Par Pacific Holdings Inc (PARR) 2015 Q2 法說會逐字稿

Greetings and welcome to the Par Petroleum Corporation's second-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 welcome everyone to Par Petroleum Corporation's second-quarter 2015 earnings webcast and conference call. With me today are Joseph Israel, President and CEO; Chris Micklas, Chief Financial Officer and Will Monteleone, Senior Vice President of Mergers and Acquisitions.

Before we proceed, I would like to remind everyone that comments made today by management contain forward-looking statements. These forward-looking statements include all discussions regarding plans, expectations, estimates, beliefs and projections about future events. These statements also involve certain risks and uncertainties that are difficult to predict and could cause actual results to differ materially from the results expressed or implied in any forward-looking statements. Information about the risks we face and the uncertainties associated with the Par Petroleum 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. Par Petroleum does not assume any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or circumstances.

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

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.

Yesterday, we reported Par's second-quarter adjusted EBITDA of $31 million. Results were driven by favorable market conditions and solid execution across the board. Strong market economics, combined with safe and efficient operations, have led the way to a record high refinery throughput of 81,000 barrels per day in the second quarter.

Direct production costs are down to $3.15 a barrel in the second quarter compared to a $4.68 per barrel full-year 2014 average. On-island sales continue to be a key business focus area with a record high 62,000 barrels per day in the second quarter of 2015 compared to 52,000 barrels per day in the second quarter of 2014.

Singapore and West Coast product markets gave us a $9.76 per barrel 4-1-2-1 crack spread on a Brent basis and the Mid Pacific Crude Differential Index gave us another $1.30 per barrel discount to Brent. Combined, our benchmark margin in the second quarter was $11.06 per barrel compared to a $6.46 per barrel in the second quarter of 2014.

The oversupplied global crude market and specifically increased North American crude production continued to give us flexibility and support our feedstock cost structure. The global gasoline demand profile and a low price environment combined with the West Coast supply challenges has supported our product margins in the second quarter.

On August 1, we started the planned 10-day reformer generation with minimum planned impact on production. No major turnarounds are planned until the third quarter of 2016. For the third quarter, planned throughput is approximately 75,000 barrels per day. We continue to make asphalt for the local market and reposition Par in the local propane business to maximize on-island sales.

Our retail segment contributed $5.8 million of adjusted EBITDA in the second quarter. Year-over-year, gasoline volume and merchandise sales are up 5% and 14% respectively on a same-store basis. Mid Pac contributed on a standalone basis $4.3 million of adjusted EBITDA to our retail and refinery results in the second quarter. Integration efforts continue with the objective of realizing annual $5 million of synergies and cost savings by the end of the year.

Our equity investment in Piceance contributed a loss of $3 million compared to an $800,000 gain in the second quarter of 2014. Results were driven by gas, NGL and condensate weak pricing environment. The announced drilling program execution continues with low-cost wells expected to improve profitably and take us where we need to be on a mass standpoint. A story of value creation by increasing reserve base. And now I will turn the call over to Chris to review our second-quarter numbers in more detail.

Thank you, Joseph. During the second quarter, we reported net income of $12 million or $0.31 per share compared with a net loss of $25 million or a loss of $0.81 per share in the second quarter of 2014. Adjusted net income for the second quarter was $17 million or $0.46 per share. Adjusted EBITDA was $31 million, an improvement of $50 million compared to a loss of $19 million in the second quarter of 2014.

During the quarter, we closed two significant transactions, the acquisition of Mid Pac on April 1 and the supply and offtake agreement with J Aron on June 1. The J Aron agreement improved our cash position by $14 million at closing and our liquidity by over $30 million to date. Upon entering the J Aron agreement, we terminated our supply and exchange agreement with Barclays and our HIE credit agreement. This resulted in a loss of $19 million, $13 million as a result of choosing to financially settle our obligation with Barclays which had been previously measured assuming physical settlement. We chose to financially settle our obligation because the inventory was being transferred to J Aron at a premium to the Barclay settlement value. However, accounting rules do not permit us to recognize the gain.

The loss also includes $6 million due to the accelerated amortization of deferred financing costs. The Mid Pac acquisition generated $4 million of EBITDA. Additionally, we had a $19 million tax gain from the release of the valuation allowance because we expect to use a portion of our $1.4 billion NOL to offset the future taxable income of Mid Pac. Consistent with previous results, our second quarter included the following items that are excluded from adjusted EBITDA. There was an increase of $9 million in the estimated amount owed to Tesoro under the earnout provision of our purchase agreement. Our current and projected earnings profile have improved. Therefore, the probability of a future payout has increased as reflected in the increase to the 2015 and 2016 obligation estimates.

We had net income of $3 million due to a decrease in the value of our common stock warrants. We incurred $3 million of losses from our equity investment in Piceance Energy. $2 million of unrealized gains on future commodity contracts and $500,000 in acquisition and integration expenses related to our acquisition of Mid Pac. At quarter-end, our cash balance totaled $78 million, total debt was $171 million and total liquidity was $142 million. Year-to-date, we have generated $99 million of cash from operations, which enabled us to repay net debt of $17 million, complete the Mid Pac acquisition and make an additional $28 million investment in Piceance. The cash generated for the year was driven by strong operating results and changes in our working capital of $44 million.

As of August 3, our cash balance increased $43 million to $121 million driven by normal operating activity and J Aron's refund of advances posted at closing. Total debt was $171 million and total liquidity was $173 million. Our strong capital structure, improved profitability, combined with the positive impacts of the J Aron agreement provide us with enhanced flexibility to execute on our strategy. Now I will turn the call back to Joseph.

Thanks, Chris. In summary, the second quarter has been a story of good opportunities and solid execution. Beyond strong operations performance, the organization has successfully handled growth, integration and finance activities. We also got the opportunity to use the NOL asset through the Mid Pac acquisition and generate significant tax benefit. Overall, another positive strong quarter is under our belt as we have now demonstrated approximately $100 million of adjusted EBITDA in the last three quarters. We are excited with our position and our chance to use the $1.4 billion NOL asset as we continue to grow. And now, Jessi, we are ready to take questions.

(Operator Instructions). Jeff Dietert, Simmons.

You had strong margins both in Asia and in California. The California market experienced strong demand and increased imports. I was curious if you could talk about how the California market may have impacted your business. Did it change any of your product distribution, or did you really just benefit from the stronger margins?

Yes, we benefited from the strong margins. But, as a reminder, the West Coast market has about 20% sensitivity really on our margins and the rest is a Singapore Asian driver. Going to the third quarter, we can see the seasonality impact on the margin environment on three fronts. We have the gasoline market approaching end of a driving season. We have the ANS availability issues that are typical for the third quarter. And we have the Asian economy and demand trends in the third quarter.

On the other side, we have the falling crude price actually helping the margin with the price lag that we have in our Company. So things continue to be good for us in July and August even with the reduction in the margin environment and we are happy with the third quarter so far.

Great. You continued to show a lot of flexibility on feedstock in the second quarter. Making adjustments to take advantage of attractive African and ANS barrels. Could you talk about how those shifts occurred during the quarter and how it looks going into third quarter? Where are you seeing the best opportunity for low-cost crude feedstocks?

Yes. Crude sourcing is key for us. Being a waterborne -- the crude mix is a monthly question for us and optimization and we really worked and improved on the crude sourcing in the past few months with more people out there handling directly supply with the suppliers and developing those relationships and trying more and more grades in our refinery. So the second quarter has been a simple case of low price ANS that we were happy to take and we build the rest from optimization availability. Going into the third quarter, this is really when we see our crude sourcing improvement getting creative and being able to overcome the shortage -- the seasonal shortage -- in ANS availability in third quarter. So very happy with crude sourcing, will continue to be a key focus for our business and drive our numbers.

Thanks for your comments, Joseph.

Thomas Mitchell, Miller Tabak.

A couple of questions here. The first is, you had in some of your remarks in the last quarter's earnings discussion, you mentioned that you had made forward contracts for -- to hedge your cost of crude going out to March of 2016. I think the average was around $60 a barrel. Have you seen opportunities to go out farther and lower the average contract, or should we expect it to still stay in that general area?

Yes, sir. And welcome on board, Tom. We are glad to have you here as analyst. Just to remind everyone, we don't burn natural gas in Hawaii. We burn fuel. So our sensitivity to crude oil price is very high compared to your typical US refinery. So what we do when the future curve has a low crude price, we go ahead and use some hedging in order to secure call it energy, low energy cost for ourself. Just to illustrate what it means, at $100 a barrel crude price, like 2014 environment, energy cost was $80 million just by burning fuel. With the crude at $50 a barrel, energy costs will be $40 million a year, so it's a $10 million savings per quarter.

So the rationale and the reasoning of using hedging on a low crude environment is very valid for us. We continue to do it in the recently and capture a weak market environment all the way to the end of next year, consistently doing 74% of our fuel burn consumption, which is 74% of call it 840,000 barrels per year levels.

Okay, that's very helpful. Has the decline in the crude price at the spot actually improved the cost going out into next year, or is that still fairly high relative to where the spot price is today?

Can you please ask again?

I'll put it differently. How steep does the contango look to you versus where it was about three months ago?

Yes, surprisingly, in such a low (inaudible) market environment, we didn't develop a high contango like you would expect going to the next year. It looks like the market is realizing this crude price environment is valid longer term and keep it relatively flat. Of course, there is a little bit of contango left out there in the market. We will continue to monitor it. We don't do anything on the contango side. At this point, we'll continue to ride the market like most refineries.

I had a second question. When they came out with the new EPA rules for power plants, they seemed to be relatively severe on coal-fired plants, relatively benign towards natural gas-fired plants and it was hard to find them saying much of anything about oil-fired plants. Can you give us a rundown of how you would expect these new rules to affect your power plant customers?

Yes, Tom, let me let Will here address this question.

Our understanding is that Hawaii, it currently has an exemption underneath the proposed rule. Again, it's relatively new so we are evaluating it. I'd also highlight that our overall utility customer exposure at this point in time is relatively low. So I think those are two facts that are relevant, but our current understanding is that Hawaii has an exemption from most of those proposed regulations.

Okay, that's great. Now I had just one other question that you may have already discussed -- I may have missed it -- but your general and administrative expenses increased by about $1.7 million from the first quarter. Should we take let's say more like a $12 million or $11.5 million run rate for SG&A as likely to be something that we will see for the rest of the year, or should it continue to increase?

Yes, I'll let Chris handle it and just start by saying second quarter had lot of activities going on inside the office with the different deals and acquisitions and some internal processes that we had and still have. So I don't know how good the second quarter is as an indication going forward and definitely when you compare it to last year, I know you mentioned the first quarter, but when you compare it to last year, we were in a transition service agreement pretty much at that time and limited workforce and relying on more contract. So the numbers may not compare very well on the same basis, but I will let Chris take it from here.

Yes, I would just add, Joseph covered most everything. I think when you look at the second-quarter rate, you can assume that approximately $3 million of nonrecurring items because we did have some accelerated vesting on some stock options and we did have some significant transactions during the quarter. And these transactions were not considered merger and acquisition transactions because it wasn't acquiring a company. So we do have a slightly elevated level in the second quarter.

Okay. That's very helpful. Congratulations on a strong quarter and we'll look forward to seeing how things develop from here. Thank you.

David Neuhauser, Livermore Partners.

As you further optimize the Company at this point and you are getting your feet wet, Joseph, how do you envision how long further that takes before you start to look at other acquisition opportunities to further diversify the Company's asset base?

Appreciate the question. We feel very comfortable about what we have and we are switching from playing defense to playing offense on the growth front of things. This is a growth company and it was great to have an opportunity to demonstrate what an NOL asset means to a growth company. So we have a team ready to go. We have the systems ready to go and we have good NOL assets to build on. So we are already active and working on different M&A fronts to come up with a deal and I'll also have Will commenting on that from the M&A side.

Sure. I'd further comment, as Joseph has previously said, our strategy on the M&A front remains twofold. One is to continue to build upon our footprint in Hawaii looking for acquisitions that have natural synergies and opportunities to improve our efficiencies there. And the second is really looking at opportunities that leverage our existing operations team here in Houston and we are looking at a number of different opportunities.

And I would also add, in addition, given the uniqueness of our NOL, we are looking at opportunities where we can be the best buyer of assets and we have a number of opportunities we are evaluating and remain focused on delivering the next leg of growth for the Company, of course, in a disciplined manner.

Okay. That's all I had. Thank you.

Andrew Shapiro, Lawndale Capital Management.

Your direct production expense decreased to $4.12 per barrel in Q1 and even more here in Q2. Was that cost per barrel decrease here in the most recent quarter due primarily to production increases, or was there an efficiency improvement and do you think you are now operating close to your lowest cost levels or are there some more things meaningful that you can be -- can be done to lower your cost per barrel?

Yes, I look at it as three portions for the delta. The biggest portion is directly driven by our higher throughput and the second portion will be a lower electricity pricing environment in this quarter versus the past on a barrel basis and then the third one is probably the smaller one, but call it the quarter a barrel is coming from better reliability equal to less maintenance and lower-cost profile overall.

Okay. And further on an efficiency or synergy point of view, your Mid Pac acquisition closed at the beginning of the quarter. You stated on the last call and previously you anticipated an annual contribution of approximately $15 million of EBITDA from its operations, which didn't include $5 million from synergies. Now that you've had a full quarter somewhat under your belt since the closing, how have you revised your expectations for increased EBITDA and cost synergies, if you have? And is there a possibility -- is it in the near term or is it something that evolves and it will be a full year before those synergies are realized?

Yes, on the Mid Pac level, first quarter actually reinforced and confirmed our economics prior to the deal. We reported here $4.3 million EBITDA for Mid Pac on a standalone basis in the second quarter, so times 4, we are talking about $17 million just coming from the Mid Pac side. And if you want to look on the overall contribution to the Company, the additional $5 million of synergies that will be captured in different plays, but still generated from the Mid Pac acquisition and additional $5 million to $10 million coming from the refinery side just by selling more barrels on the island instead of putting them in export. You sum all of it and it's close to a $30 million EBITDA contribution for $110 million type of an acquisition price, so we are happy with the multiple. We are happy with the deal execution and we are looking forward to expand our marketing and retail segment in the future.

Great. Thank you. I have a few more questions. I'll back out into the queue, but if you could come back to me if there's time, I would appreciate it.

Why don't you go ahead and ask it, Andrew.

Okay. Piceance was in the middle of a multiyear capital investment program. I was wondering how the current energy market conditions affect these plans and what are your expectations on capital calls from Piceance if Par wanted to -- and I think it does -- maintain its percentage ownership in Piceance joint venture?

Will will take this question, Andrew.

Sure. Piceance is continuing ahead with its one rig program and we are seeing our drill and completion costs come down as we expected. We are currently seeing our wells drilled and completed about $1.2 million per well. So really on the low end of our original expectations. Production growth is on track to hit our expected range of 55 million to 60 million cubic feet equivalent exit production by the end of the year. We exited June with approximately 49 million cubic feet a day equivalent production. We are pursuing -- I have referenced this previously -- our water infrastructure buildout, which remains about $15 million over the course of this year and should be operational in the fourth quarter and we are encouraged by the economics we are seeing despite a challenging commodity price environment.

So it's really to continue running the one rig program. We will review that plan quarterly and obviously make decisions based on the commodity price environment we are seeing. But based on the economics we are viewing today, we are moving ahead. I would say that we did complete one small transaction actually at the end of July and at that point, a third party -- we made a small acquisition of approximately 1.7 million cubic feet a day of production, approximately 7,200 acres of held-by-production acreage for about $4 million in the Piceance basin. It was a bolt-on for us and then in addition, the seller, which is an unaffiliated third party, infused approximately $15 million of fresh equity capital into Piceance. So that took our ownership percentage down to 32.4%, but we are pleased with the transaction.

Yes, it sounds pretty good. Okay. And can you give us whatever update you can on the Chevron refinery sale process and what you see as the likely results and has the uncertainty over there provided any opportunity for Par to gain more business and expand in margin?

Yes, we cannot discuss or comment on the M&A specific-front (inaudible) Chevron, but we mentioned in the past that Chevron potentially exiting operations on the island will only mean good things for Par Petroleum, the ability to sell more barrels on the island or compete -- have a better competitive position on the island with any other player around. So we will continue to monitor and see where it goes.

Okay. And then last question then for you here, you have a nameplate capacity I think of 94,000 barrels per day. You've been ramping things up. I think on some days you've been able to hit that type of capacity and if that's the case, are there visible steps you could take to debottleneck and increase the nameplate capacity on the facility?

Yes, running to market limits really put us at 75,000, 80,000 barrels per day, selling the low 60,000s on the islands, hopefully going to the 65,000 by the end of the year and taking the rest to export and inventories by definition. So the economics of increasing the crude throughput rate is not there. Obviously, if we get to sell additional barrels on the island in the future, we will go directly to high rate and as you said, Andrew, we were able to go up to the 90,000s in a few days when we choose to catch up. So this is viable and we can develop a good reliability around that number. Going beyond 90,000 and meeting the Hawaii demand at 110,000, 115,000 barrels per day is doable, but it will take a project and the right time.

Okay. Thank you. One last thing, gentlemen, what is on the plate for your planned investor relations non-deal roadshow commitments in the coming quarter or two terms of getting the story out?

Christine Thorp, our IR and PR, will reach out to you and others and will make sure it is fully coordinated. Thank you, Andrew, for your support.

Chi Chow, Tudor, Pickering, Holt.

So you mentioned your same-store fuel sales in the quarter were up 5%, if I got that right. That's pretty strong. Could you talk about the factor that drove that and just wondering if there are more industry dynamics or something Company specific on that end?

Yes, on the 14%, on the merchandise side is another year-over-year strong growth and the reason is we are talking here about 30 stores coming from Tesoro. Tesoro is a great operator, but in Hawaii having the system for sale for such a long time, there wasn't too much marketing effort to help those sales and optimization. So from the time we got it and took it, we realized marketing is a big part of our integrated strategy and we put the effort and got the results and I don't think it will continue to improve in this type of rate, but we will now continue to improve it in a more typical industry rate.

What specific factors? Can you give us an example of your marketing efforts on what changed versus the prior owners?

Yes, it's pricing, being aware of the street price. It's the shelf organization in the store level and being on top of what's moving and what's generating the highest gross margin and working it every day and adjusting accordingly. Nothing different from what you have seen and other --.

Right. How are things trending here in the third quarter? Are you still seeing those same growth rates as 2Q? And just another broader question I guess on fuel demand, are the seasonal factors on-island the same as the mainland where things just really fall off after Labor Day, or are things a little different there?

Yes, so third quarter we report our Mid Pacific index on the core differential side in the 4-1-2-1 and July is at $9.36, which is $1.70 under the $11 for the quarter. However, we have the falling crude price helping our margin realization. So third quarter continues so far pretty flat, but our forward curve has it going down based on the three items I discussed before that are seasonal -- the gasoline approaching, end of driving season, ANS availability and the Asian economy.

I think we are less sensitive to the end of driving season than the West Coast is going through and what we will get is Asian demand going up normally in the fourth quarter and bringing us a new boost from the gasoline, as well as the distillate side for the fourth and the first quarter. So we are getting a mix from both sides and overall our seasonality is slightly lower because of that and volatility is better.

Okay, great. Thanks. And then on the acquisition front, are you focusing primarily on refining acquisitions or also midstream? And I guess secondarily, can you give us your thoughts on midstream opportunities given the downturn in the MLP market that we've seen here?

Yes, the refining and marketing midstream is our expertise and this is what our growth platform will capture and build on as we use our NOL in the future, so this is definitely the focus internally. We do have logistics that will eventually go down to separate reporting and potentially MLP following that. So we are excited with our internal MLP opportunities in the future. And outside, I think we have again the people, the back office, the systems to handle midstream opportunities on a standalone basis on the mainland as well and increase -- expand our footprint.

Okay, great. Thanks. And I guess a final question maybe for Chris. Can you explain this $18.6 million tax benefit from the Mid Pac acquisition, what that's all about and was there any sort of cash impact on that issue?

Well, the cash impact will be received in the future and the tax impact is basically being able to use the NOL to offset the future profits for Mid Pac. So it's basically being able to revalue the valuation allowance and take the result to income.

Okay. And then this was a one-time item, is that correct?

It's part of the acquisition valuation of the acquisition, yes.

Okay. Thanks. Appreciate it.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Mr. Israel for any additional 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. Have a good weekend.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.