Q3 2019 Earnings Call
Greetings and welcome to the CVR Energy Inc. third quarter 2019 conference call. At this time all participants are in listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operators distance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Mr., Jay Finks, Vice President Finance and Treasurer. Thank you you may begin.
Thank you Michelle good afternoon, everyone.
Very much appreciate you joining us this afternoon for CVR Energys third quarter 2019 earnings call.
With me today, or Dave lamp, or Chief Executive Officer, Tracy Jackson, Our Chief Financial Officer other members of management.
Prior to discussing our 2019 third quarter results. Let me remind you that this conference call may contain forward looking statements as that term as defined under federal Securities laws.
For this purpose any statements made during this call that are not statements store Colfax, maybe deemed to be forward looking statements.
Lived either for going the words outlook believes anticipates plans expects or similar expressions are intended to identify forward looking statements.
You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and then our latest earnings release.
As a result actual operations results may differ materially from the results discussed in the forward looking statements.
We undertake no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise except to the extent required by law.
This call offerings is various non-GAAP financial measures.
The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures are included in our 2019 third quarter earnings release.
And with the FCC.
That said I'll turn the call everyday.
Thank you Jay good afternoon, everyone and thank you for joining our earnings call.
We had an opportunity due to listen to the CVR partners earnings calls earlier today.
Yesterday, we reported third quarter consolidated net income of 104 million and diluted earnings per share of $1.18.
EBITDA for the quarter was 235 million.
Despite tighter crack spreads and crude differentials in the third quarter. This year, we generated strong quarterly results through safe reliable operations improved capture rates higher throughput volumes and increased fertilizer sales in pricing.
We also announced a five cents increase in our quarterly dividends to 80 cents per share.
The third quarter dividend will be paid on November 12 to stockholders of record as of the close of markets on November 4th.
With this increase our current annualized dividend of $3.20 per share.
Presents an industry, leading dividend yield of over 7% based on yesterdays closing price.
For our <unk> Petroleum segment, both plants ran well with no material downtime during the quarter.
Combined total throughput for the quarter.
2019 was approximately.
222000 barrels per day as compared to 221000 barrels a day in the third quarter of 18.
The group to the group to one one crack spread averaged $18.30 per barrel in the third quarter of 19 as compared to $19. An 88 cents in the third quarter. They ti domestic crude differentials have tightened recently, primarily due to startup in line fill a new pipeline.
It's from West, Texas to the Gulf Coast.
Brent Ti <unk> differential averaged $5.63 per barrel and the third COVID-19, as compared to $6.33 per barrel in the third quarter of 18.
The Midland Cushing differential narrowed to 26 cents per barrel in the quarter as compared to $14.33 per barrel.
The third quarter of 80.
The WCS differential.
To WT I was $12.59 per barrels compared to $27.76 per barrel the same period last year.
You know the WCS differentials largely resolved continued production curtail curtailments imposed by the Alberta government.
Life product yield for the quarter was 98% on crude oil processed ore distillate yield as a percentage of total crude oil throughput was 45% in the third quarter of 19 inline with prior year period.
Our distillate yield consistently ranks as one of the highest among the U.S. independent refiners.
In total we gathered approximately 127000 barrels per day of crude oil during the third COVID-19, as compared to 113000 barrels in the same period last year.
Our gathering volumes continued to increase throughout the quarter with September volumes at 137000 barrels per day.
As we continue to switch to shift our slate of crude oils gathered in our own back yard we have increased our scoop gathering runs by over 20% relative to the third quarter of 18, while reducing our gathered at gathering activities and other non strategic regions as well as our purchases of Cushing common crude oil.
During the third quarter, the fertilizer segment had strong reliable operations of both fertilizer both facilities.
Coffeyvilles ammonia unit operated at 98% utilization the quarter as compared to 94 in the third quarter vacancy at East Dubuque, The ammonia unit operated at 98% utilization leading up to the turnaround.
As compared to 100% in the prior year period.
The turnaround at East Dubuque was completed in October and is now coming back up to full production year over year, you a on sales volume higher prices for both UAN and ammonia.
Lower natural gas prices resulted in fertilizers positive EBITDA contribution to see CVR <unk> consolidated financial results.
The board of directors of CVR partners General partner declared a third COVID-19 distribution of seven cents per common unit.
Which will be paid on November 12 to unit holders of record at the close of market on November 4th.
At CVR energy owns approximately 34% of CVR partners common units will receive a proportionate about cash distribution of approximately 3 million.
Now, let me turn the call over Tracy discuss additional financial highlights. Thank you David Good afternoon, everyone as Dave mentioned for the third quarter of 2019, we reported consolidated net income of 104 million and diluted earnings per share of $1.18. This compares to net income of 110 million and diluted earnings per share of 85.
Sense for the third quarter 2018.
Active tax rate the third quarter, 2019 was 25% compared to 23% for the prior year period the improvement in diluted earnings per share any increase in our effective tax rate were both due primarily to the decrease in non controlling interest as a result of the first quarter equity transaction. We continue to expect that our full year 2019 effective tax.
I will be between 20 and 25%.
The petroleum segments EBITDA for the third quarter 2019 was 228 million compared to 219 million in the same period in 2018, the increase in EBITDA year over year was driven by higher capture rates an increase throughput volume.
In the third quarter 2019, our petroleum segments refining margin, excluding inventory revaluation impacts with $16 at 37 cents per total throughput barrel compared to $15. A 57 cents in the same quarter of 2018, the decline in crude oil flat price during the quarter generated a negative inventory valuation impact.
Three cents per barrel during the third quarter 2019. This compares to a 12 cents per barrel positive impact during the same period last year the capture rate excluding the inventory valuation impact was 89% in the third quarter 2019, as compared to 78% in the third quarter of 2018.
Order derivative gains for the third quarter 2019 totaled 18 million, which includes unrealized gains a 14 million associated with open commodity derivative instruments and open purchases of Canadian crude oil their schedule for future delivery.
In the third quarter 2018, we had total derivative gains of 5 million.
Rins expense in the third quarter 2019 declined by 22 million compared to the same period last year that year over year decline and rent expense was driven by a combination of lower rins prices and a reduction in our prior year renewable volume obligation based on recent market prices of rents and current production plans. We now estimate that our rins expense will be approximately.
40 to 50 million in 2019, the petroleum segments direct operating expenses were $4.46 per barrel a total throughput in the third quarter 2019, as compared to $4 in 13 cents per barrel in the prior year period.
The increase was primarily associated with increased labor and materials costs offset by lower expenses for utilities and outside services.
For the third quarter 2019, the fertilizer segment reported an operating loss of 8 million and a net loss of 23 million or 20 cents per common unit.
This is compared to third quarter 2018, operating income of 3 million and the net loss of 13 million or 12 cents per common unit. Adjusted EBITDA was 18 million in the third quarter of 2019 compared to 19 million for the prior year period, the slight year over year decrease in adjusted EBITDA is primarily due to higher operating costs and higher petco.
Prices.
Total consolidated capital spending for the third quarter of 2019 was 34 million, which included 27 million from the petroleum segment and 7 million from the fertilizer segment.
This total environmental and maintenance capital spending comprised 31 million, including 25 million in the petroleum segment and 6 million in the fertilizer segment. We now estimate the total consolidated capital spending for 2019 to be approximately 145 to 165 million of which approximately 120 to 135.
Millionaires, environmental and maintenance capital. This excludes planned turnaround spending, which we estimate to be approximately 50 to 55 million for the year.
The approximate 15 million reduction in our 2019 capital spending plan as the result of a shift in timing for certain capital projects into subsequent years.
Our cash position remains strong as we ended the quarter with cash of approximately 692 million on a consolidated basis, which includes 84 million in the fertilizer segment. We continue to feel confident our strong balance sheet our liquidity position.
Looking ahead for our petroleum segment, we estimate total throughput for the fourth quarter, a 29 team to be approximately 205 to 220000 barrels per day, we expect total direct operating expenses for the fourth quarter to be approximately 90 to 100 million and total capital spill into spending to range between 50, and 60 million for the fertilizer segment.
We estimate our ammonia utilization rate to be between 95 and 100% excluding the impact of planned turnarounds. We expect direct operating expenses to be approximately 40 to 45 million, excluding inventory and turnaround impacts and total capital spending to be between eight and 10 million with that I'll turn the call back to you. Thanks, Tracy and summary.
We are proud of our strong results in the third quarter 90, our mission continues to be tough to be a top tier north American petroleum refining and fertilizer company as measured by safe reliable operations superior financial performance and profitable growth.
Before discussing our market outlook.
I'd like to provide an update on the formal bank process, we announced in May.
We acknowledge that our premium valuation.
Relative to our appears to many of our peers resulted in a wide bid ask spreads.
Therefore that bank process has now concluded.
However, we continue to evaluate various revenue diversification and value creation opportunities.
Along with the previous mentioned, 7% increasing the dividend. The board has authorized a four year stock repurchase plan program of up to 300 million.
We will consider opportunistically repurchasing our shares as one potential way to return excess cash to shareholders over time.
I would like to reiterate that we continue to believe the best use of available cash is isn't a stable and growing dividend.
And funding high return capital projects, but this repurchase.
Authorization will provide us with additional financial flexibility should the opportunity arise.
We remain focused on efforts to improve our business through increasing shale oil shale crude sourcing that optionality.
Proving our capture rates and exploring ways to diversify into other high valued business segments.
Looking at the remainder of 19 and to 20.
We continue to have a constructive look outlook driven by a range of positive market fundamentals that we see.
First low crude prices and low unemployment are positive for us refined products demand.
Second continued low natural gas prices better benefit both our refining and fertilizer businesses.
Third gasoline demand remained strong with the latest data showing year to date vehicle miles traveled in the U.S. up by almost 1% compared to last year.
Fourth refined product inventories remain in check and are currently at or below five year averages.
Five us petroleum exports remain strong year to date gasoline and distillate exports have averaged over 2 million barrels a day and crude oil exports have been above 3 million barrels per day throughout much of the year.
Six domestic shale crude and specifically light crude production continues to increase recent government data shows that year over year growth in the crude oil production for the major shale basins over.
Of over 40 900000 barrels per day.
Like WGCL volumes are increasing as well and we believe these barrels should sell at a discount to WCS.
Seven although RIN prices have been volatile the currently remain relatively low.
Hey, again granted 31 small refinery exemptions for the the.
For the 18 compliance year, we believe the all requires continuing continued granting of these exemptions in the future.
Hey.
IMO implementation remains on track for January 1st and we continue to believe these new standards represent a tailwind for the industry refining industry in general IMO impacts are already beginning to show up in the market.
Evidence of it ended by the recent widening of.
Hi, sulfur fuel discounts.
Further recent increase in shipping rates may also be attributed the IMO 2020, and we view this as a positive for the Brent WTI spread going forward.
And finally tier three gasoline specifications changes will also be fully implemented injured by January onest. This likely represents another tailwind for the refining industries for those that are prepared.
We believe the market still does not fully understand or appreciate the potential impacts of IMO 2020 tier three gasoline and the continued growth in domestic shale crude production.
We are well positioned in regard to always market forces and the most most of the capital projects. We are developing will further increase our ability to make premium gasoline increase our liquid yields and expand our feedstock optionality.
The Coffeyville crude Optionality project, if approved as intended to increase our capacity for processing natural gasoline to 10000 barrels per day natural gasoline spreads to regular subgrade have averaged over 60 cents a gallon. This year are expected to widen further with the implementation at tier three gasoline specs.
Schedule Engineering design work and cost estimating our almost complete.
The new C. Five to six isometric anyone is also and scheduling schedule engineering and costs estimated if approved this project should improve our capture rate and our liquid volume yield.
And as we continue to evaluate the replacement of HF acid catalyst in our when he would Appalachian.
This project is expected to increase production of outflow that when you would and therefore the production of premium gasoline.
We believe all these projects are attractive and should generate returns of 30% or greater engineering work continues and we expect to have these projects define and ready for board approval by the end of the fourth quarter.
Looking at the fourth quarter 2019 quarter today's metrics are as follows.
Group, three crack spread averaged $20.70 per barrel.
With the breadth spread.
$5 in 63 cents in the Midland Cushing differential at 79 cents per barrel over Wi.
The WCS differential has averaged eight cents over W.
Over Cushy W.
Ethanol Rins have averaged 19 cents consistent with the third quarter average.
Biodiesel Rins are at 56 cents compared to 45 cents last quarter.
With that Michelle we are ready for questions.
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Our first question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.
Good good afternoon team.
I guess the first question congrats on a good quarter here first question as it relates to diversification makes me kind of walk us through.
Potential areas with which you might look to expand our broaden out business. The one that comes to mind.
Is the retail where you guys don't have a presence right now can you talk about.
What could fit within the portfolio.
Sure Neil and thanks for the compliments on them on the quarter.
The the things that probably appeal to us most of his divert for diversification of our earning streams from somewhere outside of the group.
Pad for.
Would be of interest to us.
Probably not pad three or pad, one or PADD, five, but specifically pad for.
Just because we look for those niche type opportunities.
And then secondly on on Rins I think our strategy around retail is really around a risk mitigation. We are still the poster child for for rent high RIN prices.
We recognize that we've taken steps to increase our internal blending, but we still have to either get into the wholesale side of the business or retail to really to make a dent in that whole process of course with our high yield of distillate.
It makes it difficult because that doesn't really lends itself to to re of our marketing channels to really doing much about it.
But those all remain on the table and extend it look at.
Thanks, David on your comments on pad for what why do you think that so that's what are your footprint.
There has been talk of Sun Pat for assets hitting the market any comments that you could provide there yes I think it is more you know where it inland refiner and we like that that the dislocation from the main liquidity points and think that.
A value added.
Stream for us that.
We would like to continue the kind of a.
That kind of differentiation.
Okay, and then just remind us where you stand with all the quick hit projects that you are working on to improve the refining system. What has come on what is to come on.
And how do we think about.
Allocating capital to those investments to once again enhance the refining system.
Well the one that we recently completed was the most of the Ben free relocation to in front of the reformer rather behind the reformer and that is fully implemented and service.
Largely a lot of some of the improvements and capture rate you're seeing is because of that project.
We also replaced catalyst at both both refile.
Reformers at both refineries.
End of.
That has the also I don't know if you follow the premium spreads in the group, but the in the third quarter. They averaged 35 cents over sub grid.
And that that's a lot of what the improved our capture rate in the past some of the others our longer term projects of the three I mentioned in the prepared remarks, we're on our all in the 2020 to 2020 122 range.
So we'll take some time to develop.
Alright, Thanks, Dave appreciate that sure.
Thank you. Our next question comes from the line of Paul Cheng What Scotia Howard Weil. Please proceed with your question.
Thank you thanks guys.
They just maybe that this is Phil Tracy's Tracy how much is the ACO small we find that make sense and benefit that you we quoted in the quarter.
We do not confirmed that we received an exemption simply that we received a reduction in our vo obligation for prior year. Okay can you tell us Dan dad, what is that among.
Hi, Alan 22, yes that 19 2018 any comp range that you kind of Hawaii.
I would point you to the prepared remarks and the decreased over prior year as Directionally, what you should be considering but I can't confirm that we received any exemption <unk>.
<unk> and Dave just curious that I mean, when you're looking at potential acquisition I mean, how much is the lift page right Newpage that you want you would be willing to that to pool.
To put on for the write off it.
I didn't understand your question Paul.
Yeah. If you do go for an acquisition.
Finally, we find very much that you're willing to put on you know what that to compete the transaction well our biologist Nick way. So yes, you help on should that how much they face that you're willing to put on.
Our plus the maximum.
But I don't think we'd get outside the industry average, but right now our balance sheet is very strong were long cash.
So we would we would put the appropriate amount on their or take other actions to raise capital to do such a but.
Instead of ways showed that like net debt to EBITDA or.
That's our tapping away so and the topic.
Don't have your target there Paul at all that we're trying to hit or anything.
Right now we are aware low.
Compared to our peers and we have capacity the Ed.
Mhm and when you're looking at the current mom and on the we find resale South Beach Pos.
Do you think that that's a.
Pretty good why.
Discrepancy between what people may be offering and what is the potential bought wedding to pay.
I think its individualized sets.
In our case I think the bid ask was extremely wide <unk>.
<unk> Dawn and part of it was the industry and part of it frankly, there aren't that many consolidator consolidators out there to even compete.
The I would I would make a comment that the the MP companies I don't think are long cash in any way shape or form.
At $55 crude more $50 crude.
And therefore, you're at your with your left with refiners that the.
There just aren't that many out there the that have the work with all the do it again and again in our case, we're we're looking for diversification to EBITDA, just adding more group three type assets really doesn't move the needle forces were were exposed to the same market parameters.
And what we need as a company is the diversification of the EBITDA source <unk>.
And if we're looking at today, the Midland priced, yes, about but higher than Cushing.
So it does it still make economic sense for you guys to run the Midland COO under that scenario.
Well you don't add that do you have any kind of pickle pay or minimum warning fee you have to pay.
No. We're just on historical space on on basin pipelines, we don't use that we tend to assuming thats proportion, we would lose historical space.
But that's that's another sort of the case.
Our case, where our strategy is really all around gathering crudes around in our backyard.
And that for the most part is the scoop and stack.
There's we have a proprietary lines as well as a public lines.
We have pretty good long runway to go there.
Our purchases of Cushing common are down.
Substantially and we.
We have the flexibility to bring midla, none of its profitable don't bringing in if it isn't.
I'd bring your attention to the WGCL barrel, which is.
The light version of Wi.
Volume is growing rapidly.
And we have the ability to Rob process that material also.
Thanks, how much of that.
Sorry, how much is the WT now you could run.
Given the Ami.
We're still determining that but of the it's it's a value added crude to us over Wi.
It's just so new to the market ball, we just don't have enough data. Okay. That's great final question for you and off takes 48 million the quota seems high but that's has been high for the last two quarters I don't know is it mainly because of the tend to want what will be a reasonable one way going for.
All that.
Well I think you can look forward to see something between 40 and 50 it was higher in the quarter due to our turnaround that was going on at the East Dubuque facility.
So Tracy we not going to see them go back to because a couple of years ago that you would be in this up 14, <unk> 30, 537, So we're not going to go back down to that column that <unk>.
Well remember the impacts of inventory changes also impact their offer opex expense on a quarterly basis that we had that occurring in this past third quarter. So that will depending on whether we're building are drawing inventory continue to have an impact and then if you listen to the color reference back to the script.
Mr. Pytosh indicated that they're going to continue to make investments and de bottlenecking and reliability projects going forward, which to the extent our maintenance projects will be expensed as we complete them.
Okay. So that means that we're not going to be no 40. So 40 to 50 this new range that we should.
So what happens in inventory Paul So right. Okay. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Prashant Rao with Citigroup. Please proceed with your question.
Hi, good afternoon, and thanks for taking my question.
First one of them [laughter] gathering.
Kind of a macro question then how do you baked into that or may be are not as exposed to some of the negative headwinds in scoop stack specifically.
The rig counts down pretty dramatically year to date.
And I get that that's due to the fact that theres more gas NGL price sensitivity, but we've been getting some questions in our upstream about productivity in our upstream coverage on productivity in some of the areas and we had some fiercer investors it could be production rolling over for some of the operators. There next year. So I was wondering if you can maybe comment to that have the macro seems.
Good day incrementally negative, but do you guys are you able to increase your gathering there and get some distillate rich barrels. So just wanted to get some some.
Some thoughts and color on on how to frame that up from you.
Well I think I would answer that is that we're aligned with the large producers out there.
Then we pretty much take all their production.
And they that you've heard of the driftwood formation and they've been very productive out of that.
And we go right with them so.
Our pipeline connected basically to them so.
That's how we've grown it.
Yeah, I think rig count is down ducks are down.
But the production seems to still grow in that region of the is really productive plays.
Okay and good.
You have a good confidence and are you at least won't be affected in case from production rolls over and I'm sure. It sounds like what you're saying as it would probably be smaller operators on the larger guys you're connected.
That's correct. These guys or were you get their projections going forward and there's still sign up into the right.
Okay makes sense and Paul question related to the buyback.
Just curious.
How you would go about that what you're auctions maybe.
Open market looking into the I'd or would you consider doing a block given.
Asking the question specifically because of the shareholder concentration in your base.
Just wanted to get offensive.
How about my might play out what what you're keeping open on the table here.
Well I think it's a four year.
Authorization and I think we've made at abundantly clear that we would only do it and when the opportunistic opportunities shows up.
That implies a site because this is a cyclic business and that rolls, sometimes when it when it rolls low we'd probably be buyers Howie exactly go about is we really havent.
Disclose that probably won't until the time comes if it comes.
Okay makes sense, that's all for me thanks for taking my questions. Thank you.
Thank you once again, if you would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star keys.
Our next question comes from the line of Matthew Blair with Tudor Pickering, Holt and company. Please proceed with your question.
Thanks, Good morning.
Any update on how you're thinking about you again as part of the portfolio, whether that's where that makes sense long term or whether you might even I guess add to your exposure to you in here.
Well that will certainly be the diversification of our EBITDA, but.
The and work the stocks currently trading than what we think the forward curve is it could be attractive, although we don't view it as highly accretive at this point.
I think we'll keep an eye on it will look at it our ownership is only 34% of the.
So it's a big.
Big enough to take it all the way to two underneath the.
CVI umbrella.
But we also are very cognizant of what's happening with variable distribution MLP is.
And the effect on that so we continue to watch as Matt.
Sounds good and then you mentioned reduced gathering.
What's a good EBITDA number for your gathering activities is is it still around 70 million or so and Im sorry can you repeat what was the gathered volumes in the quarter.
You're talking about MLP able logistical type assets corrected it has gone up since our volumes have gone up in fact, our Red River pipeline, we bought back in late 17, yeah.
Is basically full.
And that we're delivering barrels from from the winning what area to Cushing and then onto to our refinery and Coffeyville.
So I think it's gone up summit, we quoted 70 before it's probably more than 80 range on that I guess.
And we're looking at other opportunities for before.
Assets like that that we can roll into it.
Okay and did you have no plans to do any kind of logistical MLP. We just don't have the scale Ford.
Got it and what were your gathered volumes in the quarter.
127000 barrels per day.
Great. Thank you very much.
Welcome.
Thank you there no further questions at this time I'd like to turn the call back over to management for any closing remarks.
Okay again, thank you all for your interest and CVR energy. Additionally, we'd like to thank all our employees for their hard work.
Commitment toward safe reliable and.
Our mentally responsible operations.
We look forward to reviewing our fourth quarter 2019 results during our next earnings call.
Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.