Q4 2020 Par Pacific Holdings Inc Earnings Call
[music].
Greetings and welcome to the par Pacific Holdings fourth quarter earnings Conference call.
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It is on my pleasure to introduce your host machine you could tell manager Investor Relations for par Pacific Holdings. Thank you. Mr tells you may begin.
Thank you Sarah and welcome to par Pacific's fourth quarter earnings Conference call. Joining me today are William Pate, President and Chief Executive Officer, well months Liang, Chief Financial Officer, and Joseph Israel, President and Chief Executive Officer of par petroleum.
Before we begin 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 or events. They 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.
Whereby something.
I refer you to our investor presentation on our website and to our filings with the SEC for non-GAAP reconciliations and additional information on.
Now I'll turn the call over to our President and Chief Executive Officer, Okay.
Thank you Jamie.
Morning to our conference call participants.
It goes without saying that 2020 was an extremely challenging year for all of us.
Last February on our earnings call. It was inconceivable that global consumption of crude oil will drop from 100 million barrels per day to 80 million barrels per day over the span of a few weeks.
Our 2020 financial performance reflects the resulting collapse in prices and margins, despite our actions to reduce costs and preserve liquidity.
Full year adjusted EBITDA was a loss of $86 $7 million and our adjusted net loss was $4 69 per share.
I am pleased with the way our team responded to the pandemic.
We implemented additional layers of safe workplace practices and identified multiple areas to reduce costs.
We also finished the year with our best safety and environmental performance.
We accomplished our cost control objectives, while successfully completing two major turnarounds.
And we expect 2021 capex to be less than $45 million.
Based on this estimate the current market outlook and good operational performance, we will generate free cash flow for 2021.
We had a busy fourth quarter completing a turnaround in Wyoming preparing for another in Washington, and bringing our renewables logistics project online.
We've received the first unit train of ethanol into our Tacoma facility in November.
We completed the Washington turnaround this month.
With no major planned downtime other than the second phase of the Washington turnaround early next year, our refineries have a clear pathway to strong free cash flow generation for several years.
During the fourth quarter several positive developments began to lift business profit profit despite weak cracks.
Unfortunately, these positive developments were offset by a non cash mark to market charge associated with the steep climb and rens pricing.
Most of the notable improvements related to demand for our products.
Hawaii lifted its 14 day quarantine mandate and passenger count data has been very encouraging.
Holiday season arrivals were close to 40% of pre pandemic levels and that trend has remained steady early this year.
Burnt Hawaii jet fuel demand is a sweet spot for our production capability at the par East refinery.
And all of our markets, we continue to see recovery in ground transportation fuels as COVID-19 related restrictions are lifted.
At this time improving market cracks are the biggest factor to stronger financial performance.
On that note the 'twenty 'twenty, one calendar strip for our Singapore three one to market index has improved more than $2 50 per barrel since mid November.
With the outages from the current cold, we expect the North American inventories to rebalance I believe a return to more normal cracks on the mainland is ongoing.
Retail was a strong contributor to overall earnings during the quarter before the year.
Overall, our retail business unit adjusted EBITDA has grown at a 28% compound annual growth rate from 2017 to 2020.
We started the rebranding of our Piceance from your retail locations to our proprietary non brand.
This action allows us to optimize our fuel supply arrangements launch a loyalty program and.
And upgrade our point of sale to permit the latest pricing and marketing solutions.
We were also pleased to announce the sale and leaseback of 22 of our Hawaii retail real estate locations for approximately $116 million at a very attractive valuation.
We closed on most of these properties this week.
Today, we're a stronger company, we're well positioned to return to profitability as the economy recovers and demand returns to 2019 levels.
Our leverage to distillate cracks as significant.
$2 per barrel improvement is equivalent to $1 per share of additional free cash flow.
We benefit, particularly from the jet fuel market.
With more than four times, the exposure to jet cracks than the rest of the industry.
The pandemic environment has been challenging for the refining sector with many permanent plant closures. However, we believe that the commercial improvements we have accomplished coupled with our cost cutting initiatives position us well as vaccination rates climb cases drop in global demand recovers.
At this time I will turn it over to Joseph to discuss our operations in more detail.
Thank you Bill.
I'm from any could envision the unprecedented challenges that the refining industry faced last year.
With minimum preparation time, our team has done a tremendous job through 2020 to adjust operations execute our planned turnarounds cut our cost structure, while achieving our best safety and environmental performance on vehicle.
Now with regards to the fourth quarter.
Oh team successfully completed the planned major turnaround.
The refinery, which we started only in November.
Well positioned from an estimated five year cycle.
The next major channel.
Our Wyoming three two on index in the fourth quarter was $18.45 per barrel.
Refinery throughput, including the tenant on impact averaged approximately 7000 barrels per day.
Oh, we realized adjusted gross margin in the quarter.
Well I'm doing on 58 cents per barrel, mostly mostly driven by an estimated $9 a barrel listed on home related missed opportunities.
Our production costs were 17, Colo and 26 cents per barrel, including approximately 170 cents per barrel.
Unfavorable Tony on impact.
Oh gosh talk through in Wyoming remains favorable and we are expecting to average under $6 50 per barrel on annual basis, as we increase throughput to meet demand.
Within related outages, mainly in the Gulf Coast and Midwest.
Have created product shortages in the market.
Which is supporting the Rocky Mountains.
Finding margins new space.
Our Wyoming three two on index as average approximately $17 per barrel so far in the first quarter.
Our target throughput is approximately 14000 barrels per day as we started preparing for the gasoline season.
In Washington.
Fourth quarter Pacific Northwest 522 on Index was 11 do it on the 26 cents per barrel on.
In that space as well.
Our refinery throughput averaged approximately 39000 barrels per day.
And on a realized adjusted gross margin was a negative <unk> 51 per barrel.
Production costs were $3.47 per barrel in the quarter.
Truly on demand.
The refinery team successfully executed on plan 20 days, depending on the works.
And no additional.
Major maintenance is planned for the rest of the year.
So far in the first quarter 05221 index has averaged approximately $10 on 25 cents per barrel.
Consistent with all season environment.
In fact five named.
The index has trended up in the past week due to strong support for West coast products.
Especially in a diesel.
Our planned throughput, including the pivotal on impact.
On the 30 to 32000 barrels a day range.
The completion of the renewables logistics project.
Is it giving us new capabilities and the strategic Pacific Northwest markets.
On the equipment.
Currently in ethanol service, mainly from our system used.
And we are evaluating certain on growth opportunities there.
Oh boy.
Oh, Singapore 312 index was $2 63 per barrel on Brent basis and on <unk>.
Realized crude differential in the quarter averaged $2 25 per barrel premium to Brent.
Oh throughput averaged approximately 79000 barrels per day and on fourth quarter realized adjusted gross margin was a negative 17 cents per barrel.
Our production costs were $3.27 per barrel.
Oh, Singapore 312 index continues to slowly improve averaging over $4 a barrel so far in the first quarter and reflecting demand recovery in Asia.
Our crude differential in the first quarter is on.
Also trending to the right direction and is estimated around on bolt on in 'twenty, one cents per barrel premium to Brent.
With our improved cost structure and contracts in Hawaii.
Estimating.
The implied EBITDA breakeven point around.
Thank you.
For the Singapore 312 index.
Current terms.
Apparel.
As a reminder.
The index averaged approximately $10 80 per barrel in the three years volume.
On the pandemic.
Oh throughput target from the first quarter is in the 82 to 84000 barrels per day range.
Summary.
2020 is over.
I'm proud of the folks focus and performance demonstrated by our team.
In the challenging price.
We transitioned to the recovery phase.
Are you excited about our improved positioning and margins outlook across our system.
Now ill turn the call over who will review consolidated results.
Thank you Joseph fourth quarter.
<unk> adjusted EBITDA and adjusted earnings were a loss of $34 million and $75 million or $1 41 per fully diluted share.
Focusing on accounting items first.
<unk> adjusted earnings and EBITDA from Washington, Refining results had been reduced by the $6 million reversal of the prior quarter LIFO layer liquidation.
Impacting our GAAP results was an $18 million noncash asset impairment recorded on the par west assets.
Shifting to segment results.
Retail segment adjusted EBITDA contribution was $16 5 million driven by strong margins and seasonally improving volumes.
Store sales volumes were down roughly 16%, while merchandise sales were approximately flat compared to the fourth quarter 2019.
Gasoline demand in Hawaii increased approximately 5% the 85% range of pre COVID-19 levels versus the prior quarter.
Merchandise performance, particularly in the northwest has remained strong.
The logistics segment adjusted EBITDA contribution was $9 million down $3 million from the third quarter of 2020.
Why activity began to increase with the reopening of the state. However, it was more than offset by reduced contributions from Wyoming and Washington locations.
Wyoming volumes were reduced due to the turnaround activities.
Washington results were impacted by lower sales activity during the quarter.
Looking forward, our Hawaii logistics volumes are stabilizing.
Other than the first quarter, Washington turnaround activities, we expect steady improvements across this segment during 2021.
The refining segment recorded a segment adjusted EBITDA loss of $50 million.
Largest factor impacting this segment was a mark to market of environmental credits of $23 million principally related to increasing RIN prices.
Our net rens expense associated with this quarter's refining operations was $9 million.
In addition, the Wyoming turnarounds and seasonally reduced sales volumes impacted results negatively.
Why in Washington results from.
Were negatively impacted by compressed margins on heavy products in a rising price environment.
The uncertainty surrounding the implementation of the renewable fuel standard as well as our historical status as an exempted small refiner make managing this liability increasingly dynamic.
The volatility created by inconsistent application of the RFS creates substantial hardship for small refiner.
It's difficult for any efficient business to run if it's unclear what your costs are.
We will continue to avail ourselves of all options to minimize this exposure.
Laramie generated adjusted EBITDAX of $15 million in there.
Net income of $4 million for the fourth quarter of 2020.
Fourth quarter cash consumed from operations was $63 million exclude.
Excluding the impact of rents and deferred turnaround expenditures net working capital was a use of approximately $13 million.
Capital expenditures were $21 million and accrued deferred turnaround expenditures were $9 million totaling approximately $30 million from the quarter.
The working capital reversal referenced in the third quarter is mostly occurred as of yearend.
Crude cash interest equaled $16 million.
Full year cash consumed from ops was $37 million.
Full year capital expenditures were $64 million and accrued deferred turnaround expenditures were $50 million totaling approximately $113 million consistent with the midpoint of our provided range.
Our year end liquidity totaled $108 million made up of $68 million in cash and $40 million in availability.
We expect to receive approximately $116 million in proceeds once finalizing our Hawaii retail real estate sale leaseback transactions.
After paydown of associated real estate obligations, we expect our net cash position to increase by approximately $62 million.
In addition, we recently extended the Washington, Intermediation, and expect to extend or replace the Hawaii facility shortly.
With our liquidity on hand, we are well positioned to cash settle the upcoming convertible note if required.
Cost control across the organization remains strong during the fourth quarter as we registered our lowest consolidated quarterly Opex G&A and logistics cost of sales number of the year at $101 million.
Our Q2 to Q4 average ran at approximately $103 million, which is an annualized reduction of approximately $55 million from 2019.
Beyond just opex, we exceeded our initial $150 million COVID-19 cash outlay reduction targets by approximately $10 million. Despite the increase in crude prices from when this target was set.
As a reminder, total cash outlays included energy related cost of sales Opex.
Opex and Capex versus previously planned amounts.
I'd like to thank the entire par Pacific team for their focus and dedication across every location this cost discipline.
We expect our overall cash outlays to be down during 2021 versus 2020 as our identified cost savings were partially offset by increases in energy cost insurance premiums and projected 2021 bonus compensation versus 2020.
Our expectation for 2021 capital expenditures and turnaround outlays is between 35 $45 million, including between $10 million to $15 million for the Washington turnaround activities.
We anticipate the combination of commercial contract improvements cost containment capex reductions and market healing.
It's in a position to generate free cash flow during 2021.
This concludes our prepared remarks, operator, I'll turn it back to you for Q&A.
Thank you.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning team and thanks for taking the time.
The first question I had with good morning, Bill well team. The first question I had was around Hawaii, it's such a critical part of your story. So can you talk about what youre seeing in terms of a real time recovery in Hawaii demand and then any quantification that you can provide around that.
Margin uplift from either improving cracks and then also progress on more favorable contract terms.
Yes, Neal this is bill.
As I mentioned in my prepared comments.
We've seen a reasonable recovery.
And really in all products in Hawaii.
And at this point with respect to par East, we're really running all out as Joseph mentioned in his prepared comments I mean, we're targeting 80000, plus which is as high as that refineries run and we really expect that refinery.
To be pushing pushing the limits frankly going forward.
Any increases in demand at this point are likely to be addressed not through additional rig.
Refining throughput, but through imports. So we're as I mentioned, we're kind of in a sweet spot from a volume perspective.
The demand from power Gen.
Really consumes all our fuel oil demand for jet is really fully loaded and obviously it just depends a little bit on on crude selection.
And from a gasoline perspective.
At this point among us and our competitors, we're actually in an important mode. So I don't see a major change I also the nice thing is were well balanced and we're not in a position where we have to export any products. So the key for us in Hawaii at this point.
Does not revolve around volumes, but it revolves around cracks and as I mentioned the market cracks that we focus on the most in Hawaii, our Singapore. They are up about $2 50, a barrel on a calendar strip basis.
For 2021, when compared to the late fall of last year and.
That's a fairly significant improvement and as Joseph noted dips, which are obviously another key factor for the economics there.
We've realized some pretty attractive debt both in Q4 and also on Q1, I do expect debt that could get a little tighter but overall.
And again as Joseph noted our breakeven is at a $4 50, and I think last week, we reported a 312 at $4 56, and that's what the that's with a differential estimate of plus two.
And as Joseph noted for the quarter were coming in at about $1 20. So we're actually in a positive EBITDA position right now in Hawaii for Q1 subject to.
Any kind of changes in mark to market on rents and also subject to the price lag, but I feel pretty good about where we are overall.
Thanks, guys and then the follow up is on.
On retail how are you thinking about the strategic fit of the business post sale lease back.
You were able to pull some cash out of the business, but do you see this business as a core part.
If your strategy going forward and then if I can tack one on as it relates to retail.
Do you think about the higher impact.
The impact of higher crude on your retail margins.
Yeah, Let me let me take the last one first I mean, there certainly may be some near term pressure on the margins given crude oil price increases, but for the year. We expected any margin compression is likely to be offset by increases in fuel volumes as mobility trends improve.
With respect to the strategic nature.
As I noted I mean, this business has grown attractively over the last three years. So it's a big financial contributor retail also really affects how we think about our capital structure.
The stable retail free cash flow actually supports our entire debt service even after the recent sale leaseback.
And then from a from a strategic perspective, it's attractive in smaller markets to have.
On a controlled short four year refinery production now that's changed a little bit in Hawaii given.
Given the fact that we no longer have any refining competition there.
But it's still I think pretty valuable and when it's most valuables in markets where <unk> got.
<unk> link and so I think it's been valuable for us even even through the pandemic and its proving valuable right now.
And in the northwest with respect to our units.
And again, it's not always related to directly supplying the refinery, but through exchanges you can ensure that you can place your product in.
And realize attractive margin. So it is a strict it is an attractive strategic asset.
I'll, just caveat that by saying look we're not wedded to any of our assets and obviously you can engage in transactions with contractual relationships.
That.
Preserve some of that strategic benefit and at the right price.
Some of our business units are always going to be for sale.
Thanks Bill.
Yeah.
Our next question comes from Phil Gresh with Jpmorgan. Please go ahead.
Yes, hi, good morning, Thanks for taking the question.
First one would just be on the environmental costs in the fourth quarter.
$22 million I believe is the number.
Do you have a rough allocation of that across the three refineries.
Sure Phil it's will.
Approximately $10 million in Hawaii.
$7 million in Wyoming, and about $6 million in Tacoma.
Okay, great. Thank you.
What are your thoughts on the ongoing rins impact for 2021.
Or at least for the first quarter I guess, we don't know where rins are exactly going here.
Yes, I think Phil for the ongoing recurring expense.
At current prices for.
For 'twenty, one we'd expect our annual rent expense to be in the $50 to $55 million per year range.
So I think that's our.
Overall look on a recurring.
Expense.
Okay, great. Thank you.
And then just from a balance sheet perspective.
You had mentioned the idea of <unk>.
At the right price any asset it would be for sale.
Just how do you think about where you want the balance sheet to be are there other actions you might take to accelerate.
Progress there.
As you look out kind of on a more normalized basis I guess beyond 2021.
Yes, I think.
Our historical perspective on this is Ben we'd like our net debt to cap to be in the 30% to 35% range still think thats. Our objective, we've obviously had.
On to delay that objective given the impact of the pandemic, but I still think that remains our objective.
And again.
With our mix of businesses I think we achieved that as our long term target that gets us in a position. We can then begin to contemplate.
On reallocating capital either.
Efficiently towards M&A transactions are back towards shareholder returns.
Bill. This is bill let me just add onto that I mean.
Obviously, I believe we have a high cost debt and obviously coming out of the pandemic and coming out of the turnarounds, we have more debt than we'd like.
We said that we have as I mentioned, no major planned turnarounds going forward.
And we expect to generate significant free cash flow and we will dedicate that cash flow towards paying down the debt.
And getting back to a level that is a little more reasonable.
Keep in mind, we have a lot of diversification, we've got significant cash flow coming from our retail, which actually helps to support the level of debt. We have today, but we would certainly like it to be lower.
And I'd also note that with respect to our free cash flow, we're not a federal taxpayer so.
We don't have to.
We've realized profitability won't have any significant cash taxes to pay as well. So we can dedicate all of that to repayment of debt.
Alright, okay. Thanks for taking my questions.
Okay.
Our next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, everyone will could you provide a quick update on Laramie.
Where does the drilling program stand.
We're day in a position to capture the higher natural gas price does that that occurred earlier this quarter and where do you stand on potentially looking to divest that debt interest.
Sure, Matt with respect to their development program.
It's not operating any rigs at the moment, so again continuing to.
Produce its base.
Proved developed producing assets.
With respect to the recent.
Pike in gas prices.
Laramie was was able to operate through the cold snap and did have some significant exposure to the daily market.
As a result, the company did realize significant profitability over the last couple of weeks related to.
On the spike in gas prices.
So I think it's a.
Helpful benefit to the company, but I think it.
It remains challenging to finance and grow a natural gas company in the current.
Environment, but the Laramie management team continues to explore their options regarding its assets and capital structure today.
Sounds good and then thinking about refinery opex for the first quarter here.
Will there be any headwinds from from higher natural gas prices, hitting either I guess, Wyoming or Washington.
And then what about the higher crude price impact.
In Hawaii.
Hey, Matt this is.
Joseph.
Because of all contractual structure on the gas price.
<unk> any.
Significant spike in.
In gas price flow refineries.
And it'll be very very minimal.
And with regards to the crude.
Could this up but.
On the facility.
Hang up as well and overland crack spreads on improving the crude this isn't though.
Isn't it.
He is in a good place.
Matt I'll add to that and in Hawaii.
Again, we're internally consuming the barrel to generate heat given we don't have access to natural gas there. So the rising flat price does impact.
The.
Overall yield cost.
That said I think.
And we've got a number of other offsetting factors that we believe position us well to.
Keep our aggregate cash outlays flat to down for the full year.
Sounds good and then final question.
So the mark to market on the RIN liability cost to about $2 a barrel.
I think $23 million or so on your gross margin in Q4, where does that liability stand.
Currently or I guess at the beginning of the quarter either in just like a dollar liability or a.
Or I guess, if I can open position.
You start Q1.
Matt I don't think we're going to get into our specific rent position, but I think it's fair to assume that with the <unk>.
<unk> increase in price that we have observed in the January February timeframe that theres additional.
Mark to market expense.
That we'd expect.
Makes sense. Thank you.
Again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Manav Gupta with Credit Suisse. Please go ahead.
How much of Bakken crude are you running in your system and how much can you run me if youre actually operating close to 100% I'm trying to understand it.
On that.
Does go down in the Bakken.
Do widen from.
How much could benefit from it.
Yes. This is.
Joseph we consume approximately 15 million barrels of.
Back in <unk>.
As Tim between.
A coma.
Wyoming refinery.
And this include the PLD.
Can look.
It looked like.
So from.
Pricing upside and point.
This will be the impact from a physical standpoint, we haven't pre line in any way on the dapple operations, we have on the flexibility in the world to keep power.
<unk> optimized even without the Apple.
Yes. The question was it definitely goes down how could you benefit.
And completely understand the second quick question is you kind of indicated that we'll get caught on margins and stuff you would expect to be positive on the cash side and refining I'm just trying to understand your refining is pretty closely tied to you on.
Logistics and if you can raise the refining rates I'm, assuming then that is a tailwind for the logistics business also so could you give us on outlook for the logistics business in 2021 based.
Based on the fact that you actually I think on improvement in demand and you could actually raise your.
Refining utilization.
Sure Manav this is will.
I think your comment with respect to the throughput and sales do.
Driving logistics activities, particularly relevant for our mainline operations, so for Wyoming and Washington.
And so I think we would expect as throughput and.
And sales recover that we would see normal or returned to prior year levels of EBITDA contribution from those assets.
So again I think other than the first quarter turnaround in Washington, which will as you heard Joseph mentioned, we're expecting reduced throughput there given that activity I think we would expect.
On a return to normal contribution from those business units and then I think with respect to Hawaii.
The key driver there is really refined product demand, particularly on the neighbor Islands, which again I think we are seeing.
<unk> there.
Saw improvements in the fourth quarter, we're seeing ongoing improvements in the first quarter. So the Hawaii logistics story I think is not necessarily tied directly to getting total throughput on the island back to 115000 or 120000 barrels a day, where we're running combined parties par west can achieve a level of logistics profitability.
They're consistent with prior years without hitting the 120000 barrels a day.
So I think hopefully that helps give you some sense of I think how we can get back to a.
Prior year level of logistics EBITDA contribution when I say prior year really.
Thousand 19 levels.
Even with throughput in Hawaii being lower.
Makes a lot of sense. Thank you so much for taking my questions.
Our next question comes from Patrick Sheffield with Beach point capital. Please go ahead.
Hey, guys. Thanks for taking my questions.
Most have been answered a couple of housekeeping one on.
On the sale leaseback transaction, you guys referenced paying down some associated debt.
I assume that the retail property term loan.
Was there anything else that you pay that debt you pay down with some of the proceeds.
That's correct Patrick it's the retail loans and again I think we'd expect to pay down the balance there is a series of smaller property loans and I think pro forma for closing each of the transactions would you expect to pay down.
Those retail loans.
And then that would be the net proceeds of roughly $62 million.
And Patrick we closed on.
90% of those sales in the last 48 hours.
Okay.
And what.
And what's the incremental lease expense that.
Or how.
How do we.
When we look at retail EBIT EBITDA, what's the incremental rent expense, it's going to hit it.
Sure Yeah, So we filed our 8-K with debt.
Details of the lease on it but roughly.
The $7 million annual lease expense.
I think when you look at the segment retail results going forward. The annual result will be about $7 million lower.
However, if you looked at it on a corporate level in aggregate, our interest and amortization related to the retail loans was about $3 $5 million.
So net net is really an increase of about $3 $5 million outflow for us.
At a on a consolidated basis.
Pretty good deal.
We thought it was an attractive transaction and so.
That's why we elected to move ahead with it.
Great well, thanks, guys, that's all I had.
This concludes our question and answer session I would like to turn the conference back up as well.
<unk> for any closing remarks.
Thank you Sarah.
We look forward to the next few months as vaccination decline case rates decline in mobility trends improve.
I believe theres a lot of pent up demand for personal travel and our company is well positioned to benefit from increased travel and an economic recovery have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.