PARR
#Thank you, Doug.
Good morning, everyone, and welcome to Par Pacific Holdings First Quarter 2018 Earnings Conference Call.
Joining me today are <UNK> <UNK>, President and Chief Executive Officer; Will <UNK>, Chief Financial Officer; and <UNK> <UNK>, President and Chief Executive Officer of Par Petroleum.
Before we begin, please note that some of our comments today may include forward-looking statements as that term is defined under federal securities laws.
Such statements include, but are not limited to, those concerning plans, expectations, estimates and our outlook for the company.
Any forward-looking statements are subject to change and are not guarantees of future performance or events.
They are subject to risks and uncertainties, and actual results may differ materially from what is indicated in these forward-looking statements.
Because of this, investors should not place undue reliance on forward-looking statements, and we disclaim any intention or obligation to update or revise any forward-looking statements.
I refer you to the latest Forms 10-K and 10-Q Par Pacific Holdings filed with the SEC for a more detailed discussion of the major risk factors affecting our business.
Further information regarding these, as well as supplemental financial and operating information, including reconciliations of certain non-GAAP financial measures to the most comparable GAAP figures may be found in our press release and our investor presentation on our website at www.parpacific.com or in our filings with the SE<UNK>
I'll now turn the call over to our President and Chief Executive Officer, <UNK> <UNK>.
Thank you, Matt.
We reported solid financial results in the first quarter due to strong contributions from Wyoming Refining, our Logistics unit and our Retail business.
Adjusted earnings per share were $0.18 in spite of challenging crude differentials in Hawaii, which negatively affected our quarterly results by more than $25 million when compared to the first quarter of 2017.
The impact of these dips was partially offset by the favorable impact of Small Refinery Exemption to the Renewable Fuel Standard 2017 requirements.
Wyoming reported record seasonal sales in the quarter at nearly 18,300 barrels per day compared to 14,800 barrels per day for the first quarter of 2017 and also realized an improved gross margin per barrel on a year-over-year basis.
We are very pleased with the market profile coming into the traditionally strong summer season.
Our Hawaii refining operations also had record on-island sales of more than 69,000 barrels per day, and our distillate yield continued to be healthy at 47%.
The high crude differentials we faced in the Pacific are largely a result of the current OPEC production constraints.
The production cuts have had a particularly significant impact on medium sour crudes and have also created a highly backwardated market, which exacerbates the cost of our Hawaii supply chain.
Our Hawaii retail business continued to perform very well with gross margin growth of 8% on a year-over-year basis.
Segment profitability was down 6% as we felt the impact of higher minimum wages at our store expense level.
Sales volumes ebbed somewhat with same-store fuel volumes declining 2.8% and merchandise sales declining 0.7%.
We believe these trends are related to a variety of factors, including the adverse impact of retail price increases on consumption, limited conversion work at our stores and competition at The Street level.
On the strategic front, we had several notable accomplishments.
We previously announced an agreement to purchase 33 convenience stores in the Spokane, Washington region.
We closed this acquisition at the end of the first quarter.
I'm pleased with the integration of the business, and I look forward to this expansion of our mainland activities and the enhanced diversification to our business profile.
We believe the Rocky Mountains and the Pacific Northwest are great regions in which to focus our growth initiatives.
Internally, our distillate hydrotreater project in Hawaii continues to be on time and on budget.
We expect to have this project operating in time to supply additional clean distillate products to address incremental demand generated by IMO 2020 standards.
In Wyoming, we have several projects ongoing to increase distillate production yields and debottleneck our crude unit to achieve greater flexibility and meeting summer demand.
And finally, we're making progress on the new fuel retail opening in Hawaii and working on other locations in the growing areas of West Honolulu.
At this point, I'll turn the call over to <UNK> to report on our operations.
Thank you, Bill.
In Hawaii, our combined Mid Pacific Index was $7.40 per barrel during the quarter compared to $8.90 per barrel during the first quarter of 2017.
The relatively weak margin environment in the first quarter was driven by overall elevated crude pricing.
On the product front, market conditions are favorable.
4-1-2-1 Mid Pacific crack spread on Brent basis was $7.38 per barrel in the quarter compared to a 5-year average of $7.19 per barrel.
Global demand is strong, and inventory levels, especially for distillates and fuel oil, are low.
However, on the crude oil side, as Bill mentioned, OPEC production discipline, geopolitical dynamics, combined with strong economy and strong demand for oil, continued to support high oil prices in a backwardated market structure.
As a result, our Mid Pacific crude oil differential in the first quarter averaged only $0.02 per barrel discount to Brent compared to a 5-year average of $1 per barrel discount to Brent.
Our Hawaii refinery throughput in the first quarter was 76,000 barrels per day with 98.5% operational availability.
We sold a total of 84,000 barrels per day in the quarter, including record-high 69,000 barrels per day of on-island sales.
The EPA granted our Hawaii refinery Small Refinery Exemption for the calendar year of 2017, which resulted in the net first quarter RINS benefit of approximately $9 million for the Hawaii refinery.
Our adjusted gross margin was $5.20 per barrel, including positive $1.30 per barrel related to the RINS benefit.
This quarter, we estimate our negative capture to be $1.25 to $1.50 per barrel driven by the following 2 items: first item is a negative $0.65 per barrel impact associated with export timing.
As a reminder, in the fourth quarter of 2017, we realized approximately $1 per barrel of positive capture mainly associated with low exports.
In the first quarter of '18, we almost doubled our exports compared to the fourth quarter, mainly with low-value product, which drove our realized adjusted gross margin down.
The negative $0.60 to $0.85 per barrel lift is related to the backwardated market structure and elevated shipping rates for the crude oil processed in the quarter.
Our production cost in the quarter was $3.64 per barrel.
So far in the second quarter, our combined Mid Pacific Index is approximately $8 per barrel with crude differentials improving by approximately $0.50 per barrel for our third quarter crude oil purchases.
Our second quarter planned throughput is in the 72,000 to 73,000 barrels per day range.
In Wyoming, our 3-2-1 Index was $15.65 per barrel during the quarter.
This is compared to $16.51 per barrel during the first quarter of 2017.
In the first quarter, our refinery throughput averaged 16,500 barrels per day with 98.9% operational availability, and we sold record-high 18,300 barrels per day.
The EPA also granted our Wyoming refinery Small Refinery Exemption for the calendar year of 2017, which resulted in a net first quarter RINS benefit of approximately $4 million for our Wyoming refinery.
Our adjusted gross margin in the quarter was $13.96 per barrel compared to $9.45 per barrel in the first quarter of 2017.
Excluding approximately $2.70 per barrel of net RINS benefit, our results for the quarter represent a strong capture rate of approximately $3.25 per barrel over historical performance.
We attribute the strong capture to our increased commercial and operational flexibility.
As reported in the past, our ability to rail and truck oil product outside of our market and support this incremental demand with our improved deal flexibility is critical to smooth out seasonality and enhance profitability.
In the first quarter, our Wyoming refinery produced record-high distillate of 7,400 barrels per day, and our premium gasoline sales represented over 13% of our total gasoline sales.
Production costs were $7.74 per barrel, approximately $0.60 to $0.70 per barrel over our run rate, mainly related to inventory adjustment.
Market environment is now improving in the Rocky Mountains as we approach gasoline season with close to mid-cycle gasoline inventory and low distillate inventory.
So far in the second quarter, our Wyoming 3-2-1 Index has averaged $19.20 per barrel, and our target throughput in Wyoming is approximately 17,000 barrels per day for the quarter.
And now I'll turn the call over to Will to review financial results and Laramie highlights.
Matt, it's <UNK>.
Like every quarter, we optimize our crude slate based on what the LP and the model is giving us.
And ANS happened to be an optimization at 40% like African crude at 40% and the mix of both with other crude gave us the optimized yields.
Beyond that, I won't go into more commercial details.
This is Bill.
Yes.
It's ---+ I would say mainly on the fuel retail side.
And actually, while margins were good, it was a difficult environment in terms of sales volume because there was a lot of activity going on within our store network during the quarter.
Also with rising fuel prices at the pump, you do see some changes in customer habits.
That impacted parts of our business as well.
Generally speaking, when you have rising pump prices, you ---+ I believe you tend to see customers migrate toward value-oriented brands.
And also the spread can widen between the premium brands such as 76 and high-volume retailers.
So we believe that there are increased sales at the high-volume retailers and then also increased sales at our value-themed Hele brand.
Did that answer your question.
No.
We did not receive a waiver for 2016, and we're not going to comment on any conversations we're having with the regulatory agencies.
Sure.
No impact on our operations.
We do have a terminal in Hilo, which is reasonably close to the volcano, and ---+ but there have been no ---+ the only real impact that could have taken place probably would have been with respect to the large earthquake, and we inspected our facility shortly after and had no issues.
This is Bill.
We're still debating and discussing that.
I think one of the big issues with E15 is just whether the car companies are actually going to abide by this and deal with the warranty issues associated with automobiles on the road at E15.
We'll watch it, obviously.
I don't expect if the market does shift to E15 that it will have any material impact on our business.
Would you want to add anything to that, Will.
Yes.
Let me just correct, it's not 18 million, 18,000 barrels per day rate, really our record-high sales in the quarter in Wyoming.
That was great to see, especially outside of the season.
For the rest of the year, we are planning around the 17,000 barrels per day type of run rate, and sales will be accordingly, probably 17,000 plus more in the summer, slightly less in the winter.
I have a few, and I'll back out in the queue and let us back in if you can.
A follow-up on the inquiry on the Hawaii volcano issues.
Since a good deal of our online sales and our on-island sales and desire is for jet fuel, are the other islands or main islands where you guys, I would think, some more jet fuel, are they experiencing increased jet landings.
And is the Big Island an area where we do a lot of on-island jet fuel sales.
And are they losing aircraft landings due to the ash issue that would be a problem for aircraft traffic.
Well, keep in mind that most of the air traffic to the Big Island is Kona, which is on the other side of the island.
And I'm not aware of any impact on our jet fuel sales with respect to the volcano, either up or down.
I think most activities continue to move on.
Kilauea is on the south and east side of the island closer to Hilo.
There's not as much tourism in that area, other than people driving over to the volcano.
And let me also say that all of our stations are operating on the Big Island as well, so we really don't see any impact in the business associated with the volcanic eruption at this point.
Okay.
And then regarding Laramie, regarding the transaction with an in-basin oil and gas producer at the end of February, where our equity ownership percentage was reduced by the issuance of new units for an aggregate total valuation of that acquisition of, I think, $28.1 million, your 10-K said.
The implied price per unit, I think if we did the publicly available numbers accurately, was fractionally above about $400 a unit.
And I was just wondering what is the value per unit of Laramie on Par's books.
And if you can't be specific, can you at least say is this current $400 a unit valuation in which they were issuing shares units, is it greater or less than the value of Laramie's units on Par Pacific books.
Okay, great.
And is there an accounting principle or something else.
What was the reason that Par Pacific no longer will include share of Laramie's unrealized derivative gains and losses in your calculation of adjusted net income.
Okay.
And then my last question before getting back in the queue, and I do have a few others, so hopefully there's time.
But my last question before getting back in the queue is with respect to ---+ you've acquired additional retail.
Laramie's acquired some things, and obviously crude prices have really strengthened.
In light of the things that have gone on in the last, call it, 6 months and where you are, and debt's coming down, is the focus still kind of tuck-in acquisitions.
And whether it's tuck-in or maybe additional, a larger acquisition, has there been any shift as to what areas you're finding attractive versus other areas where it's not as much of a focus.
<UNK>, our focus remains the same.
We think we have two very good franchises, really three, including Laramie, which is an investment.
In Hawaii, there are some opportunities for growth that we'll continue to pursue.
And then in the Rocky Mountains, we have a toehold with our Wyoming position.
We've added to that in terms of the mainland activities with respect to our new retail franchise in Spokane, and we think there are multiple opportunities to continue to grow in that region, where we have synergies associated with our existing assets.
Yes.
We need to look at the index and see the trend, and we basically follow the index.
We had ---+ our market environment this quarter was $7.40 per barrel of the combined index.
And in our prepared remarks, we spoke about the crude differential, which is traded at Brent flat.
It was much better in the last, year-end quarter.
But in addition, this quarter, we had some negative capture that we broke down in our prepared remarks.
The $0.65 per barrel associated with the export timing is noise.
We exported 1.3 million barrels this quarter compared to almost half of it in the previous quarter.
And our export is typically a low-value product, which pushes down our realized gross margin.
So this is noise.
And then we spoke about the backwardation and the shipping rates that we had to face in this quarter.
Backwardation is still there, and the shipping rates are already back to historical ranges.
We don't see much on the competitive landscape that changed.
It's another market with supply-demand dynamics, where you have an interface between the Rocky Mountains and the Midwest, and it will continue to move up and down.
And in some days, it will be better than the Sioux Falls, Chicago, alternative, and sometimes, it will be under, like this quarter.
Obviously, we don't try and we cannot drag the market the way we want.
We just continue to participate based on supply-demand and market opportunities.
We think it's still early for the IMO to really have an impact on the market.
The Brent minus $8 to a Brent minus $10 type of Sing 180 is slightly under mid-cycle.
It's not very weak.
It's just slightly under historical average, but you're right.
Inventories are very low, which means we have more upside than downside.
And the reason inventories are low is because heavy crude is less available and refineries are more complex this year than compared to where they were two years ago.
So the Russians cannot flood the Singapore market with fuel oil.
They have more equipment to finish fuel oil into light products, and then also the demand side is positive with strong economy in Asia, et cetera.
So we're going to continue to follow the market, and we think there is an upside to where we are at this point.
I think the IMO market will start affecting the market mid next year or early '19.
And then, just to complete that picture, HSFO may be weaker next year, and probably high-sulfur oil gasoline will be weaker.
We need to remember that for every barrel of these two products we make, we make over 4 barrels of clean product: jet fuel, ultra-low sulfur, diesel, low-sulfur fuel oil, and therefore, overall IMO is not a concern for us.
It's really the other way around for both refineries.
You answered a few of them, but I just had 1 or 2 left.
You closed on the Cenex acquisition at the end of the quarter.
Can you update us.
Is there any integration that you may have to do, information systems, payroll systems.
Any major CapEx or other things that the company needs to do to have this thing click along.
<UNK>, our team did a great job, and they ---+ we converted all the systems over in the first week of the acquisition, really the first day of the acquisition, and things are going very smoothly.
We don't anticipate any additional capital associated with the integration.
There will be some normal maintenance capital associated with just the upkeep with respect to the stores, but things look good right now.
And here we are at the ---+ in May, so halfway through the second quarter.
The results and the cash flows are operating at your expectations or better.
We're happy with where things are right now, yes.
Excellent.
And then last call, I think it was ---+ you talked about increased competition that was somewhat occurring in the Wyoming area with the strong performance it had in this last quarter and all that.
I think you thought things would correct.
Is this indication of a correction.
Or is there still some shifts in the competitive landscape for us to keep an eye on in Wyoming.
No.
Like we addressed the question earlier in the call, we don't see any change on the competitive landscape in Wyoming.
We do have more flexibility and more options than we ever had in the past.
So when we choose, we put oil product on railcars or trucks, and we target other markets that are short and present opportunities for us.
And we also have enhanced distillate capability now after doing the HDS project, and we can also make a lot of premium gasoline as we are long octane.
So we have more flexibility.
We are less reliant on the Rapid City as a market, and we'll continue to optimize sales.
Got it.
In fact, it seems like you've made that refinery much more competitive by doing all of that.
Last call, in the year-end call, you referred to debt to total cap as a potential indicator of whether it's acquisitions or other shareholder ---+ returning capital to shareholder issues.
When you referred to that, I just want to confirm, you were referring to book value of equity, not market value of equity, right.
Okay.
And lastly, upcoming non-deal road shows, conferences, et cetera that you guys have on the calendar that can give us a little more advanced foresight on that you're going to provide us here before we see the press release of it.
Thank you, operator.
Thanks for joining us this morning.
Our team has done a great job of overcoming the crude dips in the Pacific due to strong results in Wyoming and our Retail unit.
We're excited to be involved with our new team in Spokane and look forward to their contribution to Par Pacific's success.
We continue to see opportunities to build on this base with additional acquisitions, and we will stay in touch.
Have a good day.
