瓦萊羅能源 (VLO) 2005 Q1 法說會逐字稿

Thank you for standing by and welcome to Premcor's First Quarter Earnings Conference Call.

All participants will be able to listen only until the question and answer session.

This conference is being recorded at the request of Premcor.

If you have any objections, please disconnect at this time.

I would now like to turn the call over to your host, Ms. Karyn Ovelmen, VP of IR and External Reporting.

Ms. Ovelmen, you may begin.

Thank you, operator.

Good morning and thank you for participating on our call today.

Joining me today is Jay Allen, our CEO;

Hank Kuchta, our President and COO; and Joe Watson, our CFO.

Our press release was sent out this morning and posted on our website.

If you don't already have a copy, you can access it there.

For those of you that have been following us for some time, you may have noticed that we have revised the content of the tables included in our earnings release, and we included more summarized information regarding gross margin and operating expense by refinery.

The details, throughput and production by product, by refinery, formally attached in a table to the earnings release, can be located in the ND&A section of our form 10-Q.

Our form 10-Q will be available on our website once it has been filed with the SEC.

Let me also point out that in this morning's press release, as well as on this conference call, we make reference to our SEC filings and we encourage you, as always, to review those filings thoroughly to get a better understanding of the Company in our industry.

As required, I'd also like to direct you to the forward-looking statement disclaimer contained in the press release.

Certain statements made in our press release, and others that may be made on this call, will constitute forward-looking statements.

Actual results may differ from those we currently expect, and the factors that could cause actual results to be different are described in our earnings release and in our filings with the SEC.

Therefore, any forward-looking statements made may prove to be inaccurate, and we can not assure you that our expectations will be achieved.

At this point I would like to turn the call over to Jay Allen.

Jay?

Thanks, Karen.

I'm sure you've all seen our press release issued Monday regarding the execution of a merger agreement for Valero to acquire Premcor.

And we would be happy to answer any questions you have after our comments.

But this morning, our comments will be focused on our results for the first quarter of 2005 and Premcor's outlook for the remainder of the year.

Market conditions for the first quarter and beginning of the second quarter have been strong for the refining industry, and especially for refiners like us, with the ability to process a large percentage of heavy, high sulfur, crude oil.

As you can see from our first quarter financial results outlined in this morning's press release, Premcor's results were excellent, especially considering that our Port Arthur refinery was down for most of the quarter for a scheduled plant-wide turnaround maintenance work.

The turnaround, which was completed on schedule, included maintenance activities on all of the major units at the refining.

All of those units have since been restarted and are running reliably.

By the way, I want to congratulate all of the people at Port Arthur in completing such a massive effort in such a successful fashion.

Truly a job well done.

Indeed, all of our people work very hard, but this turnaround is a very visible success.

The growth in our earnings in 2005 and the strengthening of our capital structure is a reflection of the market conditions, as well as our growth strategy.

Prior to the announcement of the merger agreement with Valero, Premcor's shares had appreciated almost 40% since January 1st of this year, and 146% since our IPO in April of 2002.

As of yesterday's close, Premcor's shares had appreciating close to 180% since the IPO.

We are proud of the outstanding results that Premcor has achieved and continues to achieve for its shareholders.

Assuming our refineries run reliably, and absent any unexpected economic changes, we believe the remainder of 2005 will continue to be a favorable environment for high conversion refiners such as ourselves.

I'd now like to turn it over to Joe Watson for a more detailed review of our first quarter results, and then provide additional information for the second quarter and the remainder of 2005.

Joe?

Thanks, Jay.

In my comments on Premcor's first quarter results, I'd like to focus, as always, on those issues of particular interest to those of you who are trying to model the Company's financial results.

Looking at Premcor's net income from continuing operations, excluding special items, Premcor earned approximately $129 million, or $1.41 a share, in the first quarter, more than double the $53 million or $0.70 a share we earned in the year ago quarter.

Our first quarter gross margin was $549 million, compared to $317 million in the year ago quarter.

Our first quarter increase reflects continued strong refining margins, our ability to capture the benefit of extraordinarily wide, light/heavy crude oil price differentials in our markets, and the full quarter of the Delaware City refinery operations.

In regards to refinery operations, proof-up raised at Port Arthur, outside of the scheduled turnaround work, were better than expected.

The turnaround occurred in two phases; the first, including the crude unit coker and hydrocraker, lasted from early January to mid-February.

During the second phase, the cat-cracker and alkylation units were down from late February to late March.

The impact of the turnarounds was a lower overall throughput, averaging 184,000 barrels per day versus a more normal 250 a day, and a reduction in Port Arthur's clean product yield, which averaged around 70%, versus a more normal yield of around 85%.

Port Arthur was able to achieve a higher throughput rate than we had planned, which was 150 to 160 a day, due to favorable market conditions for intermediates, which we were able to produce and sell at positive economics.

The Gulf Coast 211 refining margin increased over $1.17 a barrel in the first quarter versus the same period in 2004.

And the MIA-WTI crude oil differential averaged approximately $17.09 a barrel in the first quarter, as compared to $9.36 a year ago.

All of this resulted in better than anticipated results for the quarter from Port Arthur.

During the second quarter we expect to return to normal run rates at Port Arthur, with an average of around 240 to 250,000 barrels per day.

Total throughput at the Lima refinery for the first quarter averaged 134,000 barrels per day, as compared to our plan of 140 to 150 a day.

The Lima refinery reduced crude rates in late January and early February for approximately five days when the mid-valley pipeline, which supplies crude oil to the refinery, was temporarily shut down.

Since that time, the refinery has been running reliably.

The Chicago 321 refining margin was down slightly versus the year ago period, but it still averaged about $6.00 a barrel during the quarter.

For the second quarter of 2005, we expect Lima to average around 140 to 150 a day.

Total throughput at Memphis for the first quarter averaged 135,000 barrels per day, as compared to our plan of 150 to 160 a day.

Total throughput was lower than expected because of unscheduled maintenance associated with the continuous catalytic reformer, or CCR, which affected operations and required us to reduce our crude rate from the beginning of March through April.

The CCR shutdown also reduced Memphis' clean product deal by about 5%.

After completing the repairs, all units were brought back on line and are currently running well.

Partially offsetting the reduced throughputs, Memphis benefited from the $1.17 per barrel increase in the Gulf Coast 211 refining margin.

Including the impact of the CCR being down through most of April, we expect Memphis to average around 130 to 140,000 barrels per day for the second quarter of 2005.

This reduced throughput expectation represents a reduction of approximately 15% to 20% below our normalized expectations for the quarter for Memphis.

At Delaware City, total throughput for the first quarter averaged 172,000 barrels per day, compared to our plan of 175 to 185 a day.

Total throughput was slightly lower than expected due to unscheduled maintenance at its CCR, hydrogen plant, and a series of boiler outages.

All of the units have undergone the necessary maintenance and are currently up and running.

Even with the unscheduled maintenance work, Delaware City benefited from a strong New York Harbor RFG-321 refining margin of $6.00 per barrel, and a WTI Arab medium crude oil price differential of over $9.00 per barrel during the quarter.

We expect second quarter throughputs at Delaware City to average around 175 to 185,000 barrels per day.

As you would well imagine, all of the planned and unplanned maintenance activity significantly limited our earnings potential for the first quarter.

There are no significant turnarounds planned for the second quarter at any of our refineries, and none for the remainder of the year at Port Arthur, Lima, or Memphis.

At Delaware City, the coker and hydrocracker are scheduled to be brought down in the third quarter for 40 to 45 days of scheduled turnaround maintenance work.

Turning to operating expenses, variable expenses were high during the quarter, primarily due to natural gas pricing and our maintenance activity, both planned at Port Arthur and unplanned at Delaware City and Memphis.

Natural gas averaged $6.15 per mmbtu versus $5.39 in the first quarter of 2004.

First quarter G&A, including stock option expense, was $42 million, up $19 million from the same quarter last year.

This increase was due to higher incentive compensation, the addition of Delaware City, and an increase in employee benefit expenses.

First quarter depreciation and amortization increased to $46 million from $34 million in the year ago period, primarily due to the Delaware City acquisition and new capital investments.

Our balance sheet continues to improve.

We ended the quarter with a debt to capitalization ratio of just under 45%.

At March 31, we had approximately $570 million in cash, equivalents, and short-term investments, including $57 million in restricted cash.

The decrease from year-end of approximately $250 million in total cash and short-term investments is primarily due to our increased capital expenditures, and an increase in working capital.

Our working capital increase was primarily in inventory, where we've had an approximately $200 million build due to the significant amount of planned and unplanned turnaround activity during the quarter.

We had a temporary build in crude inventory after we reduced throughput rates at Memphis, Lima, and Delaware City, and we had a temporary build in unfinished products at Port Arthur during the period that the backend units were down, which limited our ability to produce light, clean products.

With the return to normal operations in the second quarter, we expect inventory to decline to more normal levels by June 30th.

Capital expenditures, including turnarounds, were $193 million for the first quarter, and we expect total capital expenditures for the company, including turnarounds, to be approximately $725 million for the year.

As we've indicated before, we plan to fund our 2005 capital program with cash on hand and available cash flows from operations.

For the remainder of 2005, D&A expense should be approximately $45 to $50 million per quarter, adjusted for increases in capital spending.

G&A, including stock option expense, but excluding any incentive compensation, should be around $25 to $30 million per quarter.

Net interest expense should approximate $110 million for the year, which represents gross interest of $150 million, plus deferred financing cost of $10 million, less capitalized interest of $40 to $45 million, and interest income of $9 million.

Our tax provision should continue to be booked at an effective rate of around 37%.

The rate will continue to vary since it is a blend that depends in part on where our profitability is generated.

Finally, our first quarter share count is 89 million common shares outstanding, with our diluted share base just under 3 million shares more than basic.

Operator, we can now open the lines to take any questions.

(OPERATOR INSTRUCTIONS.) John Meloy, Bleichroeder.

I guess a big picture question I wan to start with is just -- are you guys seeing more product coming -- more clean product coming on the imports and are foreign upgrades, I guess, allowing this rise in imports we've been seeing recently?

Hank, why don't you take that one?

We've seen increases in imports for gasoline, absolutely.

The distillate demand has been strong outside of the U.S., so we haven't seen big increases in that product.

But as far as productive capacity outside the U.S., I really can't comment on that.

Okay.

And then for Joe, Joe I had a couple areas of the call cut out on me.

Just a question about Del City costs.

Where do you think they're heading in the second quarter?

Del City costs in the second quarter.

Look, we have said for the last couple of quarters here that we're working toward general reduction in the cost structure there.

We are making progress.

A lot of that will tie back to the operations of the gas supplier unit.

In the first quarter, you know, the expenses were a bit lower than they had been on an absolute dollar basis from the fourth quarter.

A lot of that has to do with a decrease in repair and maintenance expenses, both in terms of having made progress there and because there was less turnaround activity at Del City than there had been in the fourth quarter.

So, we would've expected to see those expenses decrease a bit.

And going forward, I can't quantify it for you, but you should continue to see modest progress and a downward pattern there as we move through the year.

Jeff Dietert with Simmons

Good morning.

Following up on John's question on the operating costs at Del City, are you still targeting 325 to 350 long-term operating cost there?

Yes, we're still looking to reach the 350 and maybe a little bit less than that, probably by the very end of the year on a monthly basis we would expect to do that.

However, net gas prices, for instance, are quite a bit higher than what we had projected in the budget, so that's going to have an upward influence on the final target.

Okay.

Good.

And Maya discounts relative to WTI are still substantially steeper than they have been historically.

But if you look at the spread, it's fallen from about 18.25 below WTI on April 1st, about $13.50 below now, reflecting some strength in resid prices relative to WTI and some other issues.

Would you comment on where you see these spreads going forward, and kind of what's driving the reduction of the discount?

I think you hit it on the head.

The high sulfur fuel oils are very strong right now.

And that's pushing the spread to be closer to WTI.

If that continues with high sulfur fuel, we'll see these spreads in the range that they're in right now.

And I think, generally, as crude prices tend to move down, I'm not surprised that spreads move in.

Chi Chow, Petrie Parkman.

Just wondering.

Can you give us some comments on how you see the FTC process proceeding on the transaction?

Sure.

We had commented before, and there's no new news or new approach to this.

Both companies said they will promptly file their Hart-Scott-Rodino.

And the process will then play out as it does.

It's clear that both Boards believe it's likely this transaction will be approved.

But, the timing simply can't be handicapped.

It'll have a life of its own.

Are you expecting a lot of scrutiny from the FTC, or political pressure given street price of the gasoline?

Just don't know.

Can't judge that in regard to the FTC, rather.

But you know, political interest in our industry is always high.

Right.

And second question here.

On Lima, the performance has been pretty strong over the last few quarters relative to the crack that we track.

Have you been realizing any upside due to the [pre-slate] mix there?

Yes, that's the principle improvement we've seen.

The differentials for sweet crudes that are imported as opposed to the WTI itself, has had a influence on the absolute total crude price we see at Lima.

So, yes, that's the principle factor.

A positive influence?

Yes.

What sort of crudes are you bringing in?

We've been bringing in some [Brent], Girasol, those types of crudes.

And they're landing in at one or two dollars under TI.

What sort of throughputs are you putting through on those crudes?

That's roughly 20% of our throughput.

(OPERATOR INSTRUCTIONS.) Jay Saunders, Deutsche Bank.

Just a quick question on [inaudible] for diesel for the middle of next year.

How do you guys stand in terms of readiness to meet the stack at all the refineries?

We're completing the projects on time at Port Arthur and at Lima, so you'll see the production from there.

Also at Memphis.

The only place where you will not see ultra low sulfur diesel will be at Delaware.

We'll have a small amount that we'll product, we think approximately 10 a day or so for rack-type sales.

But, we don't have a specific project to upgrade all the distillates to the low sulfur.

Jeff Dietert with Simmons.

A follow-up on Jay's question on diesel.

Do you expect any loss of diesel production, or reduction of diesel yield as you meet the 2006 specs?

And if so, how significant could it be?

Yes.

I think we expect to see somewhere around the 1% to 1.5% reduction.

At this time, there are no further questions.

Okay, great.

Thanks for listening in.

That will conclude this call.

Thank you for participating in today's conference.

The conference has concluded.

You may disconnect at this time.