Q3 2020 HollyFrontier Corp Earnings Call
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Sure, It's Mike Jennings, President and Chief Executive Officer enjoys.
He is joined by Rich Voliva Executive Vice President and Chief Financial Officer, Tim Go Executive Vice President and Chief operating Officer.
Tom Cleary, President refining and marketing and Bruce Lerner, President Hollyfrontier lubricants and specialties.
At this time, all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation.
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Okay.
Thank you Craig.
Good morning, everyone.
Pleased to report solid third quarter results in the face of the economic downcycle caused by the COVID-19 pandemic.
We remain focused on the health and safety of our employees and I'm pleased to report we've had both safe and reliable operations across our three operating businesses during the third quarter.
As we work through this last quarter of 2020 I remain confident in both the long term market for our products and the ability of our talented employees.
Turning to our third quarter results were reported a net loss attributable to highlight frontier shareholders of $2 million or one penny per diluted share.
These results reflect special items that collectively increased net income by $65 million.
Excluding these items the net loss for the third quarter was $67 million or negative 41 per.
Per diluted share versus adjusted net income of 278 million or $1 68 per diluted share for the same period in 2019 at.
Just did EBITDA for the period was $66 million, a decrease of 457 million compared to the third quarter of 2019.
The refining segment reported adjusted EBITDA of negative $54 million compared to $425 million for the third quarter of 2019 and consolidated refinery gross margin was $4 93 per produced barrel of 71% decrease compared to the prior period.
This decrease was primarily due to continued weak demand for gasoline in distillates, coupled with compressed crude differentials.
Third quarter crude throughput was approximately 391000 barrels per day above our guidance of 340% to 370000.
Our plant operated well and we saw somewhat better product demands unexpected in our markets, particularly in the southwest and Rockies.
In August we ran the last barrel of crude oil at Cheyenne and we began the conversion to renewable diesel.
Our lubricants and specialty products business reported EBITDA $61 million compared to $38 million in the third quarter of 2019 rack forward EBITDA was $79 million, representing a 19% EBITDA margin. The rack forward segment saw improvement in industrial and transportation related and markets.
Which drove higher demand and unit margins during the third quarter of 2020.
Sales volumes improved 24% compared to the second quarter, and we're down 7% versus prior year.
Within the rack back portion demand for base oils increased to fourth quarter 2019 levels, while supply was limited due to a number of factors, including plant closures reduced run rates that base oil plants co located with fuels refineries and hurricane impacts on U S. Gulf Coast. This combination of factors drove higher <unk>.
Margins and utilization at our facilities during the third quarter.
In terms of maintenance, we successfully completed the plan turnaround on our white OLS unit at Mississauga that began in late September and we're back to running at full rates.
Energy partners reported EBITDA 50, $55 million for the third quarter compared to $123 million in the third quarter of last year.
Reported EBITDA for the third quarter of 2020 included a $36 million goodwill impairment charge and reported EBITDA for the third quarter of 2019 included a $35 million gain on sales type leases, both of which eliminated in the consolidated company's financial results.
It ATP, we've continued to see incremental improvement in demand for transportation and Terminalling services during the third quarter of 2020, particularly and the assets around the Salt Lake area and we expect this trend to continue through the fourth quarter of this year.
Although the current replant refining outlook remains challenged we are encouraged by the resilient financial performance from our lubricants and our midstream businesses in the third quarter, we're making progress on all three of our renewable projects, which currently remain on time and on budget.
We're confident that demand for transportation fuels will return and we will be well positioned for the next up cycle and with that let me turn the call to rich.
Thank you Mike.
As previously mentioned the third quarter included a few unusual items.
Pretax earnings were positively impacted by a $77 million gain recognized upon the settlement of the company's business interruption clean related to a loss of the woods Cross refinery, which occurred in 2018.
Along with a lower of cost or market inventory gain of $63 million.
These items were partially offset by charges related to the Cheyenne refinery conversion to renewable lethal production <unk>.
Including LIFO inventory liquidation costs of $34 million <unk>.
Decommissioning charges of $12 million in severance charges totaling $2 million.
A table of these items can be found in our press release.
Cash flow from operations was $82 million in the third quarter, which included $25 million of turnaround spending $53 million a working capital gains.
Probably frontiers Standalone capital expenditures totaled $75 million for the quarter.
In September we reinforced are robust liquidity with position through successful $750 million bond offering.
The offering consisted of two tranches of senior unsecured notes of $350 million three year bond with a coupon of two and five eighths.
And a $400 million 10 year bond with a coupon of four 5%.
This opportunistic financing provides holly frontier with enhance liquidity and ensures the necessary capital to fully fund the previously announced renewable diesel units located in Artesia and Cheyenne as well as the pretreatment unit in Artesia.
As of September 30th or total liquidity stood in approximately $2.9 billion comprised of a standalone cash balance of 1.5 billion.
Bubbles.
$30 million to $35 million, and Luke and specialties and.
And $85 million to $100 million for turnaround and catalyst.
It AGP our capital budget is reduced to a range of $43 million to $58 million.
From 58 to 69 million.
For the fourth quarter of 2020, we expect to run between 360 and 380000 barrels per day of crude oil.
And we expect to adjust refinery production levels commensurate with market demand and economic drivers.
Looking to next year, we are currently finalizing our future operating and capital budget and plan to release guidance later in the fourth quarter.
And with that we're ready to take questions.
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Thank you.
First question is coming from.
That's gona costs and as you recall that was $30 million.
$20 million, which will show up in SG&A 10 million will show up in Opex, We believe both of those steps.
Are not only going to help us here in in 2020, but will carry over into 2021 and continue to.
Reduce our overall.
Refinery costs.
The other thing you will notice, though is we are driving structural reductions in our refining costs. If you compare year over year refining is down 20 million in the third quarter, roughly 8% versus what we were at last year and year to date.
It's about $40 million or 5% year over year, we again believe that those reductions will be able to be carried over into 2021, and we're continuing to drive further reductions there.
Willow I'll be honest with you Paul I came to Holly frontier to drive operations excellence.
That involves EHS performance and involves reliability improvements and involves operating efficiencies and operating costs and so we are looking at what we considered to be high relative operating cost per barrel.
We are working through the process to try to continue to drive those costs lower.
Route the COVID-19 environment, our forestry mining construction and heavy industry all of which we serve.
And passenger car motor oil and other auto related product lines began recovering strongly in the mid third quarter and have continued to perform.
And so while volume is down year over year for the same quarter of slightly.
We've enjoyed at higher volumes than we would have expected.
Let me what I can tell you is that we guided.
We reduced the guidance here for 2020 to 130 to 145 from the 150 to 180.
What's happening here is really timing of invoices are sliding a little bit into the first quarter as Mike mentioned the projects are still on time and on budget. So I think what you're seeing is probably going to be a little bit a shift of spend of dollars actually out the door from 2020 to 2021, but no role impact.
Okay got it thanks for that I missed that.
And then I guess sticking with the rich on working capital can you just talk about.
Are we level on that at this point or do you see any any puts and takes on that in the fourth quarter and then.
Additionally.
Many of your peers have called out a sizable tax receivable potentially in the second quarter, the third quarter of 21.
Do you have a balanced like that that you can call out.
So brown working capital I think we're probably going to be neutral to maybe slightly positive here in the fourth quarter from an inventory perspective were pretty much where we need to be.
So as you are aware right. This is going to turn into it.
Function of what the flat price does primarily the curve, obviously looks pretty flat. So you wouldn't expect a huge move in working capital either way.
We are now to your second question on tax we are now forecasting a taxable loss for 2020, so we'd expect to see a refund in the second quarter.
I don't we're not in a position to give a number.
The good news and this is one of those good news Bad News stories right you would prefer not to have a loss.
So.
We're we're just crossing the line were forecasting so again, we do expect to see a refund next year, but I don't have any guidance for at this point.
Okay. Thank you.
Your next question comes from the line of Manassas data.
From credit Suisse. Your line is open.
Hey, this probably would need luck Tom.
Distillers gone oil and maybe some animal fact or is it a 50 50 animal flat in distiller, calling like if you could give us some idea as to the lower carbon intensity feedstock, which is the main one of your targeting with your pretreatment unit.
The pizza.
Dislocated it or <unk> will be able to run a variety of different low Ci feedstocks, including Desio Carlo Yuko.
And and what we're going to be doing there is it's just not necessarily a price.
Termination, it's a price to yield to Ci and sort of like running an LP in a crude oil refinery we're going through purchase.
Renewable business in particular, so thats really going to be the source of our cash. We also view the dividend very seriously and viewed as the primary source of our cash return to shareholders.
The cash return is fundamental in a mature low growth industry like ours, and we've consistently acted upon that in the last 10 years with industry, leading cash returns.
Now that said look these are unusual times and visibility is poor.
So as we discussed the level of the dividend in particular with our board.
Who make the dividend decision.
We need to balance cash returns, maintaining an investment grade rating and financing the company. So.
Drove there in.
Refining portfolio each of these assets has something special in terms of either it's geography feedstock.
Served markets et cetera, and so we feel as though the existing asset portfolio has strength and durability.
If we take the Tulsa asset for example, the group one lubricants production is something that many patrolling refiners simply don't have an groupon loops is becoming shortened supply.
And fairly deer, and so that gives us a competitive advantage to Tulsa and as we marched through our portfolio, we seek out to create competitive advantage in each of these assets that it has some durability.
As we look forward.
The fuel segment clearly we have compressed demand questions, how how quickly does it respond recover into what level.
We think that hydrocarbon fuels are intrinsically valuable and there'll be a huge market for this product as we roll forward, but.
The most competitive assets will prevail, so creek, creating advantage within our portfolio and to the extent that opportunities come up adding the most competitive assets to that portfolio is something that we want to do we believe in this business and our point is to try to get to the.
Right point on the supply curve.
Okay. Thanks, Mike.
Your next question comes from the line of Matthew Blair from Tudor Pickering Holt Your line is open.
Good morning, everyone either question on will Salt Lake City refining market and it looks like.
<unk>, especially depot cracks, they're actually pretty strong for this time of year.
Can you talk about the dynamics here too.
Or their supply issues that are pushing things off and you also talk about the.
The Salt Lake City, Las Vegas, Nevada.
That open at the call.
Hi, Good morning, Matthew It's Tom.
What's cross.
Margin, whether it's in Las Vegas, or Salt Lake by.
By putting the barrels into the right place at the right time, and we continually do that on a month to month basis.
Thats helpful. Thanks, and then what's going to happen here WCS pipeline capacity to Cheyenne are you still going to have.
Yes, some taste WCS on on those pipes, and just resell them into other markets or are you, giving up that capacity and could you also talk about your outlook for WCS differentials there. Thanks.
Okay on WCS differentials, we are keeping our express base.
We view that as it is a valuable commodity to move barrels out of hardisty as we move forward I think we can probably expect XL isn't going to be built anytime soon nor Trans Mountain Express.
So we're going to still be confronted with the same issues that we've had.
For the past few years for the next few years and Thats apportionment on the Enbridge system in Keystone being full so the express outlet.
Gives us access to various markets, including the Petroken sales.
Saint Louis market.
As well as there is.
An opportunity to move on flat and then tie back into spearhead to get to Cushing.
That is in place with Enbridge right now and we're looking at some other alternatives, we may or may not use that space for WCS. We're also going to be using using some of that capacity to supply our woods cross refinery with synthetic crude.
Because it's a good fit for us.
Loops.
We certainly saw some supply.
Destructions associated with the Hurricanes that hit and to Louisiana that I think that short term.
Supply disruption has certainly improved.
The rack back business, both had Tulsa and Mississauga.
We have talked about over the past year or so that we did think that the supply demand balances would return closer to normal.
They were depressed in the last 12 18 months as we've talked about and we believe that we are seeing some of that so yeah. There was certainly a one time correction.
Through some of the weather disruptions, but we think from a secular trend standpoint, but.
That the ratbag business is improving.
Alright, thank you.
Line with national averages.
I think we're what we're seeing is gasoline demand down through the Magellan system year on year by about 11% distillate.
Less than that right now, it's probably running 4%, but we attribute that to some of the harvest activity that.
Thats going on in the mid continent. The harvest this year is earlier than in prior prior years.
I think on corn word almost 80%.
Broadly on both a mid cycle in a trough basis.
Approximately three times mid cycle of debt to EBITDA is the threshold that communicated to us.
And we believe we're going to get through 2021 without an issue there and then in the long run obviously is going to 22 will be generating substantially more cash flow.
Like our growth into renewables is going to be credit positive for both diversification and the stability of earnings it's going to bring.
So we feel like we're in pretty good shape on the rating side.
Thank you.
Your next question comes from the line of Phil Gresh from JP Morgan Your line is open.
Thanks.
And I believe that there is some overhead costs that are going to be associated with the plant and then secondly, I wanted to just get your updated views.
On the low carbon fuel standards outlook I think there's a lot of focus on the fact that other states are progressing.
Legislation to pass.
Programs, that's probably going to be a medium term benefit but it seems like it's going to take some time for that to get passed so just wondering more near term.
We now and you call. It 2023 2023, what your thoughts are on the way credits price over that time. Thanks.
Hey, Jason its rich, let me take a shot of your cost question.
In September we put out an 8-K, where we recast our refining regions with cost data side point just to that for context in general as you would expect.
Woods Cross is a higher cost plan just because of its size.
And and all of them have if they are not in hand, they had been filed and we expect approval, we're going to meet our schedules. So.
So we will be up and running and be able to take advantage of the California market and as a result, we.
We think that were that L. CFS.
Credits will be in the same range as they are now that 180 to 200.
Number that we're looking at.
And that's good news for US and is just another point to make is on the BTC.
We have not included any BTC.
Benefit past the year 2022.
So our outlook and our economics are very conservative at this point in time.
The capture rate was very low there.
And you are lapping the second quarter when you had the the contango benefits so.
It sounded like what you're saying is just that this is a little crack tight deaths you know it goes a little capture but was there anything unique in the corner in the quarter that you would point out or is this just kind of the run rate as when we're when we're in this type of environment.
Yeah, So when I look at the numbers in the mid con it really boils down to the crude differentials.
Especially feel a quarter over quarter are are crude death.
Compressed significantly in the mid con.
To the tune of about $3, a barrel, which really just bridges the difference between the second quarter capture in the third quarter capture.
Right, Okay, alright, thank you.
There are no further questions I will turn the floor back over to Craig for any closing remarks.
Great. Thanks, Rob This is Mike Jennings.
We appreciate your participating with us today.
And hearing through our third quarter, the economic environment that we're participating in right. Now is obviously testing the refining space and with that said HFC is really well equipped with an investment great balance sheet and approximately $2.9 billion of existing liquidity.
We've been investing in our asset base to further strengthen four distinct big business segments that we believe will provide great diversification through through the cycling through down cycles and refining as we currently see.
We're really heartened by the performance in our lubricants in our midstream business.
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