Par Pacific Holdings Inc (PARR) 2015 Q4 法說會逐字稿

Greetings and welcome to the Par Pacific Holdings fourth-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christine Thorp, Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone, to Par Pacific Holdings' fourth-quarter and full-year 2015 earnings conference call. With me today is William Pate, President and Chief Executive Officer; Chris Micklas, Chief Financial Officer; Joseph Israel, President and Chief Executive Officer of Par Petroleum; and Will Monteleone, Senior Vice President of Mergers and Acquisitions.

Before we begin the discussion please note that some of the statements we make during this call may contain forecasts, expectations, estimates and projections. These are forward-looking statements that involve significant risks and uncertainties which could cause actual results to differ materially from the results discussed in these forward-looking statements.

Because of these risks and uncertainties investors should not place undue reliance on forward-looking statements which are effective only as of today's date. We seem no obligation to update or revise any forward-looking statements to reflect new or changing events or circumstances.

Information about the risks and uncertainties we face can be found in our Form 10-K and other documents filed with the Securities and Exchange Commission. Today's call is being recorded and will be available on the Investor Relations section of the website. Now let me turn the call over to Bill.

Thank you, Christine. And thank you for joining us this morning. 2015 was a terrific year for Par Pacific with strong financial and operating performance. Chris will go into the financials in more detail, but we are very pleased with our fourth-quarter results despite pressure on our crack spreads which ended the year below mid-cycle levels.

Joseph and Will will cover the operating performance in Hawaii and Laramie, respectively. Before they cover the results I would like to touch on our 2015 strategic actions.

In April we closed the Mid Pac acquisition which dramatically changed the profile of our Hawaiian operations. This impact is most noticeable with the recast of our operating segments for financial reporting. Profits are broken out for the first time among refining, retail and logistics.

With the acquisition of the Tesoro operations we had a decent business, but one in which it was difficult to increase our throughput. With the Mid Pac acquisition we have a more internally balanced operation that allows us to operate our refinery at higher throughput and therefore lower unit cost.

As a result, in 2015 we had $97 million in adjusted EBITDA in refining, $33 million in retail and $29 million in logistics. We also agreed in December to make an additional $55 million investment in Laramie Energy, to support their purchase of largely contiguous acreage with significant natural gas production and drilling inventory.

We believe this purchase will prove as transformative to Laramie as Mid Pac was to our Hawaiian operation. We think we acquired existing production at a great price and the economies of scale and our ability to reduce field costs should also change our going forward drilling economics.

Finally, we enter 2016 with a great balance sheet. We are in a net cash position due to the registered direct offering that we completed in October. Later in the fourth quarter we completed a refinancing of our retail secured credit facilities pushing out any material debt maturities for several years.

We will use some of our cash in the Laramie investment early in March. Nonetheless, we are well positioned to pursue additional opportunities in the energy and infrastructure sectors which are emerging rapidly in this volatile environment.

At this time I would like to turn the floor over to Joseph who will provide more detailed perspective on our Hawaiian refining retail and logistics business.

Thanks, Bill, and good morning, everyone. Before digging down into operations results I would like to thank and congratulate our employees for outstanding 2015 execution. We are especially proud of our 2015 safety record across the board, including our 0.26 [total] recordable injury rate in the refinery and zero for our logistics group.

Our refining segment adjusted EBITDA in the fourth quarter was $23 million. Combined 4-1-2-1 crack spread and Mid Pacific Co-Differential index in the fourth quarter was $8.25 per barrel, approximately $0.25 per barrel below the mid-cycle environment. The weak index was mainly driven by low jet fuel crack spreads, basically at a five-year low, and continued global weakness (inaudible).

However, our improved 62,000 barrels per day (inaudible) sales combined with high-margin export with mixed aromatics to Asia. An optimized co-differential allowed us to outperform market conditions with realized adjusted refining margin of $6.05 per barrel.

On the fixed dock side we continue to benefit from the oversupplied market and contango market structure. In the fourth quarter we continued to [dilute] our cold oil flexibility by writing new grades and optimizing transportation.

In 2015 we optimized our business and improved our capture rate. Our adjusted refining margin for the year was $6.82 per barrel, $3.45 per barrel stronger than our 2014 realized margin, while the combined index gave us only an additional $1.66 per barrel to work with.

So far in the first quarter the combined index has averaged approximately $7.00 [a barrel]. However, the global octane shortage and the gasoline blending data mix in Asia continued to present mixed aromatic opportunity for Par.

Overall we continue to benefit from our improved capture rate and mitigate market conditions in the first quarter of 2016. Our strong 99.9% mechanical availability for the quarter and 98.7% for the year has allowed us to optimize our assets and execute our operations plan.

Our refinery throughput in the fourth quarter was 80,000 barrels per day, consistent with our guidance. And our average 2015 refinery throughput was 77,000 barrels per day, 13% higher than our 2014 average throughput. Our planned throughput for the first quarter is approximately 75,000 barrels per day.

Our production cost in the fourth quarter of 2015 was $3.51 per barrel and for the full year our production cost averaged $3.54 per barrel, 25% under our 2014 average production cost. This reduction implies $30 million of annual cost savings, $8 million attributed to lower steam and electricity costs and $22 million, or $0.75 per barrel of improved efficiency through higher refinery throughput and other sales [help] improvements.

Our refinery turnaround is scheduled to start in the second week of July with an estimated 30 days oil to oil. Scope includes the execution of routine maintenance including high/low crack and [a catalyst change] as well as regulatory consent decree warrants.

Our Retail segment adjusted EBITDA in the fourth quarter was $7 million. Year-over-year gasoline volume and merchandise sales are up 2%, 10% respectively on same-store basis.

Following our successful integration with Mid Pac we are achieving our profitability objectives. And while $50 million of EBITDA contribution to our Retail segment and additional $50 million to our Refining and Logistics segment under a mid-cycle condition.

Running an integrated, difficult to replicate (inaudible) logistics asset has been a primary key to our success in the niche market of Hawaii. Starting this quarter we are reporting our logistics-related financial performance as a separate segment.

Activities in this segment include feedstock receipt to our single point mooring facility and shipments to the refinery, as well as refined product movement through our pipelines and [eight] terminal systems including trucking, barging and storage activities. Profitability for this new segment is mostly driven by intercompany activities. Our Logistics segment adjusted EBITDA in the fourth quarter was $6 million.

In summary, we are very excited with our progress in 2015. We have benefited in the first half from favorable market conditions. But most importantly, we have diversified our system by growing our retail footprint and improved our profitability profile as a Company to better capture future opportunities.

In addition, we are well positioned to grow and duplicate our business model in different places. And now I will turn the call over to Will to review Laramie operations and results.

Thank you, Joseph. As Bill referenced, Laramie is actively consolidating assets in this opportunity rich environment and building a first-rate asset base during this down cycle. The Laramie story and the overall economics in the Piceance basin continue to fundamentally improve for the Company. A few data points on this front.

The Laramie team has driven down drilling and completion costs from $1.8 million per well in 2012 to $1.4 million in late 2014 to just over $1 million as of year-end 2015. The vast majority of these reductions are driven by structural efficiencies rather than simply service cost reductions.

Simultaneously, estimated ultimate recoveries are holding steady or improving and currently averaging between 1.6 billion and 1.8 billion cubic feet equivalent per well. Ample takeaway capacity and robust market demand on the West Coast New Mexico provide attractive demand dynamics.

The previously announced acquisition of additional properties in the Piceance basin is expected to close this week and the work there is just beginning as far as reducing costs and extracting material synergies.

As Bill mentioned, Par Pacific is investing an additional $55 million of capital and increasing its ownership stake in Laramie Energy from approximately 32% to approximately 42%. The major merits of the transaction are the cost reductions available through the combination that will offer more efficient base operations and projected improved returns on incremental capital deployed.

Laramie's lease operating expenses during 2015 averaged roughly $0.56 per million cubic feet equivalent, while the acquired properties were around $0.73 per million cubic feet equivalent. This is a primary example of the great opportunity to right size the cost structure of the acquired properties, a task well suited to the Laramie team given their realized efficiencies in the current asset to date.

Year-end production was 56.8 million cubic feet equivalent per day, up from 46.3 million cubic feet equivalent per day at September 30, 2015. Laramie drilled 18 wells and completed 14 wells during the quarter and further built the drilled but uncompleted backlog of wells to 64 as of year-end.

In addition, the $15 million water infrastructure capital project came online in early February and is now treating and storing produced and flow backwater for recycling. This project positions Laramie to further reduce total field operating costs through water handling cost reductions and efficiently run a large-scale drilling program.

At this juncture Laramie is modifying its 2016 capital plans to reflect the current commodity price environment. Laramie laid down its drilling rig in December and has ceased completions. As a reminder, there are 58 wells on three pads in inventory that can be brought online quickly if economics support the investment.

Pro forma for the closing of the pending acquisition 2016 exit production is expected to be between 130 million and 140 million cubic feet equivalent per day, which reflects modest completion activity in the back half of the year of $10 million to $20 million.

Post acquisition Laramie expects to be net cash flow positive during the remainder of 2016 and has the flexibility to accelerate completion activities and grow production rapidly or alternatively pay down additional debt with cash flow from operations.

The final 2016 Laramie capital plans will be set at a minimum quarterly and will be based on the then prevailing commodity market dynamics. The Laramie balance sheet post transaction is strong and the debt to EBITDA profile at year-end 2016 is expected to be between 3 and 3.5 times depending upon the ultimate level of completion activity.

The debt balance pro forma for the closing of the acquisition will be approximately $129 million. As a reminder, Laramie hedged approximately 90% of projected existing gas production through December 2018 at $2.34 per million BTU, which provides certainty in these markets.

During the quarter Par Pacific recorded a non-cash impairment to our equity investment in Laramie of $41 million. This charge reflects the equity valuation implied by the pending $55 million investment to facilitate a highly accretive transaction to Par Pacific's stake. The carrying value on the balance sheet now reflects the recent valuation set by this investment.

In summary, the capital plan outlined previously demonstrates both the operational and financial flexibility captive inside Laramie, which provides great value to its shareholders. This flexibility affords Laramie the ability to make capital allocation decisions based on economics alone rather than [sunk] costs or capital structure, factors that differentiate Laramie from its peers.

Laramie is appropriately capitalized for the current market and has the runway to not just survive this down cycle but thrive as a consolidator. I will now call over to Chris to review our financial results.

Thank you, Will. During the fourth quarter Par Pacific reported its fifth consecutive positive quarter of adjusted EBITDA at $23 million and a full-year adjusted EBITDA of $110 million. Adjusted EBITDA includes a one-time non-cash gain of $5 million as a result of eliminating certain employer sponsored benefit obligations.

To provide additional transparency into the drivers of our performance, we are now presenting our results using three primary segments and are reporting full-year adjusted EBITDA of $97 million for Refining, $33 million for Retail and $29 million for Logistics. Bear in mind our results include just three quarters of Mid Pac's results.

I would like to highlight three non-cash charges that reduce our net income for the fourth quarter. The first item is our equity loss of $50 million related to Laramie, which has already been addressed by Will. The other two items include timing differences related to the valuation of our inventory in unrealized mark-to-market losses on derivatives.

We continue to see operational and financial benefits of our supply and off-take agreement with J. Aron. However, this agreement creates certain timing differences on a GAAP basis. During fourth quarter we had a non-cash charge to earnings of $19 million, which primarily includes a reduction of our inventory to the lower of its cost or net realizable value.

We use derivatives to manage our cost of our internally consumed crude, which is a major cost to our refinery. In 2015 we hedged approximately 75% of the cost associated with our internally consumed crude through 2017.

We also use derivatives to manage the price of crude cargoes and our inventory levels. The falling crude price during the fourth quarter resulted in a mark-to-market loss of $6 million.

Year to date we have generated $132 million of cash from operations and during the fourth quarter we continued to strengthen and improve our balance sheet. We completed a stock offering raising $76 million and consolidated our retail financing agreement into one facility using a portion of the proceeds to repay $35 million of our term loan that was scheduled to mature in March of 2016.

Our year-end cash balance totaled $168 million, total debt was $165 million and total liquidity was $229 million. Currently our liquidity is $175 million. The reduction from year end is the result of pre-funding our $55 million contribution to Laramie and reduced activity in Texadian, partially offset by a $23 million increase in the availability of our J. Aron deferred payment agreement.

With regards to Texadian, we responded to market conditions by consolidating activities in Houston and we allowed our credit facility to lapse. The expiration of the credit facility reduced our year-end liquidity by $26 million. However, freed up access to $18 million.

As Joseph mentioned, during 2017 we will be executing a plant turnaround at the refinery which will require cash expenditures of $30 million to $35 million. Additionally, we will be performing maintenance projects on logistics assets which we expect will have a $5 million to $10 million impact on adjusted EBITDA. Now I will turn the call over to Bill for his closing comments.

Thank you. Operator, that concludes our prepared remarks. Would you check for any questions at this time?

(Operator Instructions). Scott Levine, Imperial Capital.

First question. You referenced the deterioration in the Mid Pac crack spreads recently, but it looks like you've been able to offset a portion of that with improvement in your differentials.

So I was hoping you would be able to provide a little bit more color regarding any changes in strategy there, how confident you are that that can continue and a little bit more elaboration on the crude sourcing strategy in general.

In the first quarter we continue to see the same theme from the previous quarter and over the last year. What we do is increase our on-island sales to improve margins. And then we look for what we call a high-quality type of export that will allow us good economics even when we load cargo and send it to Asia.

Last quarter it was gasoline on the West Coast; this quarter we mentioned mixed aromatics in Asia. And as long as we are able to [catch] those then we will perform our market conditions like we have done in the fourth quarter, like we are expecting in the first quarter.

On the (inaudible) side we continue to look for flexibility, run new grades and therefore improve our commercial leverage and [ultimately] differential versus what the market is giving us.

Understood, thanks. And then a follow-up for Bill. Just hoping for maybe a little bit of an update. You have been clear about your acquisition profile and what your priorities there. But just wondering if there was any update to your thoughts.

And maybe a little bit more color around the market in general and how you see 2016 playing out from an M&A perspective for the industry, as well as any thoughts directly relatable to Par.

Sure, Scott. First of all, we are not going to make any comments with respect to any specific acquisitions and that will be our policy. We won't comment on acquisitions unless and until we have a signed agreement and we decide to go public.

But generally speaking, I think one of the things you're seeing in the market in general is the distress that last year was somewhat contained to the E&P space is really moving downstream into the midstream sector into the downstream sector.

And as we have said, the only area of interest for us to date on the upstream side has been to continue to build Laramie. Obviously we are doing that with the announced acquisition in December which we hope to close or expect to close this week.

Downstream and midstream is much more interesting for us with respect to our tax attributes because we think that the tax attributes provide more leverage and more of an advantage to us. So the market I would say is coming our way and I feel like we are well capitalized and able to pursue opportunities in this turmoil.

Great, thank you for that. And then one last one if I may. I think, Chris, you had indicated $30 million to $35 million in capital spend on that turnaround and a $5 million to $10 million EBITDA impact. Is that all expected to be in the third quarter?

And if you can provide additional color just regarding your capital expenditure expectations for 2016 for the Company as a whole if you are willing to provide that as well.

Hey, Scott, it is Bill. Just quickly, I think Chris in his prepared remarks mentioned 2017; I just want to clarify that the turnaround is in 2016 not 2017. So, go ahead --.

Right.

Yes, so of course there is a cost element that Chris clarified well in his comments. Beyond that there is the missed opportunity side. We will run probably close to 60,000 barrels per day in the third quarter, 55,000 to 60,000 as a result of the turnaround and this will definitely be another impact on our financial results.

But we are expecting a strong Q2 and strong Q4 as far as throughput. So overall for the year we will probably be just a little bit under 75,000 barrels per day, [200 say of the] demand in our system.

Got it. And all of that will be contained in the third quarter, correct, on the turnaround?

[Correct]. The second week of July 30 days oil to oil.

Got it, great. Thanks, guys.

Thomas Mitchell, Miller Tabak.

Since you are breaking out the logistics separately, which I think is a great idea, and there has been talk on and off about maybe creating a master limited partnership out of logistics assets. It looks to me like to have something that would be interesting and possibly an MLP that was attractive to the public, if it was going to go public, it would need more scale.

That the level of EBITDA run rate or at least in the fourth quarter the level of sales. It seems like you would want something that would be three or four times that size before you could think about bringing it out into some sort of an offering in the marketplace. I am just wondering about how you are thinking about it and about the potential for an MLP?

Sure, Tom. This is Bill. I think in light of the current market conditions the likelihood that we would pursue an MLP at this point is slim to none. I do think it is helpful just to break out the profitability of this infrastructure for investors so they understand what we have.

I agree with you, the scale is a little light. Although I don't think it is as significant as you make it out to be. Most of the offerings -- even some of the larger companies have started with offerings where $50 million or so of EBITDA has been -- or of free cash flow has been provided in the IPO of a master limited partnership.

But I agree that one of the focuses for us from an acquisition perspective is the income -- MLP-able income. But I think at this point, in light of where the market is, we are really thinking about it more from the perspective of just free cash flow for our own entity.

Okay, that is very helpful, thank you. The other thing -- I just wanted to verify, because I may have this wrong. But I believe that prior to the off-take agreement with J. Aron the switches -- the changes in inventory valuation would have been -- since the inventory was owned by Par, not by a third-party, would have actually blended into the cost of revenues in those previous quarters basically before the third quarter of 2015. I just want to verify that that is a correct reading on my part.

Yes, thanks, Tom, this is Chris. When -- before switching to J. Aron we had a volumetric exchange. And therefore the impacts would stay within the exchange; we did not have the gains and losses in unrealized gains and losses running through the P&L. So you are correct that there are other line items.

However, our adjustment is done to make them comparable as we are trying to reflect the true economics of the agreements. So that is why you see more line items as one is a volumetric exchange and the other is a supply and off-take agreement.

Okay, that is very helpful. And then the last thing, is probably -- it may sound a bit naive, but you're been focusing on mid-cycle. I am just wondering what are the characteristics of late-cycle and early-cycle crack spreads as opposed to mid-cycle?

Yes, mid-cycle is the definition of average three years crack spreads on the [code] side as well as the product side. You have down-cycle in this cyclical refining industry and you have good times like the first half of 2015 where spreads are high more than normal and could fully -- almost (inaudible) refiner.

So when we define mid-cycle it is just simply the average and it helps us to quantify how good the market is for us in converting it to cash results. I think the key in our industry is to be able to cash flow in the down-cycle. And so far we have seen this trend for our Company, this is a good thing.

Is there any possibility that the down-cycle benefits Par by comparison with your single competitor in Hawaii -- in one way or another?

I am not sure that I would assume that. I mean I think -- each refinery in Hawaii has different economics, they have different configurations. So our profitability and their profitability -- they are largely the same. But they are not going to be materially different; there may be some differences at the extreme and obviously they are smaller scale, the other refiner is smaller.

So their fixed costs are probably a little higher which means that their breakevens, if you will, are probably a little higher. But they also have the benefit of being part of a larger -- much larger organization. And I am not sure you would really see those breakevens affect their operations in any material way.

Doug Leggate, Bank of America Merrill Lynch.

Bill, I've got one on Laramie and one on refining also, if I may. So I guess first on Laramie, obviously you are taking up your stake at Par. I'm just trying to understand what the longer term game plan would be there in terms of your preparedness and ability to continue to support the acquisition strategy.

Ultimately do you have a limit as to what ownership stake you want to have there? And ultimately where do you see the opportunity to fully consolidate?

Yes, good question. We are very comfortable with the 42% stake. We would be comfortable with a higher stake. For us it is a function of, do we have a good management team here that has a strong strategy. We believe that is the case. And so we are very supportive of what we do. We also have very good partners here.

Given the fact that the way one values Laramie and the way one would value refining are very different, I am not sure that it matters if it is consolidated or not. Any investor that is looking at our Company really has to look at each of them independently and approach it from a sum of the parts basis.

We looked at the acquisition that was done in December as an opportunity to both increase the scale of Laramie to pursue opportunities that allow us to reduce costs. We actually hedged out through the end of 2018, so it is not about revenues or a near-term perspective on where natural gas prices are going. But rather let's build an operation where we are a low cost producer of natural gas.

We like the fact that the Company has scale away from the Marcellus and the Utica because you are not doing battle day to day over marketing and getting the gas to market. I don't think the Laramie or even -- any Rocky Mountain gas has much hope of things flowing East at this point. So you are really looking to assess markets to the West whether it be California or the South even, Mexico.

But we just think it is an attractive opportunity where consolidation has been and will continue to take place in the Piceance and we like our management team and their ability to create value throughout the cycle.

They don't have any long-term commitment, so it gives us a lot of flexibility over the next three to four years. I mean we could spend no capital on this business over the next three to four years and just cash flow -- extract the cash flow.

Okay, that is very clear. Just a point of clarification. So if you did see a situation where you increased your stake further, you would continue to have that arm's-length relationship or would you rather --?

I am just thinking that the idea of -- the way that pure play refiners have been volatile over the course of this last year or so, I am just wondering if there is a mini integrated business model that you might have considered or not?

Well, I think -- when I think of the business and as we discuss our mission around here, our goal is to buy and build an energy business and to utilize these tax attributes that we have in doing so. And we have a great business that Joseph runs in Hawaii in terms of a refining, marketing and logistics business.

And we think we can grow that business in the lower 48 as well, leveraging what Joseph does, his commercial team, their ability to be -- as he was just mentioning, their ability to be very flexible in even a difficult market environment and capture value and capture more of the crack spread.

On the Laramie side I feel like it is the same way. We have got a great management team in Denver. It is a business we can build. We tend to think about ourselves as operating a very, very thin holding company and pursuing and buying and building other businesses underneath that.

So, whether it is Laramie or it is Par Petroleum or it is a third or a fourth leg, our objective is to build businesses within this market context. And (multiple speakers) at the right time if one of these businesses is kind of -- there is an opportunity to monetize we will monetize as well.

That is very clear, thanks. My follow-up is on refining actually. So a very quick one for Joseph. So Pacific Northwest was particularly weak. I guess logistics constraints and so on have been impacting that whole region along with the weakness we saw last week in California.

So I am just curious, Joseph, we have seen some run cuts from some of your competitors. What is your expectations for how long it takes to clean up that West Coast market? Have you been trimming economic run cuts? And is there any kind of prognosis you have for a repeat of the kind of strength we saw in 2015, the likelihood that that occurs again on a go-forward basis? And I will leave it there. Thanks.

Yes, no, thank you. Just to remind you, we are about 80% driven by the Singapore market and the West Coast is more like a 20% on our overall sales profitability. I agree with you, current environment on the West Coast is challenging. The civil management, they gave about 30% reduction for margins for 2015 versus -- 2016 versus 2015. We don't have any reason to think otherwise.

But diesel and the distillates are just looking for better news from the global economy side, especially industrial production. However, I think there is a good reason to be optimistic on the gasoline side.

We have started to see last week changes in the gasoline pricing and spreads really driven by the RVP change. This is the time of the year when things are coming back there.

Also I would say that on the demand side, due to elasticity of the demand curve, we see a lot of good news. When talking about VMT, the mileage driven, Hawaii actually finished December with a 7% increase year over year; California is about 11%. Interestingly enough, California is number two -- California is number one, Hawaii is number two. So a lot of good demand (inaudible).

So longer-term we continue to see the change in the freight, more and more SUVs and basically drivers are trading MPG with comfort like they have done before 2008.

And finally, fuel oil is slightly better than mid-cycle for the first quarter. So, yes, it is not as great as it was in first half of 2015. But not overly concerned at this point, we adjusted our rates down to use some inventories and optimize our sales, but no panic, no drama at all at this point.

I appreciate the answers, Joseph. And I will see you in a couple days. Thank you.

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

I am not sure if you had mentioned it or not, but briefly what production equivalent level did Piceance Energy exit December at, Will? And did this production growth meet your expected range, which I think was 55 million to 60 million cubic feet a day on a prior call, yes?

Correct. So it exited December at 56.8 million cubic feet a day. So sort of within the range that we provided.

Right. And when you said you are laying down the rig, is that in the area that you have the JV with Wexpro or is that a separate area that drilling and activity are still ongoing?

We were only operating one rig and that was under the Wexpro JV and we have laid that rig down at this juncture.

Okay. And the follow-up -- I am not sure who to ask it of. But on the retail sales did you guys provide or can you provide your retail sales on a same-store sales basis, is that available yet?

Yes, we mentioned a 2% year-over-year increase on the fuel volume same-store basis and a 10% merchandise sales increase year over year. And our sales volumes are in the press release.

Okay, excellent. I have a few more questions; I will back out into the queue but please come back. Thank you.

Mike Harrison, Seaport Global Securities.

It looks like Europe showed up as a crude oil source for the first time. Can you maybe give a little more color on the dynamics that played into your crude procurement in Q4? And is Europe going to be a part of the mix going forward?

Can you please repeat your question?

Just wondering if you could talk about the dynamics that played into crude procurement in Q4 and whether Europe is going to continue to be part of the mix.

Yes, it continues to be a [little] supply market. So we do have a lot of options. A big part of it is also the contango; actually traders don't mind floating storage and filling tanks. So for us as refiners, we have a lot to choose from and we have different alternatives for which [create]. This has been the theme in the past two/three quarters and this continues to be the theme in Q1.

As a refiner the trick is within the safety principles is to be open to test new grades and make sure the list of candidates is as long as possible. This is how we can get our commercial leverage and buy the best out there possible for us to (inaudible).

Now European refineries see a lot of interesting dynamics as well. The Iranian crude is in the market big-time in North Egypt, available for European refineries to run competing with West African crude and lowering overall crude costs for them. So really crude differential has been very good and friendly to refiners recently. And expect it to continue and do so with this market structure.

All right, and then the on-island sales volume around 62,000 barrels a day, does that reflect the contracts that are going to be in place during 2016? Or should we expect that on-island sales number to go higher as we go through the?

Yes, as I mentioned in the previous call, we are expecting on-island sales based on a signed contract and (inaudible) to go up towards 65,000 barrels to date. So we are expecting Q1 already to show an improvement versus the fourth quarter.

All right, and then just a quick housekeeping one. There are a lot of moving pieces with the debt. What is the best quarterly interest expense number to use for 2016 or is it going to be moving around?

Interest expense. The interest expense should be about $4 million, but cash interest is around $2 million to $2.5 million.

The remainder of that is principally amortization of financing costs associated with the facility.

All right, thank you very much.

Andrew Shapiro, Lawndale Capital Management.

Yes, my follow-up is to have -- are you able to provide an outline or give us a little bit of visibility on the hedges you have in place both at -- you mentioned the pricing which gas was hedged out in the Piceance, but I don't know if you had mentioned that it was X percent of production going out only six more months, a year?

In other words, when do those hedges fall off? And on the refinery side similarly, either with respect to the internal use as well as any hedges on the sales?

Sure, Andrew, this is Will. I will take the Laramie portion of it. But we have hedged 90% of our existing production. And to be clear, that includes both the existing Laramie production as well as the acquired production through the end of December of 2018.

Wow, okay.

Those hedges are in the Laramie book.

Yes, they are on Laramie's balance sheet, they do not flow through our financial statements.

Okay. And then the refinery side?

Yes, and with regard to the fuel burn, we have hedged out 75% of the fuel burn for this year and the hedge price is at $50 to $55 a barrel.

Right, so that excess cost in a sense goes away at the end of this year?

Maybe I misunderstood, but I am trying -- for modeling next year or this year that would be 75%. And we have hedges in place through 2017. And with the current low prices we are looking to put in a program for 2018. So again, we would try to do 75% of the fuel burn to lock it in at these lower rates.

Okay.

But, Andrew, to your question, yes, to the extent that prices stay where they are, that would -- we would continue to have that additional expense through that timeframe.

Through that timeframe. Okay, and on the sales side we don't -- the J. Aron thing is really not a hedge, right?

Correct, it is a supply and off-take agreement and it is a derivative but it actually mirrors cash. So when you model it you model it towards cash, you don't model it assuming any hedges.

And a final follow-up. The money that goes in on this particular turnaround on the refinery, are there any particular special notable projects for which when you come out of this turnaround you're expecting some meaningful improvement in cost structure, productivity, etc.?

This is a typical routine maintenance for refinery. Probably the biggest item out there is replace the catalyst on the hydro cracker. So normally the cycle is we get out of turnaround and your company (inaudible) and this is where the activity is at maximum.

We will see highest click with the recovery volume expansion at that point and this will remain through the next cycle. So, yes, we are expecting better performance, better operations performance after the turnaround.

Great, thank you, guys.

David Neuhauser, Livermore Partners.

Most of my questions are answered regarding some of your hedges. But I did have a question; just how are you looking at things via acquisitions at this time? Are you seeing more opportunities, less opportunities, more opportunities to sort of diversify potential revenue streams? Can you add a little color on that, please?

Sure. And as I kind of implied earlier, we are seeing more opportunities and probably as importantly, those opportunities are moving closer to our operations today.

So it is more opportunities to build on the refining, retail and logistics network in Hawaii -- not necessarily in Hawaii but in the lower 48, just given the distress that is going on, it is spreading into -- well, it's spreading downstream.

And that will create opportunities for us. And probably positions us to utilize the tax attributes in a more favorable way. Because investing, while we like the investment in Colorado that we made in December, E&P companies generally, when they are drilling, generate quite a bit of text shield.

So, it doesn't create any taxable income and it is not a favorable way for us to allocate capital that takes advantage of our tax attributes. Whereas (multiple speakers) downstream are more likely to do that.

Yes, that is an excellent point. I think that is one thing that a number of investors are focused on is how do you end up using that tax asset at some point. And like you said, the upstream side doesn't really allow that, it actually provides more cushion. So ways in which you could use to start to extract that would be a good thing.

In terms of the Company at this point, when you look at a further acquisition, and again, that could depend on size, how would you look to fund things going forward? Would we see more of an equity offering if something is very accretive or are there other ways you are looking at things?

Well as Chris mentioned, our liquidity right now is pretty strong and most of the investments we are looking at are of a size where we can probably accomplish them using liquidity.

But I would probably say that if we go out and do a transaction or announce a transaction we are likely to -- we don't want to draw down too much in terms of the availability at the J. Aron facility or utilize all of our cash.

So, we are likely to go back into the market and raise equity probably no more than the size of the acquisition that we actually announce. But I can see us going back into the equity market once we -- or if we complete or announce a transaction.

All right and then of course everything you are looking at would be add-ons or tuck ins that would be very accretive to the current structure?

Certainly, we hope so.

All right, that is all I had. Thanks, guys.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Thank you, operator. Thank you, everyone, for joining us today. We are delighted to conclude the year and we are really looking forward to a successful 2016. Have a good day.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.