PARR
#Thank you, Melissa.
Good morning, everyone, and welcome to Par Pacific Holdings' fourth quarter 2017 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, 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.
These 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, our investor presentation and our website at www.parpacific.com or in our filings with the SEC.
I'll now turn the call over to our President and Chief Executive Officer, <UNK> <UNK>.
Thanks, Matt.
It was very efficient.
2017 was a record year for Par Pacific.
Our adjusted earnings per share was $1.77, more than 4x the previous highest adjusted earnings per share which we recorded in 2015.
Our book value increased by more than 20% due to these strong earnings.
And we have healthy free cash flow, reducing our debt by $56 million during 2017 and further strengthening our capital structure.
We successfully managed through weakening product cracks and increasing crude oil differentials in Hawaii last quarter, reporting adjusted EBITDA of more than $33 million as our team improved our capture margin with excellent commercial planning and operational execution.
In December, we rolled up our remaining debt in a broad refinancing, eliminating all of our near-term maturities and providing significant liquidity for operations and growth.
Our acquisition of Wyoming has proven to be an attractive transaction.
We finished the year just ahead of the $50 million adjusted EBITDA target for Wyoming Refining and Logistics that we announced at the time of the acquisition.
Product cracks in our Rocky Mountain region continue to be strong with good fundamentals in terms of inventory levels and product demand.
We're very pleased with this addition to our refining asset base.
As we enter 2018, we announced the acquisition of 33 retail stores in the Spokane, Washington area to buttress our Wyoming refining operations and expand our operational footprint in the Rocky Mountain region.
We believe this region is full of attractive growing markets, and Spokane, in particular, offers the type of logistics complexity in which our organization thrives.
As part of this transaction, we also entered into a supplier agreement to benefit our Wyoming refining output.
In our Hawaii operations, we finished the year with strong financial and operational results.
We announced a new distillate hydrotreater project to enhance our position in the state, especially as we anticipate stronger distillate cracks in the face of growing demand and the expected widening of the spread between high and low sulfur products in the Pacific due to the IMO changes in 2020.
This project is proceeding as we anticipated, with start-up scheduled during the middle of next year.
This project should allow us to further increase our market share in the state beyond the record on-island sales during the fourth quarter of approximately 67,000 barrels per day.
Hawaii refined product demand continues to be led by strong airline growth.
Domestic-originating air arrivals were up 5.1% in Hawaii in 2017.
Our retail operations also continue to perform exceptionally well.
Retail margins have been good despite a rising crude oil price.
For the year, we generated a 2.6% fuel volume increase on a same-store basis, and merchandise sales were up 2.1% in 2017 on a same-store basis.
All in all, great execution by the team.
Overall, we entered 2018 with an improved outlook in Wyoming and a more difficult environment in Hawaii due to a tighter physical crude market.
We continue to build our earning and cash generation capability in other business units to mitigate the cyclicality of our Hawaii refining operations.
We also enter with a much better market position in both of our principal operating markets and improved asset profile that will be enhanced by our current capital projects and a stronger financial capitalization.
We continue to evaluate a number of acquisition possibilities that strategically fit our existing business capabilities.
With that, I'll turn the call over to <UNK>.
Thank you, Bill, and good morning, everyone.
I would like to start by congratulating our teams in Hawaii, Wyoming and Houston on a solid execution in 2017.
The consistent focus on safety, environmental compliance, operations reliability and commercial flexibility have led the way to strong 2017 results across the board.
Now with regards to the fourth quarter.
Strong capture rates in both refineries more than offset planned maintenance and relatively weak market environment in the Mid Pacific and allowed our refining system to generate $31 million of adjusted EBITDA in the quarter.
In Hawaii, rising Singapore inventories have negatively impacted gasoline and fuel oil crack spreads.
On the other hand, distillate and especially jet-fuel crack spreads have been strong, supported by strong demand and low inventory.
On the feedstock side, our Mid Pacific Crude Oil Differential index for the fourth quarter of 2017 implied only $0.02 per barrel discount to Brent compared to $1.48 per barrel discount in the fourth quarter of 2016.
As a result, our combined Mid Pacific Index was $7.83 per barrel during the quarter compared to $8.48 per barrel during the fourth quarter of 2016.
Our Hawaii refinery throughput in the fourth quarter was 72,000 barrels per day with 99.9% operational availability and record high 52% distillate yield.
We successfully executed our planned reformer catalyst regeneration in the fourth quarter on time and on budget.
We sold a total of 75,000 barrels per day, including 67,000 barrels per day of on-island sales in the fourth quarter.
This number is reflecting approximately 10% growth in on-island sales compared to where we were in 2016 and the first half of 2017, mainly driven by gasoline and jet fuel contracts that were added in the second half of 2017.
Our adjusted gross margin was $6.54 per barrel, and production costs were $3.41 per barrel.
So far, in the first quarter of 2018, our combined Mid Pacific Index is approximately $7 to $7.50 per barrel, and our first quarter planned throughput in Hawaii is approximately 75,000 barrels per day.
We continue to be aggressive in our crude selection process and optimize our crude mix and mode of operations in Hawaii per market condition.
In Wyoming, strong margin environment was supported by low gasoline and distillate inventory in the Rocky Mountains market as well as continued constructive demand fundamentals for distillate.
Our 3-2-1 Index was $23.79 per barrel during the quarter compared to $13.69 per barrel during the fourth quarter of 2016.
In the fourth quarter, our refining throughput averaged 15,000 barrels per day with 99% operational availability, and we sold approximately 15,000 barrels per day.
Our adjusted gross margin was $15.70 per barrel, and production costs were $7.46 per barrel, including approximately $0.50 per barrel of production costs associated with the maintenance and upgrade to work.
So far in first quarter, our Wyoming 3-2-1 index has averaged $15.50 to $16 per barrel, and our target throughput in Wyoming is approximately 16,500 barrels per day for the quarter.
Overall, 2017 was a strong year for both refineries.
Beyond optimizing operations and improving commercial flexibility in both systems, we invested $11 million of CapEx in the Hawaii refinery, an additional $8 million of CapEx in our Wyoming refinery.
In 2018, we are planning to invest approximately $35 million of CapEx in both refineries, with the majority, approximately $20 million, in growth projects, including our announced DHT project in Hawaii.
And now I'll turn the call over to Will to review consolidated results and Laramie highlights.
We haven't added any material operating costs associated with the acquisition in the first quarter, and we don't anticipate any significant costs.
We're able to leverage the team that we have in Hawaii.
We're putting together a small group in Spokane that will be working and reporting directly to Jim Yates, who's responsible for the Hawaii marketing logistics operations.
We, first and foremost, think about capital and free cash flow in terms of reinvesting that capital in the growth of our business where it's strategically relevant and where the return on investment is attractive.
After that, we dedicate the cash flow to the reduction of debt.
And we target a debt to total cap of about 30% to 35%.
If we were to reduce our debt to total cap below that level and we had sufficient liquidity, we would then start to consider returning capital to shareholders in the form of either share repurchase or dividend.
Yes, the increased distillate yield was mainly a function of feedstock quality.
The crude we ran allowed us to make more distillate than typical.
And you're right, the demand profile for the Hawaii market is all distillate-driven, especially the jet fuel part, and as the local refinery out there, we are primarily focused on what the market needs.
I'm wondering if you could help me a little bit here.
I'm just trying to understand, in each of Hawaii and Wyoming, what contributed to the higher production cost per barrel.
Is the crude cost itself part of the production costs.
<UNK>, do you want to take that.
In Hawaii, $3.41 per barrel is actually a very good low production cost.
So we're very happy with that, and we'll take that every quarter.
In Wyoming, the $7.46 included $0.50 per barrel associated with the maintenance work that we had there.
So without the $0.50, it's approximately $7, again, very similar to what we have shown in the past.
And when you compare fourth quarter '17 to '16, please remember, the fourth quarter of '16 per our earning release included approximately $2.35 per barrel of positive pension credit that made that number a little bit lower.
Okay.
But when you look at year-over-year, though, is ---+ are crude costs part of production costs.
Or they're below that line ---+ I'm sorry, are production costs below the line of crude costs.
Crude costs are not included in production costs.
The production costs include only the operating costs associated with the facility.
Okay.
And you stated on ---+ in the press release and on the conference call regarding the Cenex acquisition that you thought that transaction would close during Q1.
You got about 3 more weeks left.
Do you still see it closing before the end of the quarter.
And is the closing process going smoothly.
Yes, <UNK>, we still anticipate closing it before the end of the quarter.
We're waiting on a few necessary permits to ensure that we can operate the stores upon closing.
Okay.
And then we're happy to see a record amount of on-island sales.
I think you kind of guided that you were expecting to increase it nicely.
Is ---+ are these contracts, are they longer duration.
6 months.
A year.
Do you feel that this kind of level of on-island sales is something that can be maintained and improved upon.
With what we have right now on the table, the 67,000 barrels per day level is a good assumption for the next 12 months.
Obviously, it's going to go up and down every quarter, but this reflects pretty well our contractual volume at least.
Okay.
And then a question for you, Bill or Christine, is I think you guys announced you got a nondeal road show coming up, I think, this week, and then maybe another one.
What else is on the calendar play.
With a little foresight here coming into the next few months, so when will you be able to make plans.
We continue to be very happy with our investment in Laramie.
And obviously, it obviously brings a lot of value to our operations as a legacy asset.
And as you noted, we're the successor to Delta Petroleum, and with coming out of that reorganization, we had Laramie as well as a large amount of tax attributes.
On those tax attributes, we built a very nice refining business with a great team that helps us continue to grow our downstream operations.
We evaluate our investment in Laramie and treat it as an investment and are always looking for opportunities for maximizing returns and realizations on Laramie.
This could include anything from a sale of our equity interest to an IPO as well as continued acquisition and divestiture activities within Laramie itself.
They announced an acquisition ---+ or they completed an acquisition last month in-basin, and that was a nice little deal and an add-on to the business.
So we're pleased with the company, and we'll continue to evaluate it in the context of its growth, both in production and contribution toward our earnings per share profile.
Well, <UNK> mentioned that our Pacific market margins are $7 to $7 (sic) [$7 to $7.50] per barrel, which is probably $1 to $1.50 below last year's average.
But we continue to expect strong results in Wyoming where margins are strong.
Our capture rate in Hawaii has improved quite a bit due to our sales and our yields.
And our retail business is doing quite well.
<UNK>, do you want to add any color to the cracks with the Mid Pacific Index.
I will just add that inventories across the board are low.
Gasoline, fuel oil, closer to mid-cycle in the Mid-Pacific.
But distillate is extremely low in the Mid Pacific, and this is very encouraging.
It's always hard to evaluate share, but I do think our team has done a great job in the Hawaii retail market.
Margins have been stable and strong and continue to look pretty good.
And at the same time, our team has shown volume growth, as you noted.
I think some of that's related to the fact that the rebranding to Hele has gone very well.
It's also due to the fact that our team has put together some attractive marketing operations and strategies that allow us to grow our fuel volumes from our existing store network.
To be honest, we do both.
And like we said earlier, we continue to be very aggressive in our crude selection process and use pretty much every place in the world as a candidate for the crude sourcing, Africa happened to be our optimization here in the fourth quarter, and we used it.
And I think you can only guess that on the western side of Africa, there's rich distillate crude.
So it has something to do with that.
So we continue to look every quarter, every month and make the best crude selection for the company.
Especially in this type of crude diff environment, flexibility is critical.
Yes, we'll continue to monitor equipment and catalyst to make our plans accordingly.
We don't think major turnaround will be needed before late '19.
Hopefully, we'll be able to push it to early 2020.
We will see.
Thank you, Melissa.
Thank you, everyone, for joining us this morning.
We look forward to building our business in 2018 through our recently announced retail deal and the distillate hydrotreater project in Hawaii.
With a strong financial capitalization, we'll continue to pursue opportunities that offer a strategic fit and bolster the profile of our existing businesses.
I'd like to close by congratulating our organization on a job well done during 2017.
Thank you.
