PBF Energy Inc (PBF) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the PBF Energy Second Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, today's call may be recorded. (Operator Instructions)

It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.

Thank you, Erika. Good morning, and welcome to today's call. With me today are Tom Nimbley, our CEO; Matt Lucey, our President; Erik Young, our CFO and several other members of our management team.

A copy of today's earnings release, including supplemental, financial and operating information including throughput guidance is available on our website. Before getting started, I'd like to direct your attention to the safe harbor statement contained in today's press release.

In summary, it outlines that statements contained in the press release and on this call, which express the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we describe in our filings with the SEC.

Consistent with our prior quarters, we will discuss our quarterly results, excluding a noncash, lower-of-cost-or-market, or LCM, after-tax gain of approximately $116.3 million. As noted in our press release, we will be using certain non-GAAP measures while describing PBF's operating performance and financial results. For reconciliations of non-GAAP measures to the appropriate GAAP figure, please refer to the supplemental tables provided in today's press release.

I'll now turn the call over to Tom Nimbley.

Thank you, Colin. Good morning, everyone, and thank you for joining our call today.

For the second quarter, we reported adjusted EBITDA of approximately $365 million, which was in line with our expectations and a good result. We ran well when the market was there and that is the key to this business. Looking ahead, we see a number of items that are lining up favorably for the refining sector in general and for PBF specifically.

Market fundamentals are favorable as we progressed through the summer driving season. Product inventories, especially distillates, are trending down with inventory days to cover for distillates near 5-year lows, despite high refinery utilization. Demand for cleaning products remain strong across the board and this continues to be supported by a strong export market.

On the crude side, we continue to see opportunities to source the most advantaged barrels for our system, and we've seen many differentials move favorably. WCS takeaway capacity constraints should continue to support wider differentials, which benefits many of our assets, especially the East Coast.

While RIN prices were under control in the second quarter, we are still hopeful for more coming action on RINs, particularly since the acting EPA administrator referenced the White House RFS negotiations at a hearing this week. EPA and EIA data show ethanol blending and use remains robust, even slightly ahead of this point in time last year despite RIN prices well below the 2017 average. These facts proved that you can control RIN costs without adversely impacting biofuel use.

Looking ahead, we believe our high complexity refining system is well prepared for the upcoming marine diesel fuel standard shift with IMO 2020. As we have said in the past, PBF has more coking capacity on a percentage of throughput basis than all but one independent refiner.

That being said, PBF does have the opportunity to optimize its system even more. We have received board approval as well as all required permits from the State of Delaware for a third-party processor to build and own a new hydrogen plant that will sell incremental hydrogen to Delaware City. The new supply of hydrogen, which should come online in Q4 of 2019 will further increase Del City's clean product yield and allow the refinery to process an even harsher crude slate.

Our strategy in this environment, as always, is to put our assets in a position to succeed and capitalize on strong market fundamentals. We do this by running our assets safely and reliably and by making selective organic investments in high-return projects that incrementally improve our crude-sourcing optionality and our yield of high-value products. By executing this strategy, our assets will be profitable and our employees and shareholders will benefit.

I'll now turn the call over to Matt to run through our operational highlights.

Thanks. As Tom mentioned a moment ago, the story of the second quarter was availability of our assets. We accomplished a significant amount of turnaround work in the first quarter, and this set up our system to run well during the second quarter.

Market did present some challenges as cracks are now late in the quarter, but favorable feedstock differentials coupled with strong operations offset the temporary weakness in cracks and generated strong results.

Total throughput for our refining system during the second quarter was approximately 867,000 barrels per day, which was in line with guidance.

Chalmette continues to run reasonably well, and we continue to see significant latent potential in this asset. The tank project completed by PBF Logistics continued to deliver on expectations as we exported on average 48,000 barrels per day of clean products in the second quarter. The restarted reformer and associated equipment is now performing as expected and we should see full benefits going forward. We continue to uncover and evaluate other opportunities within the plant to increase our clean product yield and enhance margins.

In Toledo, our first quarter turnaround, while it was completed on budget, it did extend into the first couple weeks of April, which impacted our results for the quarter. Since then, the refinery operated well and was able to take advantage of the very favorable crack environment.

The East Coast ran well in the second quarter and continues to run well. The Paulsboro refinery set record levels of production for asphalt, averaging 20,000 barrels per day in the quarter.

Our results show the advantage of having these high complexity assets and Delaware, in particular, has been and will be a beneficiary of wider crude differentials, especially WCS.

Lastly, Torrance. It continues to perform well. Reliability is excellent; and operating expenses, which were $6.80 for the refinery, were in line with our expectation. Our high yield of clean products coupled with favorable crude differentials drove the strong results.

For the remainder of the year, system availability should be high. Torrance, Chalmette and Toledo do not have any planned downtime for the remainder of the year. Our turnaround activity will be focused on the East Coast in the fall.

Paulsboro has scheduled work on its coker, and its smaller crude unit, which is set to begin in mid-September with work complete by mid-October.

Delaware City has turnarounds work scheduled for its reformer and aromatics units set for November.

With that, I'll turn it over to Erik, who will go through financials.

Thank you, Matt. As a reminder, our comments on second quarter results will exclude the aforementioned noncash LCM item.

For the second quarter, PBF reported income from operations of approximately $264.3 million and adjusted fully converted net income of $160.2 million or $1.38 per share on a fully exchanged, fully diluted basis.

Our EBITDA comparable to consensus estimates was approximately $365 million, which includes approximately $8 million of noncash stock-based compensation expense.

For the quarter, G&A expenses were $58.7 million, depreciation and amortization expense was $92.3 million, and interest expense was approximately $43.4 million. PBF's effective tax rate for the quarter was approximately 25%. For modeling purposes, going forward, please continue to use an effective rate of 27%.

Our RIN expense for the second quarter totaled $39 million. While still a burden at the current rate, we could see full year RIN expense in the $150 million to $175 million range as compared to our 2017 expense of approximately $300 million.

Consolidated CapEx for the quarter was approximately $214 million, which includes $213 million for both refining and corporate CapEx and an incremental $1 million incurred by PBF Logistics. These figures exclude the $58 million paid by PBF Logistics for the Knoxville Terminals acquisition.

With respect to our balance sheet, we ended the quarter with liquidity of approximately $1.8 billion, including $478 million in cash, and our consolidated net debt to cap was 36%.

Lastly, we're pleased to announce that our board has approved a quarterly dividend of $0.30 per share. Also of note, today, PBF Logistics announced its 15th consecutive quarterly distribution increase and provided additional details on its growth plans.

I encourage you to listen to that earnings call later this morning.

Operator, we've completed our opening remarks. And we'd be pleased to take any questions.

(Operator Instructions) We'll go first to Roger Read from Wells Fargo.

I guess, can we talk a little bit, you mentioned it in the preview here, the economics of crude by rail to the East Coast, particularly WCS barrels. And then could you give us an idea is there anything else? I'm thinking the extreme differentials we've seen in West Texas; and maybe as that gets worse as the year rolls on, what the opportunities may be there as well?

Sure, Roger. Obviously, you know what the market is right now for WCS versus TI. And then when you layer on the Brent-TI spread, you got a pretty wide differential. That we are going to be move -- have been moving a significant amount of the volume somewhere between 60,000, 70,000 barrels a day and we'll continue to source that. And if we can run more, we will. Most of that is going to the East Coast, but some of that's going to Chalmette and some of that's going to Torrance as well.

We see that situation continuing for 18 to 24 months, perhaps longer. And it's going to totally a function of much as it is in the Permian, the ability to clear the barrel by some alternative means other than [Brent]. And right now that looks like that isn't going to happen some period of time. So as I said, we believe this puts us in a favorable position to source -- a difficult crude to run, but a profitable crude for us.

On the Permian side, in the distressed side there, we do have some exposure to that today as we do run some basically Permian-based crudes in Toledo. It's not a huge volume, but we'll try to see if we can source higher volumes of that. But obviously, anybody who -- everybody who is trying to source more volumes in those are -- those pipelines are pretty full. Good story for us though.

Yes, definitely. I guess, the follow-up question, you now put several quarters in a row here of good OpEx performance at Torrance, which is good. But with that now essentially corrected, focus here on Chalmette margins there definitely have been a little bit weak. Touched on some of the things here, the restart of the reformer and kind of the commentary to do more. Can you give us an idea at Chalmette, what we should be looking for over the next, let's say, 12 to 24 months of what can help margins there, [maybe] a little bit more detail?

Yes, again, it's a great question. And to be perfectly honest, when we took over Torrance, we put all of our optimization focus -- I shouldn't say all, but a high percentage of our optimization focus -- self-help, if you want to use the jargon, into the opportunities that we saw in Torrance; and they will manifest. And we captured a lot of those things, whether they would be going into new markets like Vegas or starting to produce some asphalt in Torrance; literally a laundry list of things that we started pursuing, and pursuing it bigger. And we captured a fair amount of that in Torrance, but there's still some to be had.

In the last 3 months, we have shifted that optimization focus full time into Chalmette, because candidly, there is a lot of opportunity there. As we've talked before, that was a broken marriage, that joint venture. There was not a lot of creativity, ingenuity, money put into the plant. And we have now developed a significant list of opportunities whether they -- we're into the -- Matt mentioned that we made 20,000 barrels a day, sold 20,000 barrels a day of asphalt at Paulsboro, a good number. But we're a pretty big player in the asphalt business, which allows us to increase throughput at Chalmette, and with the Gulf Coast cracks right now, that's very economic. We're looking to -- we're clearly focusing on different crude substitutions. They had a very narrow envelope.

And then the other area that is -- Chalmette has a lower percentage of high-value products than I would like or we would like. And we see opportunities to increase distillate yield particularly by modifying some of the operations inside the fence line, and we're doing test programs right now to [ferrify] that upside. But suffice it to say, we think there's fertile ground in Chalmette.

And Roger, just on the -- just from the reformer right size, that depending on octane values, you should see incremental EBITDA from those process units at $40 million to $70 million a year range.

(Operator Instructions) We'll go next to Neil Mehta from Goldman Sachs.

This is Carly Davenport on for Neil. My first one is just on cash flow from ops during the quarter. Was there any working capital impact in that number we should be aware of?

We had about $65 million of positive working capital hit the balance sheet.

Okay, great. And then my follow-up would just be on California. We've seen some weakness in West Coast refining margins during the third quarter. So just wanted to get your thoughts on that market going forward? And then along with that, how you view the earnings power of Torrance in that context?

I think clearly, California is a market that when everything runs well, you can get into a reasonably balanced position on inventory supply/demand. Right now, that's pretty much the case. Everything is running well, including Torrance. Those things will change. You get into the heat of the summer. You're going to wind up seeing some operation cuts just because of, frankly, temperature, humidity, cooling temperatures. Right now, I personally believe that Torrance is going to be our best refinery in the PBF system. And at the end of the day, we'd put it up against any other refinery on the West Coast. That assumes that we're continuing to make progress in how we run it and get our operating results under control. So from an earnings standpoint -- earnings power standpoint, we are very happy we purchased that facility.

And we will go take a follow-up from Roger Read from Wells Fargo.

Wow. I didn't think I'd be on quite that quickly. Could we go back and talk about the hydrogen plant? Sort of how does that compare to the economics you have today for hydrogen at Del City? And then how should we think about that impacting you really, I guess, 2020 onwards?

Yes. The project will come in, as I said, fourth quarter. It is a third-party lease arrangement. So we'll be spending a little bit of capital to hook up the hydrogen plant to the various units inside the refinery, and then it'd be a third-party provider of the hydrogen who is actually going to build it and operate it. And we'll give them a lease payment, which is attractive, and gives us a fixed cost of hydrogen, which is attractive. And clearly, what this will do is Delaware is a powerful machine, lots of coking, hydrocracking, lots of hydrotreating and insufficient hydrogen. When you have a market that is rewarding you for running harsh higher sulfur, lower gravity crudes. And that market exists today and we expect it would exist in the absence of MARPOL.

However, with MARPOL coming, it just gets exacerbated. So we'll wind up with a little bit more hydrocracker feed, we'll make a little bit more diesel. But the big play is it will allow us to actually increase the amount of heavier, higher sulfur crudes, which we expect to be obviously threatened or negatively impacted from a price standpoint in a post-MARPOL world.

Okay. And then, from -- I guess, one quick follow-up on that. Where do you -- today, do you source hydrogen from somewhere else? Or is it simply not available on the East Coast?

That actually -- there are no third -- really, there is no East Coast refinery that has a third-party hydrogen plant. So the way we source hydrogen, for example, in Paulsboro, we actually have a small hydrogen plant that is there that we run periodically. But most of it comes from hydrogen produced off the reformer. In Delaware City, it's -- we do have a hydrogen plant there that we own and we run in addition to the reformer hydrogen, but that in total is not sufficient for what we can really use. So this will be the first third-party hydrogen plant built on the East Coast. That's more than norm, by the way, in the rest of the country.

Right. And is there -- can you frame any kind of margin uplift, EBITDA impact from the additional availability at this point?

Roger, I would say what we expect in 2020 with IMO, it increases as Tom mentioned. But in today's environment, your -- call it $40 million and probably north of $75 million in a post-2020 world.

Okay. And then, last question for you. RFS, RINs, issues, obviously I've been following the same thing as you mentioned, the favorable comments from the new administrator. But anything else you can add to that? I would think, election year, little expectation between now and November. But after that maybe something can happen?

Yes, I do think the administration has been working to find a solution. The other side of the refiners, they're not a easy group to manage. But the simplest way to look at it in today's market is, there have been some waivers granted by the EPA. But yet lending has not declined; in fact, it has increased. So the whole argument that the biofuel side needs high RIN prices, has been proven to be bunk. And so we'll continue to work with the White House and with EPA. And there was a compromise that we think would have worked. And they will go back to that or maybe there will be a new one. But I do think there is a joint agreement that it needs to be addressed, and addressed in a comprehensive fashion.

And we'll go next to Paul Sankey from Mizuho.

Very impressive selection of questions from Roger there. Can we just follow up, I guess, seeing as he's asked some good ones. But I was wondering how you see IMO impacting you -- it was a little bit more specific what you said previously. And I guess, what I was wondering is how soon you think this impact is going to come through given presumably everyone is going to have to be ready for what seems to be a 3 million barrel a day change in the market. I don't know if that's kind of the number you guys are working with. But the question is, do you think the impacts are coming through already? Or do we wait till 2019 or will it be late '19?

Thank you, Paul. It's good to hear your voice again. Look, I think we've been pretty clear on this. We're well positioned for IMO. I personally believe IMO has probably already started to show up in some manner to a limited extent. I don't think it's going to be a light switch that goes off on December 31. I think you're going to see -- you got to get the new oil to whatever port that's got to be in so that when it starts getting loaded on a ship to be compliant fuel. I think anybody in this supply chain, whether it would be the shippers, the refiners, the producers, all need to be looking at IMO because it is a rather significant change. And deciding what things they want to do; and boards and every -- directors in every board room should be addressing this question.

An example is, if you have a strategy -- here is our view. The 3 million barrel number you talked about, yes, that's pretty much the consensus. You're basically going to wind up disappearing 3 million barrels a day of high sulfur bunker fuel. And then replacing it with 0.5, which is effectively a sweet gas oil or diesel lookalike. So it will be a big increase in distillate demand and sweet gas oil demand. That can be made we think without a problem by the industry is very creative. But that will result in higher distillate margin simply because while it's a 3 million barrel increase in demand and 100 million barrel global demand position when you do it on a distillate basis only is pretty significant.

I personally think the bigger factor is going to be sulfur is the enemy. And the sweet/sour spreads and light/heavy spreads will widen out. And particularly for refiners who don't have an ability to clear that bottom stream today, so somebody who is running Basrah or Arab crudes or any sour crude, that does not have hydrotreating capability on a bottom stream or coking capability, it's got to find a way to clear that barrel. And I think there's going to be a lot of bartering going on as people look for opportunities to maybe look to people like PBF who have coking capacity to see whether or not that can happen. But as I said, I think, there's not -- you cannot wait till December 31. That will be way too late; and I suspect we're going to start seeing momentum pull on this thing right around midyear.

How are you going to move the excess heavy fuel oil around? I mean, presumably, it's not that you're generating a lot of it, but you could use more...

It's a great question. Logistics is a big play here. I mean, we talk about, okay, people with hydrocrackers can make a lot of distillate, they're advantaged, and that's true. And certainly, we're advantaged because we can run every barrel we produce and into a coker, but there is a big logistics play in it. One of the reasons we bought the -- we announced we bought the [Axion] terminal candidly is that has 4 million barrels of tankage and 3 of it is heated tankage. And we're going to look to see how we can hook up Paulsboro and Delaware City together, but just as importantly, figure out how to import coker feed into our plants. And to do that, you need heated barges, you need to figure out how to have hot pipes. So there are some opportunities here, but there is some work that has to be done there, but logistics is a big play.

Great. And then If I could just ask the final one. I've got to work at how to frame this, it's the dreaded M&A question. We know that your stock is for sale every day in the market and we know that you're always looking, but is there anything that you can add on M&A as of today? You mentioned a relatively minor acquisition that you just made. Particularly wondering, if there is impact from, in your view and I'm sure there is, of a couple of the mergers, notably the MPC-Andeavor merger on the market?

Yes, I think, there is no doubt that the MPC-Andeavor merger was -- I wouldn't say a game changer but it has raised the bar significantly in terms of consolidation. We are continuing, as you say, and you know the company well. If somebody wanted to come along and write a big check that rewarded our shareholders, this management would fully support that. At the same time, absent that, we have to grow the company.

But candidly, I don't know it's because of MARPOL, but if MARPOL is probably a contributing event as opposed to 3 or 4 years ago, the bid/ask on these facilities is pretty wide. And we want to be very careful of not getting deal lost and buying something in advance of something like MARPOL at a big number and then MARPOL is only going to be a couple of year thing. So we don't really have anything right now but we continue to look.

And at this time, we have no further questions. So I'd like to turn it back over to Tom Nimbley for closing remarks.

Thank you everybody for attending today's call. And those of you who have attended [Holly's] call, we look forward to seeing you next time. Thank you.

We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect your lines at any time.