Par Pacific Holdings Inc (PARR) 2016 Q1 法說會逐字稿

Greetings and welcome to the Par Pacific Holdings first-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 and Public Affairs for Par Pacific Holdings. Thank you.

Welcome, everyone, to Par Pacific Holdings' first-quarter 2016 conference call. With me on today's call 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.

This call is also being webcast and can be accessed through the audio link under the investor relations section of our website. Information recorded on this call speaks only as of today, May 5, 2016.

Before we continue, I would like to remind you that this call contains forward-looking statements made pursuant to applicable security laws including statements of expectations, future events, or future financial performance. Forward-looking statements involve inherent risks and uncertainties and we caution investors that a number of factors could cause actual results to differ materially from those contained in any such forward-looking statements.

These factors and other risks and uncertainties are described in detail in the Company's most recent quarterly report on Form 10-Q, annual report on Form 10-K, and in the Company's other filings with the Securities and Exchange Commission. Par Pacific assumes no obligation to publicly update or revise any forward-looking statement.

I would now like to turn the conference call over to Bill for his opening remarks.

Thank you, Christine. Thank you for joining us this morning.

I am pleased to report positive EBITDA for the first quarter of 2016, despite a very difficult market with declining crack spreads. Distillate crack spreads in the first quarter of 2016 were the lowest in more than five years. We also incurred some one-time expenses and losses associated with the downsizing of our Texadian operations and Chris will go into these items and our financials in more detail later.

In Hawaii, we continued to have solid execution at all of our business units. Our retail and logistics operations are doing quite well and we are pleased with their financial contribution. The refinery performed well in spite of the declining crack spreads and the typical inefficiencies of units that are operating with catalysts near the end of their useful life. We look forward to having a fresh refinery in August after our turnaround.

Joseph will go into operations in Hawaii in a second.

On the strategic front, we increased our investment in Laramie Energy to support their first-quarter acquisition of largely contiguous acreage with significant natural gas production and drilling inventory in the Piceance Basin. We are very happy with this acquisition and Laramie management is moving rapidly to integrate those assets and capture the cost savings associated with the transaction.

In addition, our commodity price hedges have proved to be valuable in the midst of the current natural gas supply glut, permitting Laramie to realize positive cash flow even in this difficult time. I also want to comment on the recent announcement by our competitor in Hawaii that they are were selling their refining, retail, and logistics operations to a private equity firm.

Some of you may have questions regarding this recent announcement. I would like to say we know little of the buyer's strategy and have no comment on the transaction, other than to reiterate that we are very pleased with our competitive profile in Hawaii and look forward to the future as we continue to enhance our position supplying fuels vital to Hawaii's economy.

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

Thank you, Bill, and good morning, everyone.

Our refining segment adjusted EBITDA in first quarter was $6 million. Our combined 4-1-2-1 crack spread and Mid Pacific Crude differential index in the first quarter was $6.58 per barrel, approximately $1.85 per barrel below five years' average or midcycle environment. The weak index was mainly driven by low Singapore and Pacific Northwest distillate crack spreads, basically at a five-year low for both jet fuel and diesel.

In the first quarter, our on-island sales were 61,000 barrels per day; export sales were 20,000 barrels per day for total sales of 81,000 barrels per day. On-island sales were 9% lower than planned. Mainly driven by timing and lower jet fuel and low-sulfur fuel oil demand. However, we continued to target 65,000 barrels per day of on-island sales for the rest of the year, based on existing supply contracts with military, airlines, utilities, and other customers.

Our export sales included high-value mixed aromatics to Asia as we continue to take advantage of our long reformate position in a short global octane balance. On the feedstock side, we continued to benefit from the oversupplied market and build our crude oil supply flexibility by introducing new crude oil grades and optimizing transportation costs.

Solid refinery safety performance was zero. Total recordable incident rate, or PRIR, combined with 98.9% mechanical availability for the quarter has allowed us to continue to optimize our assets and execute our operating plan. Margin realization in the first-quarter and second-quarter plan is approximately $0.50 per barrel below average, due to the hydrocracker catalyst reaching the end of its useful life.

Our refinery throughput in the first quarter was 74,000 barrels per day, consistent with our guidance. Our planned throughput for the second quarter is approximately 77,000 barrels per day. Our production cost in the first quarter was $3.74 per barrel. So far, in the second quarter the combined index has averaged approximately $5.50 per barrel. However, the global octane shortage and the gasoline blending dynamics continue to present opportunities in the Pacific Northwest and Asia.

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 hydrocracker catalyst change as well as regulatory consent decree works. Our estimated cost for the turnaround is in the $30 million to $35 million.

Our retail segment has performed well with $8 million of adjusted EBITDA contribution in the first quarter. Mid Pac has generated through 12 months of operations under par $[16] million EBITDA in retail, $6 million EBITDA and logistics, and additional $8 million to $16 million EBITDA at the refinery level. Our logistics segment adjusted EBITDA in first quarter was $6 million.

In summary, we are happy with our operations results in the first quarter of 2016. This is a cyclical business and the margin environment is low now. We remain focused on what we can control, benefiting from our integrated and diversified business profile.

And now I will turn the call over to Will to review Laramie operations and results.

Thank you, Joseph. As a reminder, Laramie closed its previously-announced acquisition on March 1 and more than doubled its production and cash flow profile. Simultaneously, Par Pacific infused an additional $55 million of equity capital and increased its stake in Laramie to approximately 42%. The integration of the acquired properties is well underway and cost reduction activities are proceeding well. We are excited about the opportunities we are seeing to reduce costs and unlock value through this highly accretive transaction.

The Laramie team remains focused on lease operating expense reductions roughly 60 days into consolidated operations. Opportunities that we identified during our acquisition evaluation continue to look as large as we thought prior to taking control and our confidence in the execution of these initiatives continues to grow.

For example, Laramie has renegotiated rental compressor contracts and is preparing to re-pipe gas flows to utilize excess company-owned compression while mothballing multiple rental units; headcounts are down significantly; excess equipment that came with the acquisitions is being liquidated or incorporated into ongoing facility expansions; well chemical treatment programs have been simplified -- all to drive down costs to target levels.

As we've detailed before, the acquired properties' LOEs totaled approximately $0.73 per Mcfe during 2015, while Laramie's existing properties ran at $0.56 per Mcfe. If we can close this gap to $0.17 per Mcfe reduction, would reduce our costs by approximately $5 million annually. This would be a significant uplift from our previously disclosed $24 million five-year average annual cash flow from the acquired properties. This amount would be realized without any additional benefit from economies of scale and field operations density.

I would like to remind everyone that Laramie's assets are more than just a dry gas play. Approximately 80% is dry gas and 20% [natural gas] liquids and condensate, a significant portion of Laramie's gathering, processing, and treating costs are to strip out liquids and receiving incremental revenue.

Up until recently, NGL prices have been depressed and we weren't receiving much of a lift in pricing. However, we are starting to see that change for the better as ethane and propane prices improve.

Laramie has remained relatively unhedged on natural gas liquids pricing. However, during the quarter Laramie took advantage of some of the strength in the NGL markets and hedged approximately 25% of existing NGL production through the end of December 2016. Laramie elected to hedge approximately 875 barrels per day of propane at $0.465 per gallon and 270 barrels per day of the C5+ at $0.85 per gallon.

Excluding any impact from NGL hedges, every $0.01 per gallon move in natural gas liquids prices impacts Laramie's revenue and cash flows by approximately $800,000 annually, based on existing production only. Production has held up a little better than we expected and exit production as of March 31 was approximately 151 million cubic feet equivalent per day. Laramie completed eight wells during January and then ceased activity, leaving 58 wells that are drilled but uncompleted. Depending on gas prices through the balance of the year, we are assuming modest activity in the second half of the year.

At this point I will turn the call over to Chris to review our financial results.

Thank you, Will. During the first quarter Par Pacific reported adjusted EBITDA of $5 million. However, our first-quarter adjusted EBITDA was negatively impacted by special items that totaled approximately $5 million. These special items include $4 million related to timing from the liquidation of inventory and severance costs associated with the downsizing of our Texadian operations and approximately $1 million of additional costs incurred with our company's SAP implementation.

We reported a net loss of $19 million, a loss of $0.46 per share, but these results include a $21 million non-cash inventory adjustment, $5 million for the previously-mentioned special items, a $2 million loss from our investment in Laramie, an unrealized loss of $1 million in our derivative contracts, and $700,000 of acquisition and integration expense. Partially offsetting these items were a $6 million reduction in the value of Tesoro earn-out contingency and a decrease of $2 million in the value of our common stock warrants. After adjusting for these items, net income for the first quarter is $3 million.

I would like to take more time to provide more color to the $21 million non-cash timing difference that relates to the valuation of our refining inventory and related liability. Our supply and offtake agreement with J. Aron creates timing differences between GAAP reporting and the cash paid for inventory. For GAAP reporting, our inventory is maintained on a FIFO basis at the third-party purchase price. Also, we eliminate crude price risk by hedging cargoes on the water.

Hedge gains and losses, as well as cash paid for the sale and repurchase with J. Aron, do not impact our GAAP inventory valuation. However, our calculation of adjusted EBITDA reflects the actual cash cost for the crude run and adjusts for these impacts in timing.

In the first quarter, the adjustment was $17 million or approximately $2 per barrel. In addition, we record a liability in the amount we expect to pay J. Aron as if we repurchased the inventory at current market prices. During the quarter, due to price rises, the change in this liability was a non-cash expense of $4 million.

Now I will briefly review the segment performance. In our refining segment, the refining-adjusted margin was $32 million compared to $44 million for the same period last year. This was primarily impacted by lower crack spreads and lower on-island sales, as Joseph previously discussed.

Our retail segment generated a gross margin of $19 million, a $5 million, or 40% increase, over the first quarter of 2015. This increase reflects a full-quarter contribution from Mid Pac of $8 million and continued growth in fuel volumes offset by lower margins.

Our logistics segment posted a gross margin of $8 million, a 13% decrease from the same period last year. This was primarily due to higher costs related to the acquired Mid Pac assets, coupled with a decrease in on-island sales volumes and the refund of insurance premiums received in the first quarter of last year.

Texadian's gross margin was a loss of $4 million after adjusting for a loss of $3 million due to the sale of the crude inventory stored at our leased terminal. As we have previously disclosed, we have downsized our Texadian operation to minimal activity levels by closing our Canadian office, exiting the terminal lease, and allowing our credit agreement to lapse. Therefore, going forward, Texadian's remaining activity will be maintaining our pipeline's historic shipper status and subleasing railcars.

General and administrative expenses were $11 million, which includes over $1 million of severance costs, the majority of which was non-cash stock vesting related to the closure of our Texadian office in Canada and approximately $1 million of additional expense related to consolidating our systems and implementation of SAP.

Turning to liquidity, during the first quarter we generated $12 million of cash from operations and we continue to strengthen and improve our balance sheet. At the end of the first quarter our long-term debt balance, including current maturities, was $163 million. You may recall that we completed a stock offering of $76 million in the fourth quarter and repaid the $35 million term loan that was scheduled to mature in March of this year.

Our cash balance totaled $122 million at the end of the first quarter and our total liquidity position was $153 million, including $5 million available under our retail revolver. During the quarter, our cash interest was $3 million and our capital expenditures totaled $4 million.

Our capital budget for the remainder of 2016, including maintenance CapEx, remains in the $45 million to $50 million range. As we previously mentioned, the bulk of these expenditures relate to the scheduled refinery turnaround, which is expected to require cash expenditures of $30 million to $35 million including new catalyst.

Additionally, within the logistics segment, we expect to have a one-time operating expense of $5 million to $10 million for maintenance projects. During the turnaround we will also perform certain regulatory upgrades pursuant to Tesoro's consent decree with the EPA that is subject to reimbursement by Tesoro.

Now I will turn the call over to Bill for his closing comments.

Operator, this concludes our prepared remarks. Would you please check for any questions?

(Operator Instructions) Scott Levine, Imperial Capital.

Good morning, guys. I was hoping you could elaborate a bit on the on-island sales. As you indicated, they were a little bit light in the quarter. I think you discussed some of the reasons why, but indicated that you expect to hit 65,000 barrels a day for the remainder of the year.

Will that ramp through the remainder of the year or do you expect to be there in the second quarter? And maybe a little bit more elaboration as to what was going on there in the quarter that caused you to fall short of your target.

Scott, good morning, it's Joseph. On-island sales are contractual by nature, so normally when we are over or under it's more timing related than a really structural demand.

What happened to us in the first quarter, jet fuel was short 3,000 barrels per day. On-island sales: half of it was military, half of it was commercial, and we're expecting catch ups in inventories. The military contract has also a minimal volume target for the year, so probably see some volumes move up later in the year.

And then 2,000 barrels per day we were short on a LSFO, or low sulfur fuel oil, and this is related to a utility that we supply. That utility plant they went through a planned turnaround in the first quarter and was short 2,000 barrels per day in consumption. So we are holding and expecting to be back to a 65 level for the rest of the year because this is where our contracts are.

Okay. So you expect to be back at that level in 2Q?

Yes.

Okay. And then could you quantify the -- did you see a benefit from the declines in crude oil during the quarter? Is that something you can quantify in terms of the impact on your results in 1Q?

What you mean by a decline, Scott?

The crude oil price dropped pretty significantly during the quarter -- the first quarter there. I didn't know whether you received a benefit associated with that drop, a timing benefit.

Actually, for the quarter the price really increased slightly and it was a minimum impact, so we didn't see impact of change.

Scott, this is Bill. If you recall, it went down the first half of the quarter and then it came back up. And the changes overall were offsetting.

Were offsetting, okay. So negligible there, got you.

And then with regard to the acquisition landscape, I know you are limited in terms of what you can say, Bill, in terms of your appetite there, but maybe an update on the market in general. And does the transaction with One Rock in Hawaii affect in any way your strategic plans, either from (technical difficulty) perspective or from a business perspective as far as you can tell?

First of all, transactions, they always take some time. Bear in mind that we signed the Laramie deal in December and funded it just a month ago and we are obviously very pleased with that.

We have a robust pipeline of opportunities, but we want to be very careful. Our main objective is to identify opportunities that, to us, are attractive from a strategic, operational, and financial context. I can assure you we are going to remain disciplined as we're looking at transactions and if they don't meet those criteria, we're going to walk away.

We've done that on a couple of occasions and we will continue to do that because we want to be patient in our strategy. Yet, at the same time, I do think this environment is going to yield opportunities for us to grow inorganically.

Fair enough. Thank you very much.

Thomas Mitchell, Miller Tabak.

I just want to double check your -- if we take the whole entire refining profit or gross profit, that was about $10 million. If the onshore was $32 million, does that mean you lost about $22 million in export on a gross profit basis?

I'm not sure I follow your question, Tom. This is Chris. The adjusted refining margin was $32 million, not $9 million. $9 million is before you back out the adjustments for the inventory valuation.

So that's the inventory valuation. Okay, fine. Fine.

And then secondly, I think one or more of you may have had some experience in going into an industry where basically you are or your guiding investors are -- take a private equity point of view. Is the private equity buyer for the Chevron refinery essentially inclined to make you believe that pricing discipline will remain on the island or are you concerned about potential new competition? Or I guess we could say reanimated competition from that refinery.

I really can't comment on their strategy. I just don't know that much about it, but bear in mind Hawaii is a competitive environment. And we think we are winning our fair share of the business and continue to believe that that will be the case going forward.

Okay, thank you very much.

Andrew Shapiro, Lawndale Capital Management.

Correct me if I'm wrong, but I don't think the antitrust delays on the Mid Pac acquisition concerned the retail end. So with the shifting of ownership of several retail outlets on-island do you see any acquisition opportunities to further increase your on-island demand and economies of scale in the retail segment?

I think it would be difficult to grow our retail segment through acquisition. We are obviously focused on trying to grow it organically with new sites. We're going to be aggressive in that regard and we believe we can build the business on-island.

But bear in mind, it's a relatively small market and our ability to grow our share, even kind of at the grassroots level, is somewhat limited. But we think it's a great franchise and we want to continue to try to grow it.

Right. And you say the ability to grow it through acquisition may be problematic. Is that because of your sizable share already?

Yes. When we acquired Mid Pac really the focal point was on the retail, it wasn't on the logistics.

Oh, it was? Okay, all right. Then I was wrong, okay.

And I think the FTC was really focused on market share in that region. It is already a fairly consolidated market between ourselves, Chevron, and Sunoco or Aloha.

Yes, they bought Aloha. Okay. And then retail sales on the same-store sales basis, I don't recall if you guys mentioned it. If you did, can you at least remind me so I don't have to pick it up from the transcript?

Same-store base is up 2%.

Okay. And that is -- do you have a breakout between I guess it's the gas versus everything else?

The 2% was for fuel, actually.

Okay.

But it's really 95% gas. We move less diesel through the stores. Truly all gas.

All right, thanks a lot.

(Operator Instructions) Scott Levine, Imperial Capital.

Good morning. Was looking for just a little bit more color on the LOE savings you guys are hoping for with Laramie and the cost reduction. It seems like you have a good business plan there. Can you give us a sense -- I don't know if you have formal targets; I'm guessing not.

But just maybe informally what kind of time frames we should be thinking about to achieve the types of cost savings within the business that you are anticipating? Is it going to be a gradual process or maybe we see an accelerated process early on and then it kind of tapers off from there? Maybe a little bit more color there would be helpful.

Sure. Good morning, Scott; this is Will. I think it's the latter kind of description that you gave, which would be I think we see a significant realization within the first 60 to 90 days. And then it's going to take the balance of probably the year to get it to where we need it to be on a target basis.

Again I think from a more detailed standpoint, if you look at the acquired assets, a decent chunk of the production and acreage came from the north area that we refer to as Cascade Creek and then a large chunk of the upside and integration opportunity was actually acreage that is directly adjacent to where Laramie operates today in (inaudible) Valley. We don't have any reason to believe that the way that Laramie operated historically, let's call it around $0.50 to $0.55 per -- of LOEs per Mcfe, is an unreasonable target for us to be pursuing here.

And this, again, is giving limited benefit to economies of scale or field operations density that we would see. Said differently, we're not thinking about this in the context of it actually lowering Laramie's base LOEs either. We are just showing you what it's worth on an annual basis if we can hit the target, which we feel it's reasonable.

And to be clear, your timing in terms of hitting that target, you are thinking year-end is reasonable there?

Yes.

Great. Then one just housekeeping or clarification for the turnaround. Are you guys speaking to $30 million to $35 million in CapEx in the third quarter associated with that and then $5 million to $10 million in OpEx or P&L impact associated all in the 3Q?

Yes.

Okay, just wanted to be sure I understood that correctly. Thank you.

Andrew Shapiro, Lawndale Capital Management.

Quick follow-up. What are the upcoming investor presentations and conferences you guys have on the calendar for the upcoming quarter or two?

This is Christine. We will release them. We haven't public announced any coming up, but as soon as we get them on the schedule we will let the market know.

So the conference call isn't one of the forums to do that then?

I don't think we have anything right now because a lot of the season, as you probably know, is kind of -- we just passed through and then we will have some more in the fall which we will obviously be attending.

Okay, sounds great.

We don't have anything through the summer scheduled, Andrew.

Okay, that's fine. I just otherwise assumed that conference call seems to be -- this is the Reg FD forum that you can do things.

Yes, agreed.

Gentlemen, there are no further questions registered at this time. I would like to turn the floor back to you for closing comments.

Thank you, operator, and thank you everybody for joining us. We appreciate your time. Have a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference call. You may disconnect your lines and have a wonderful day.