same periods. In March and April, we started to make and sell asphalt for on-island use to improve our flexibility.

Our retail segment contributed $6.5 million of adjusted EBITDA in the first quarter with strong continuous progress in all categories. Gasoline volume and merchandise sales were up 7% and 14% respectively compared with the first quarter of 2014.

On April 1, we closed the $107 million Mid Pac acquisition and we are estimating an annual contribution of approximately $15 million of EBITDA from its operations, not including $5 million from synergies mainly on the logistic side. In addition, as previously mentioned, we benefit from the Mid Pac supply agreement through increased on-island sales as reflected in our refinery segment's results.

Piceance, our 34% owned subsidiary, is now executing the multiyear capital program and four wells have already been drilled and completed in March and April at a cost of $1.2 million per well, approximately 15% under plan.

Moving on to the second quarter, market conditions continue to be favorable. As the West Coast refineries are expected to increase utilization rates, the Asian demand mid-term outlook for product is strong. Currently, we are experiencing an $8.55 per barrel 4-1-2-1 crack spread and $2.46 per barrel Mid Pacific blend differential under Brent.

As a result, we are expecting refinery throughput to average closer to 80,000 barrels per day in the second quarter. For your convenience, both the 4-1-2-1 crack spread and our defined Mid Pacific blend differentials are now available on our website with a history and future updates. And now I will turn the call over to Chris to review our first-quarter numbers in more details. Chris.

Thank you, Joseph. During the first quarter, net income was $462,000, or $0.01 per share, compared with a net loss of $14.6 million or a loss of $0.48 per share in the first quarter 2014. Adjusted EBITDA for the first quarter was a positive $22.4 million, an improvement of $31.5 million compared to a loss of $9.1 million in the first quarter of 2014. Our press release provides a reconciliation of the adjusted EBITDA calculation, including the following first-quarter 2015 impacts -- $1.1 million in acquisition and integration expenses stemming from our recently closed Mid Pac acquisition; a $5 million increase in the value of our common stock warrants; $4.9 million increase of the contingent consideration owed to Tesoro under the earnout provision of the purchase agreement for our Hawaii refining business; and a $1.8 million loss from our equity interest in Piceance Energy.

During the first quarter, we generated $87 million of cash from operations and were able to repay $27 million of outstanding debt. At quarter-end, our cash balance totaled $124 million. Total debt was $112 million and liquidity was $206 million. The cash generated for the quarter was driven by an adjusted EBITDA of $22 million and a positive change in working capital of $63 million.

As discussed in our previous earnings conference call, our debt at year-end included $27 million related to a partially financed cargo receivable that was repaid in early 2015. After taking into consideration debt repayment for the quarter, our debt to capitalization ratio improved to 28% from 32% at year-end. The improvement in operating cash flow during the first quarter allowed us additional flexibility to continue our growth strategy.

As previously noted, we closed the Mid Pac acquisition on April 1. The cash consideration for the acquisition was financed with a new credit facility of $55 million and cash on hand. After taking into account the impact of the Mid Pac acquisition, our current liquidity is $132 million. Now I turn the call back over to Joseph.

Thanks, Chris. In summary, we are all excited with the progress and position of Par Petroleum in the market. We've optimized operations and Mid Pac in the mix, we have a stronger profitability profile with the ability to generate positive cash flow during downside market conditions. Par is a growth-oriented integrated refinery marketer with a $1.4 billion NOL or tax loss carryforward asset. As we continue to focus on safety and optimize operations, we will use our growth platform focusing on integration and duplicating the business we have.

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

(Operator Instructions). Adam Michael, Miller Tabak.

Good morning. I wanted to see if I could ask, you guys are now splitting out the retail line, which is helpful, on your income statement. And I guess my question would be when we're looking at kind of the results for Q1, how do they compare versus 2014? And how should we look at the metrics for retail going forward? And how do you measure internally the potential there? And what are the key variables you're looking at?

Thank you, Adam. Good morning. We started to report the marketing segment first quarter. Of course, for the Mid Pac closing on April 1, a lot more will be included in the second quarter and going forward as far as information and financial data. We are expecting between our retail and the Mid Pac contribution to have about $30 million to $35 million of EBITDA for the year, not in 2015, but for the full-year basis. Synergies will be added or contributed in the refining segment, as well as the benefit of the supply agreement with Mid Pac. So $30 million to $35 million EBITDA for that segment.

Okay. That's helpful. And then I noticed exports ticked up for the quarter and I wanted to see if you could maybe shed a little bit of light on how you think about exports and I guess leveraging the fixed costs. What's your internal threshold for when it makes sense to export an additional barrel? And it sounds like your throughput is going to inch higher up into Q2 and I'm assuming that most of those volumes will be export-related, but maybe just a little more granularity there please?

Yes, sure. We are a unique refinery. We have this 94,000 barrels per day nameplate capacity, which is available for us and sometimes we get very close to that number just on a daily basis or a few days. The reason we are unique is because we are limited by on-island marketing sales or capacity. So this is why we have mentioned in the past and we mentioned this quarter our on-island sales is our main business focus.

However, when the margins are so good, it will make sense to us to continue beyond on-island demand and basically cut from the jet fuel imports and offsetting this with lower value export and therefore increase our throughput or [pull use] inventories to get there. So what we have in the first quarter was extra inventories, about 600,000 plus barrels of extra inventories. We could pull close to 7,000 a day and together with our 75,000 throughput per day, we were able to fill 82,000.

In the second quarter, we are starting low on inventory and therefore additional sales will have to trigger higher throughput. The benefit of higher throughput for refineries is obvious. Operating expense is going down almost by the same ratio and from $4.60 a barrel direct operating expense average in 2014, we have already demonstrated the $4.10 a barrel in the first quarter.

Also on the yields, on the liquid recovery and all kind of other operations aspect, this should be really, really good for us. So we are excited about that. We currently have a 60,000 barrels per day on-island sales profile, which we are pushing as high as we can. Hopefully we will finish the year closer to a 65,000 per day type of profile.

Okay. That's helpful. And one last one, if I could. I know in fourth quarter you had the benefit of what I think was called a lag effect that was about $15 million to $20 million of EBITDA due to, I guess, the falling oil price. And I believe there is also a second factor, the contango factor, and I know contango in the curve has shrunk from $12 to call it $7 a barrel. Could you walk us through, when we're looking at fourth quarter versus first quarter, that lag effect, and I assume that that's gone away. And then maybe the current contango, if there is any shipping costs that have increased, maybe how we should think about that going forward?

Sure, Adam. This is a very fair, good question as we are new and we want to explain our business to you and the investors. We already said in the fourth quarter that a crude price fall of $37 a barrel was a significant dynamic in the fourth quarter. As we have large contractual sales on the utility side, fuel oil, as well as distillate, a lot of our sales have a one week to a six weeks kind of lag. So in a falling crude price environment, we get the benefit and we mentioned in the fourth quarter close to a $20 million benefit because of that.

We also had a little bit of that in the first quarter, but instead of a $37, I believe, we ended up with $1.50 type of move and the price really went zigzag, so almost to a zero impact. You are right to mention the contango. Contango is new. And for us, being a waterborne averaging three, four weeks underwater floating storage, it was huge for us because it averaged about $2 to $3 a barrel benefit just on the crude we had coming to the refinery.

What happened in the first quarter, not only the contango is not as steep as the fourth quarter, but also the world logistic cost caught up. I mean they wanted their share on floating storage and contango dynamics. So this was cut significantly to almost a non-benefit in the first quarter like you would expect the market -- a smart market to do.

The third item that you didn't mention was inventory. So we drew inventories -- excuse me -- we built inventories in the fourth quarter in a falling price environment. This has translated to an inventory gain. In the fourth quarter it was the other -- in first quarter, it was the other way around. Crude price went down. We drew inventories and it was translated to a little bit of a loss.

So between those three dynamics, if you take the $47 million EBITDA and cut the $20 million of lag impact, you're at $27 million. If you take the inventory and contango effect, you can take another almost $15 million back to a $12 million same basis for the fourth quarter. The market has improved $1 a barrel, so your $12 million is up to a $19 million tradeup for the first quarter. We came up with a $22 with some improvements.

I think the most important thing for us to realize is with Mid Pac on board we are adding a $5 million per quarter engine starting from the second quarter, starting April 1. It wasn't in our first-quarter number. And with the improvements we are doing on the operations side, we are adding another $1 a barrel, so call it another $5 million a quarter. So we should be looking at a $32 million to $35 million EBITDA quarter in these market conditions going forward and this is very consistent with the $100 million EBITDA we explained in the last quarter near mid-cycle environment. Remember, this is a better market than mid-cycle. So numbers are very consistent in line with our expectations. We are happy with the progress and moving on.

Joseph, thank you. Congratulations on a second positive quarter. That's it for me. Thank you.

Jonathan Segal, Highbridge.

A couple of quick questions. First, all retail volumes that you disclosed, that does not include bogey volumes, correct?

Not including Mid Pac volume, correct.

Okay. The Mid Pac crude differential metric that you continue to give, that's telling us basically where below Brent you are buying, correct?

Yes. Actually, no, I should rephrase that. The numbers you are given are in index. They are based on an FOB, three different crude grades that we are not disclosing because of [conventional] reasons. What we are giving you is a benchmark. It does not reflect our true delivered cost to the refinery. This is a benchmark. So you would expect deltas in the benchmark to act like a delta on the crude acquisition price for us.

Okay. That's helpful. And then as we think about the product yield, which you highlighted earlier, there's been a pretty large transformation on the yield. All of the distillates -- is their capacity in your view to continue to push more distillate volumes on-island?

Yes, there is. The island consumes 40,000 barrels per day of jet fuel and it needs about 25% of import. So here is your room. Here is our motivation to increase distillate and jet fuel production. We can do it short term, mid-term with different crude slate and we can look later on on potential configuration change when needed. I'm sure it will have good economics.

And so if we were to think about the asset's performance over more of a medium-term perspective, would this be the slate that you would guide the market to think about?

Yes, looks like a good balance for now.

Final question from me, obviously, crude has rallied substantially over the last six weeks. What is the impact of that likely to be in the business on the more near-term basis?

So I will start with the contractual lag. I won't call it a significant rally, but it moved up, so one of our capture realization layers will be negative due to the lag. Obviously, for this quarter and there (technical difficulty) enough room in the market to still deliver a good gross margin and realize in this volatile margin one day we will be on the positive side and the [under] on the negative on the crude price trend.

I think the good thing we continue to have in the first quarter as far as volatility on pricing, we added additional hedges around the fuel oil burn, what we call internally consumed fuel, to eliminate the [cliff nap] exposure from our profitability. And remember, we burn about 840,000 barrels a year of fuel oil and we don't want to increase costs just for an absolute increase of crude price. We are currently 75% hedged around $55 to $60 a barrel type of a range until March 2016.

Okay, that's helpful for the internal consumption, but in terms of the lagged, I just want to make sure I understood. In terms of the lagged business or the lag impact, whatever the move has been thus far, that will present some headwind in the current quarter, correct?

Yes, but, at this point, I wouldn't call it more than a $0.30, $0.40 per barrel type of event.

Okay. That's helpful. Thank you.

(Operator Instructions). Lee Cooperman, Omega Advisors.

Thank you. I only have two questions. I apologize. I think some discussion on the balance sheet took place before I joined the call, but I noticed in the quarter that the interest expense and financing costs went up quite dramatically. So they were generating free cash flow, so I would have thought that interest expense would be dropping. So could you go through one more time the balance sheet of the Company, where the debt is fixed, where is it variable and explain why the interest cost is up?

And secondly, I don't know if you want to tackle this one, we are in a highly cyclical business and most cyclical businesses, you think in the concept of peak earning power, trough earnings and normalized earnings. Do you have any input that you can share with us in terms of the Company's view of its peak earning power, normalized earning power and trough earning power depending upon business conditions?

Yes. I will have Chris starting with interest and I'll take it back on the earning power.

So the interest expense, the biggest component of our debt is at the corporate level and that interest expense is PIK interest. So as we continue to accumulate that at that level, we have -- we increase the interest expense and then all other interest expense is tied to a LIBOR plus factor. So small changes in LIBOR can cause increases in the interest expense.

And to your question around why haven't we reduced the amount of debt with the cash flow, we just continue to monitor the situation and use the positive cash flow to help pay for the Mid Pac acquisition. So we continue to look at our balance of the debt and we will continue to evaluate the situation.

Is there any refinancing opportunity that exists given the present interest rates versus your cost of capital?

Again, we continue to look at opportunities to change the interest rate and we'll just continue to monitor the situation.

Obviously, after one quarter of good results or positive results in the fourth quarter, it was a good start, but a little bit early to really work our options. Now we have another good quarter in our hands and I think now more and more windows of opportunity for us to move on and optimize.

So your other question about earning power, I touched a little bit before and in our previous call. We view our business at the $100 million EBITDA per year in mid-cycle environments. I was specific about this quarter potential having Mid Pac on board and having the other operations improvement online. At the end of the year, we should (inaudible) $32 million to $35 million EBITDA in this market environment for the first quarter.

Got you. Thank you. You did point it out and I missed it. Thank you very much. Good luck.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any additional or concluding comments.

Thank you, Jessi. In closing, I'd like to thank our employees for their continuous dedication and hard work. Thank you all for your interest in Par and your participation today.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.