Q2 2020 Par Pacific Holdings Inc Earnings Call
<unk> earnings Conference call at this time, all participants are in listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host machine Hotel manager Investor Relations Apart Pacific Holdings. Thank you Mr. tell you may begin.
Thank you Melissa welcome to par Pacific Second quarter earnings Conference call. Joining me today are William Pate, President and Chief Executive Officer, well, mostly young Chief Financial Officer.
It's real President and Chief Executive Officer <unk>.
Where we began note that our comments today may include forward looking statements any forward looking statements are subject to change and are not guarantees of future performance there.
There are subject to risks uncertainties and actual results may differ materially from these forward looking statements.
Accordingly, investors should not place undue reliance on forward looking statements and we disclaim any obligation to update or revise them I refer you to our investor presentation on our website, that's where filings with the FCC for non-GAAP reconciliations and additional information.
I'll now turn the call over to our President and Chief Executive Officer they'll pay.
Thank you Jamie.
Good morning, and welcome to all of our conference call participants.
The cobot pandemic has brought serious challenges to almost every person in the world.
Like many industries the energy sector has been hit pretty hard and Furthermore, the pandemic has impacted hawaii's economy more than most reasons given the high reliance on air travel and tourism.
Well, our geographic diversity in vertical integration has helped to offset the unprecedent an impact on our operations in Hawaii.
Our second quarter results reflect difficult market conditions.
During the second quarter, we reported negative adjusted EBITDA of $50 million and an adjusted net loss of $1.70 per share.
These results were driven principally by losses in our Hawaii, We're finding unit, which had negative adjusted EBITDA of $70 million due to low throughput and negative realized gross margin.
In response to weak demand global refining throughput has been cut to near minimum rates and yet supply continues to outpace demand for refined products, resulting in some of the most significant inventory built in history.
The same reason many refineries in the U.S. than elsewhere have permanently shut their operations.
Which is promising for well positioned refineries like ours.
With the virtual holds the commercial air traffic jet fuel demand has dropped a record low.
Refiners are dropping all possible jets in the diesel Consequently, distillate inventories are currently at the highest level in 40 years.
Finally restrictions on mobility have greatly reduce the gasoline demand.
Rising case levels in major demand areas in the U.S. like Texas, and California have stifle the increased from the partial reopening that has taken place in the early part of this summer.
On the crude supply side, both in and waterborne crude differentials experienced extreme volatility.
While crude differentials initially widened to reflect the surplus of crude oil this trend reverse rapidly as other factors tightened the physical market.
Taking all these circumstances together refining margins have dropped at historic lows that have persisted at unprofitable levels for most refineries.
Well challenges remain we believe the worst is behind us.
Crude diffs in product cracks have modestly improved when compared to the prior quarter and refine product inventories have begun to decline.
We also have several contracts with improved terms in Hawaii, which will significantly improve our capture going forward.
An increase in air travel to the state will also help the utilization and profitability of our Hawaii Logistics network.
And finally I'd like to note, we're very pleased with the financial results of our retail business, which reported record adjusted EBITDA of $19 million, Despite a decline and feel demand.
The diversification afforded by our retail unit is most evident in economic downturns like the present.
Throughout this period, we've concentrated on those aspects of our business under our control.
Making structural improvements so that we will emerge from this environment with a stronger high cash flow enterprise.
In the next nine month, we remain focused on completing three major turnarounds.
We're confident that we have very strong franchises in our local markets.
There's no better time to refurbish are valuable refining that work done in a weak market with minimal lost opportunity.
Despite the second quarter losses, we enter these turning around turnarounds, having increased our liquidity by 49% where nearly $70 million during the quarter.
We remain cautious in how we operate our business.
A quick resumption in the economy seems unlikely. Therefore, we have identified additional cost cuts to manage effectively during <unk> and extended pandemic and to position us to thrive when economic activities fully reserved.
Before turning the call over to Joseph to review our operations I want to thank our employees for their dedication and for continuing to execute safely and efficiently.
The floor is yours.
Thank you Bill and good morning, everyone.
In the second quarter, Oh system operated safely and efficiently to meet customers' demand and mitigate coping 19, moca and to win.
Oh, we finally, I will turn to produce what the market needs and our cost structure.
The news to reflect strong reliability and cost control by old pm.
The second quarter, Oh refining segment operating expense. So those three refineries combined was approximately $9 million go 16% under our average 2018 quarterly expenses.
Starting with the way on me.
Oh second quarter refinery throughput averaged approximately 13000 barrels go do it Oh.
Oh, sorry to want index quota second <unk>.
[laughter] can do lows and 39 cents per barrel and all the United adjusted gross margin was 61 of them 22 cents per barrel.
Oh comparator in Wyoming.
Good evening impacted by both pricing and rapid city and the elevated could this early in the quarter when oil price couldn't support production.
On the other and.
Finally increased almost recapture in Wyoming by approximately $3.70 per barrel.
Oh second quarter, two production cost in Wyoming were $7.72 per barrel.
Improved gasoline demand, where the challenge this great marketing the Rocky Mountain.
The bulk of the refining utilization increasing about four.
Up to 87% in July.
Below the 100% enjoys right here.
Who fall into quarter three to one index has averaged just under $21 per barrel.
Oh 45 days going on in Wyoming Kids are difficult to me tend to go plan.
This was a five years hiker major turnaround.
The team is well prepared to execute the scoop.
The target throughput for the third quarter, including the impact is in the 13 to 14000 barrels a day range.
In Washington, Oh second quarter refinery throughput averaged approximately 36000 barrels per day.
Oh, I can call to throughput comprise relatively strong 85% utilized capacity.
So to the 62% coverage for PADD five refineries.
Oh you.
And the integrated marketing prisons ended the call them each market has allowed us to maintain close to normal operations with leading recorded 19 demand impact.
Second quarter, two Pacific Northwest, probably two to one index was 11 going over 92 cents per barrel on N.S. basis.
And realize the charter schools margin was $3.78 per barrel.
Production costs were renewals and 76 cents per barrel.
The man full jet fuel.
And diesel continues to be weak in the west coast markets.
And with the gasoline demand slowly improving Oh Pacific Northwest 550 warning that.
Has averaged just under $10.50 per barrel.
All in the third quarter.
Husbands demand continues to be stable and I'll get refinery throughput for the third quarter is approximately 40000 barrels per day.
You know why Oh second quarter refinery throughput was approximately 67000 barrels per day.
Singapore products crack spreads have been extremely weak through these pandemic an hour for you want to seem to go in there.
It was a negative 14 cents per barrel on Glenn basis.
Oh second quarter crude oil differentials.
We're fine no longer than 67 cents per barrel premium for Brett.
And I realize the adjusted gross margin in Hawaii was a negative $6 a 96 cents per barrel.
Production cost were who knows how to 45 cents to bear.
Oh 30 days down around in a lie.
Started over the weekend and I won't be me is well prepared.
Well the school you probably can may do down.
Was it plan contract goes equipment and capitalize on site.
So far into third quarter.
So Jim gasoline in Hawaii, and slightly improved to approximately 30% to needy person per cents respectively.
Recall that night pain demand level.
Oh for you on to Singapore Index has improved to approximately $3 per barrel and aloe third quarter crude differentials are expected to improve to approximately one dollar an 80 cents per barrel.
Driven by global oil dynamics and be more favorable market structure and shipping rate.
As a reminder.
Oh, well differentiated estimate.
Based on all the latest fills estimate from clients, whose commitment and the implied costing.
Oh, good throughput in Hawaii, food water, including the till now and the impact is approximately 60000 barrels a day.
In summary.
These days, we remain focused on all employees community and customer safety as we own navigate through covert 19.
In addition, we all focused on the safe and efficient execution execution of our turnarounds in Hawaii Wyoming.
We have successfully matched oh operations to meet demand with maximum efficiency and remain optimistic and excited about all future has a strong and competitive system.
No I would have turned the corner, who will review our financial results.
Thank you Justin.
Second quarter, adjusted EBITDA and adjusted earnings were loss of $50 million $91 million were $1.70 cents per fully diluted share.
Focusing on accounting items first.
Well I mean are finding results, including approximately 3 million dollar FIFO accounting benefit.
In addition solely impacting GAAP net income was the reversal of a noncash lower of cost or market charge of approximately $158 million.
Shifting to segment results.
Retail segment adjusted EBITDA contribution was $19 million driven by increased fuel margins and steady merchandise margins exceeding our prior record quarter by approximately $2 million.
Same store sales fuel volumes were down roughly 30%.
Our merchandise sales were up approximately one per cent compared to the second quarter 2019.
Gasoline demand has rebounded to approximately 80% of prior year from the April troughed in the 50% range.
Our merchandise sales have been much stronger as customers turned to our stores at times, when social distancing measures make larger format retail locations more cumbersome to access.
Oh logistics segment, adjusted EBITDA contribution was $12 million down $7 million from the 2019 quarterly average with reduced throughput and Hawaii, causing most of this decline.
Washington in Wyoming locations performed in line with throughput and sale.
The refining segment recorded a segment adjusted EBITDA loss of $72 million.
Well why results.
Like the impact of elevated crude differentials paired with record low crack spreads.
You too why crude differentials decline from Q1 peaks, however, FIFO accounting and a slowing sales profile increased weighting of higher cost crude.
Procured before the pandemic.
First is cheaper crudes brokered after the tender.
As we look forward to third quarter.
Well, we expect to lose approximately 30 days the manufacturing activity due to the turn around our storage flexibility and make up capacity allow us to partially mitigate walk manufacturing.
Washington in Wyoming contributions are both close to breakeven for the quarter.
Laramie generated adjusted EBITDAX of $5 million and a net loss of $14 million for the second quarter.
Net to our interest Laramies results reduced our adjusted earnings by $2 million.
Moving to the capital structure and liquidity front.
Our ending liquidity totaled $204 million made up of 143 million in cash and 61 million and availability.
The increase in liquidity reflects the completion of the senior secured notes offering conducted in may partially offset by the net cash consumed after pay down of working capital facility.
We generated cash from operations of $19 million, which included about $5 million or turnaround outlays.
Working capital was a source of funds, excluding non cash impacts from intermediation revaluation and was principally used to reduce the deferred payment facility balanced by approximately $20 million.
Capital expenditures and turnaround outlays totaled approximately $20 million and accrued cash interest equaled about $14 million.
We made good progress on achieving our cost reduction objectives, we reduced operating expenses and logistics cost of goods sold during the quarter by approximately $50 million on an annual run rate basis.
The additional reductions identified we expect our capital expenditures and turnaround outlays to be on the lower end of our previously provided range of $95 million to $110 million.
This concludes our prepared remarks, operator, I'll turn it back to you for Human Act.
Thank you at this time will be conducting a question and answer session. If he'd like to ask a question. Please press star one under telephone keypad a confirmation total indicate your line is in the question Q.
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Our first question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.
Breaking you got to hear me okay.
Yes, good morning, Neil.
And Mark Good morning, well first question it around Hawaii not surprisingly.
And obviously very challenging results for the second quarter, consistent with the economic environment and the crude differentials.
Well, maybe you could start off by talking about how you think about he said recovery when we talk that recovery the demand side, but also the margin side and then related to that if you could also make some comments about capacity and whether you think.
You need to rightsize, Hawaii business for you.
That's.
Right.
For the long term.
Sure.
Let me, let me start by saying that I think the issues that we're dealing with in Hawaii relate principally to cracks, which obviously relate to contracts as well more so than volume volume off obviously helps as I mentioned some resumption in air travel would actually help our logistics network.
Probably wouldn't have a significant impact on our refining business with the shutdown of par west.
We have the flexibility to run that crude unit when the demand from poor jet fuel is high.
But in the current environment with the shutdown of that unit, we can actually run quite efficiently with our existing unit and so then the question really becomes when the cracks come back.
We took the perspective and continue to believe that the cracks are gonna be determined largely by global inventories.
And given the pandemic you can't wait for that to happen. So we have been working aggressively with our customers in the community and as contracts have rolled over.
We've been working with our customers to improve the economics associated with.
Our sales to ensure that we get additional profitability, even without it a resumption in cracks.
And I think the worst is behind us the other the other advantages I think we're going to see is defensive actually.
You know they were very high at the beginning of the year going into the calendar year because of IMO 2020.
As we'll noted when their sales slowed down.
We were essentially consuming on a five four basis, some higher cost crude.
That's largely behind us.
I just noticed there are our deferred have improved materially from Q2 over Q1 and of course from Q3 over Q2 until I think thats going to help us as well.
And then in terms of capacity, let me just just to address that quickly I mean, I think I've already answered it but with that with the two crude units our ability to restart the the west unit, if a capacity ramps up.
Is there, but I would point out that the real determination for the restart of the crude unit is gonna be economic which is going to relate to the cracks in the environment.
[laughter], that's very clear bill. Thank you for those kind of the follow up is just on the retail side you had a great quarter there.
Or whatever arc is worth we think the retail businesses is worth $8, a sheryl let alone the stock is trading below that.
Which might represent a.
Highlights the value of your stock at these levels.
How do you think about unlocking the value of retail.
Is there anything you can do to continue to highlight.
Illuminates the value there because it's a large driver business people often think of U.S. refining.
Second.
There's a lot of value.
Yeah. We we continue to believe is that as a operator downstream systems in niche markets that it's very important to be integrated and certainly the profitability of our retail business was very strong in the second quarter not just in Hawaii. We also had a good profitability in the Pacific Northwest.
And as we grow our business, we want to grow our retail business in line with it but with a trailing EBITDA. That's a north of 65 million, we have a very strong franchise.
And we we believe that that franchise is a significant contributor of free cash flow to our overall enterprise. So for US we think the value really will be realized a as the free cash flow. The enterprise. It is recognized and I think that.
The key is going to be getting through these turnarounds and ultimately a resumption of the global economy and without any and I don't know why we shouldn't be a significant producer of free cash flow.
Thanks, guys appreciate it.
Yeah.
[laughter]. Thank you. Our next question comes from the line of Matthew Tudor Pickering Holt. Please proceed with your question.
[laughter] Hey, good morning doing well can can you get your me okay.
Yes, I want to barely [laughter], great great. We've seen some refinery closures a in the west coast and the Rockies I was hoping you could just provide your perspective on how that might impact supply demand fundamentals. Both in the short term as well as the long term for Ah for your markets.
Yeah, I mean, if you think about it we've had two refineries that closed in the last six months, because even though even though the Dickinson refinery was announced several years ago I think the actual closure took place. This spring and then obviously Cheyenne had their last crude running through I think in last 10 days.
So that that will have an impact on our Oh, Wyoming operations, we haven't seen that yet.
But and frankly, the shutdown of those refineries in the near terms, probably not going to have a significant impact because the decline in demand overall nationally as a much more significant impact in the shutdown those refineries and I think you've seen the same thing on the West Coast Martinez has been down for a while.
Marathons announcement that that's going to be converted to an R&D facility and will no longer be producing carbon based fuels.
I think that was already baked into the market people have always said that the west coast is a one to one and a half refineries long and I think this this just reflects that.
But I think when you'll see it is in the long term.
As demand picks up and in particular as the.
As the export opportunities on the west coast pickup, namely, namely South America.
You're going to see more of a draw and I think you're just going to have more tightness on the west coast markets I don't know if you'd add anything that Joseph.
No nothing really is right. So long term impact I own industry short term, we will be patient waiting for the demand come back.
[laughter] sounds good and then just to recap on on the crude differential a at Hawaii. So.
The third quarter, what's your guidance to $1.88 benefit and do you have any.
I guess early indication on on what the fourth quarter might look like.
Yeah 188 to though.
Guidance for.
Third quarter, and we don't give though.
Fourth quarter. This to me to this point among countries. So volatile than many things can can can change as we purchase how crude so we find it premature.
[laughter] got it okay. Thank you very much.
Thank you Matthew.
Thank you. Our next question comes from line, Brad Heffern with RBC capital markets. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my questions.
I was curious about some of my comments you made on the contracts I think in the past you talked about having the the one dollar per barrel Hawaii improvement. This year, obviously that go with that in a very different environment, but I'm just curious if what you're getting on the contract front, it's sort of over and above that prior target you had.
[laughter], it's a component of prior target, but I think our forecast is substantially more than a dollar at this point it'll.
It really started with contracts that were rolling over on June 30, they're more contracts that are.
That are have amended terms that become effective in July.
In late August than I think for Q4 will have the full impact of those contracts, helping our business.
Okay got it.
And then just somehow the liquidity front, obviously, you guys did the debt offering and liquidity looks good right now I'm. Just curious if we are in a significantly you know prolong downturn what are some of the other levers that you can pull that than maybe it wouldn't be obvious to us.
[laughter] Brad this is will I think the.
Most evident in one or most attractive asset that we hold is probably the real estate.
Underlying a handful of our locations in Hawaii.
So I think that's a.
Unencumbered asset that we hold up at the parent company level, but we could monetize we do have some debt on that at the parent company level, but believe that and that's an attractive real estate portfolio.
[laughter], Okay got it thank you.
[laughter] linking our next question comes from the line of minus.
Please proceed with your question.
Hey, guys under intense front Oh, you had a good Q I'm just trying to understand the clean up between July and August as that trend to continue to work on the fuel insight into merchandise site or has that anything.
Does change was is still doing films weekends segment.
Yes, Manav I'd say that retail demand bottomed in April and then it gradually picked up.
Almost on a linear basis week by week from from the bottoming at the end of April.
At this point in Hawaii demand is about 80% other prior year.
And in Spokane demand is closer to 90% of the prior year in terms of fuel sales merchandise in both cases is above our budget and at this point kind of above prior year. So we're seeing very strong store traffic, we're still seeing some reduction in demand I don't really expect the demand to change.
Dramatically from here.
And needless to say margins have.
Were very strong when crude prices declined with the lag there and as those have firmed up some but it's been continues to be a very strong and profitable business segment for us.
Thank you think follow up on the logistics side, given all the time around activity in lots of puts should be as you'll see Q openings later or something like that to the two fewer openings oh it should be more compatible last year.
Yeah, Manav I think it's going to be tied closely to throughput, but as you heard adjustments guidance you know in Hawaii, where at 60000 a day.
Throughput and then again, there's modest impact in Wyoming with.
A small part of the quarter being impacted by the turnaround activity. So I.
I think you've got a pretty good proxy for what the logistics segment looks like with lower Throughputs with our second quarter results.
Thank you for taking my questions.
Thank you. Thank you.
[laughter].
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Jason with Cowen and company. Please proceed with your question.
Hey, good morning.
I wanted ask about the working capital impact from the quarter. It seemed like that helped cash flow can you just disclose what that amount was and that's kind of now.
Sustainable amount or if there's going to be some volatility where that could reverse.
Going forward and follow up thanks.
Sure.
So just to remind you.
Below the below the cash flow from operating sections of a cash flow statement, we've got roughly $20 million of outflow that I referenced in my prepared remarks.
And the financing section of the cash flow statement. So that's one component piece that's related to changes in working capital. They give you looked at the aggregate change in working capital netting down all the LCM charges and all the other impacts it's roughly $60 million.
A benefit and again there is about the 20 million dollar outflow, that's there and in terms of the.
Ford impact I think.
Difficult to predict the working capital swings you know I think with changes in price and refine product.
Builds and draws so.
Yeah, I guess the.
Spare another question was as some of the working capital benefit into Q.
Back to to reverse in normal course absent volatility in crude prices are.
Not.
I don't think we expected to reverse imminently.
Okay, Great and then just my follow up on 2021 Capex. Clearly this is an elevated year of maintenance. So I guess personally was there.
Any thoughts around pushing this maintenance out 2021 to defer some of the spend.
Or did you all like to take maintenance exactly because what you said on the call the margin environment as weak right now and then.
Given the high turnaround spend this year, what does that mean for 2021.
Spending does that go.
Back towards.
More of a run rate sustaining capex level. Thanks.
Hi, This is bill let me, let me say that yes, all three turnarounds while the.
Financial issues around it we probably could differ the certainly could reduce the scope in some cases and reduce the capital, but given the environment and given the opportunity to invest in our refineries at this point, we think thats the right decision to make going forward.
And tier your question about 2021, I think coming out of these turnarounds if anything Capex should go down we have no major capital requirements.
Post these turnarounds.
We've invested a fair amount this year in a facility in Tacoma that facilitates the movement of renewable fuels through a across our docking in Tacoma that with that out of the way with the turnarounds out of the way I would think once we complete the Tacoma turnaround.
Early next or late next winter.
We should have a considerable period of time, when we have high free cash flow.
Great. Thanks.
Thank you. Our next question comes from line of Andrew Shapiro with Lawndale Capital Management. Please proceed with your question.
Hi, guys had her pardon me, if hi pardon me.
You mentioned in your prepared comments, a little late to the call commercial jet fuel demand for you in the one area. What did it is that what kind of levels as the that 50%, 20%, 80% and similarly, where's the military demand that's probably remain near the same or is it draw.
Up as well.
No military demand, it's about the same and.
Military demand in Hawaii is probably 30% of our contractual demand overall in the Hawaii market. The market is running right now at about 30% of pre pandemic demand and that's up from a bottom and it when it was that it bottoms that about an 80% decline or 20% of pre pandemic demand.
Okay and has there been guidance at all from.
Oh, the govern the state authorities as to stages and the timing of Ah reopening things.
There has been it's all dependent on improvements in the case rate I mean, and the case great has been growing in Hawaii recently and Andrew you May have missed this part of the of the conversation earlier, but the key question for us in Hawaii is really not going to revolve around volumes with the shutdown of the par West unit.
We really don't need a full resumption of air traffic to.
Generate profitability there, it's much more relates to cracks and our contracts with our customers in that market.
Okay, great. Thank you.
Thank you. Thank you.
Thank you our next question comes online.
With me to point capital Management. Please proceed with your question.
Hey, guys. Thanks, Mike My questions have been answer.
Great. Thanks, Patrick.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. <unk> for any final comments.
Thank you Melissa.
Well the market's been difficult over the past few months I believe we're well positioned for the future with a diversified business model.
We will generate significant free cash flow once we complete these three upcoming turnarounds and we see an improvement in the global economy.
On behalf of our management our customers in our communities I also just want to thank our employees for their dedication and hard work have a good day.
Thank you. This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation.