Q3 2022 Par Pacific Holdings Inc Earnings Call
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Good day and welcome to the par Pacific third quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. They ask a question you May Press Star then one on your touch tone.
Phone and Swift your all your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Asami Patel director of Investor Relations. Please go ahead.
Thank you operator, welcome to par Pacific's third quarter earnings Conference call. Joining me today are William Pate, President decorative officer, Richard Kramer E V. P of refining and logistics, Jimmy H E V. P of retail and one month's Leann EVP and Chief Financial Officer.
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 are subject to risks and 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 and to our filings with the SEC for non-GAAP reconciliations and additional information.
I'll now turn the call over to our President and Chief Executive Officer, William Pate.
Thank you Ashish good morning to our conference call participants.
We're pleased to announce a second consecutive quarter of strong financial and operating results as all our business segments had strong profitability.
Third quarter adjusted net income was $2 88 per share and adjusted EBITDA was $214 million Eric.
Our organization is excited to return to a growth posture with our recent agreement to purchase Exxon Mobil's billings refinery and related logistics assets for $310 million.
Previously noted this acquisition will double our mainland refining capacity and significantly boost our logistics business.
We expect to fund the acquisition next spring with cash on hand.
This quarter, both our retail and logistics business segments reported record quarterly adjusted EBITDA. The retail unit benefited from benefit from declining crude oil prices during the third quarter retail price declines also partially reversed a portion of the demand destruction that we experienced in the spring when gasoline pump prices spiked to very high levels.
Our logistics profitability continued to improve due to increasing throughput and sales throughout our system.
Strong operational reliability, the high exposure to distillate markets in falling crude prices benefited our refining sector.
Fight refined product cracks that softened from record second quarter levels.
While gasoline cracks have dropped significantly distillate cracks remained strong due to high natural gas prices and significant incremental demand from gas to oil substitution in Europe and elsewhere prompt.
Prompt distillate prices are approximately $40 a barrel above gasoline prices in Singapore.
Forward distillate cracks remain at high levels through the end of 2023 due to rising global demand.
The profitability of our business has boosted free cash flow over the past two quarters bolstering our balance sheet.
With over $400 million of GAAP net income generated during the last six months our book equity is back to pre pandemic levels.
Over the near term, we will focus on successfully closing the billings transaction and integrating that business into our organization.
We expect the billings operation to be immediately accretive to our earnings and cash flow.
We're also making progress on several renewable energy projects, we have a small co processing investment and Tacoma scheduled to be operational in the first quarter and our joint venture with Hawaiian Airlines to explore sustainable aviation fuel is advancing quickly.
Hawaii SA F project looks very attractive based on the renewables market outlook and current levels of government support.
While we are cautiously assessing our feedstock options and mindful of potential government policy changes, we expect to make a final investment decision next spring you.
We believe this timeline would permit us to break ground next year and commence operations during early 2025.
We believe we can complete this conversion project at less than $1 50 per gallon of annual production capacity <unk>.
Collectively these two projects in conjunction with our blending operations will generate enough rents to fully cover our obligation for all units other than D. Threes.
We're also working on a green hydrogen project at our Washington refinery it would be highly competitive with a low all in cost of energy and a low greenhouse gas emissions profile.
I'll now turn the call over to Richard to discuss our refining and logistics operations.
Thank you Bill.
Our three refineries worked hard to maximize operational availability in the third quarter, achieving an average of 96, 6% availability in Hawaii, we experienced unplanned rate reductions, which push rates lower guidance for the quarter third quarter throughput was 80000 barrels per day and production costs were $5.14 per barrel.
Binaries running well in the fourth quarter and throughput is expected to be 80 to 82000 barrels per day.
The reduced throughput Q4 is related to planned maintenance activities on one of our gasoline conversion units that we expect will reduce capture rates as we are increasing purchase products in exporting secondary products.
In Washington, we operated extremely well captured peak margins related to west coast outages during the quarter.
<unk> costs were $3.43 per barrel and throughput was 40000 barrels per day.
Fourth quarter throughput is expected to be 40% to 42000 barrels per day or.
Our investments to Debottleneck heavy crude capacity during our 2022 turnaround has been successful and we've been able to increase total throughput by more than 10%.
Shifting to Wyoming, we achieved a peak monthly rate in July the 18600 barrels per day.
<unk> cost were $6 63 per barrel and throughput was 18000 barrels per day during the third quarter.
Fourth quarter throughput is expected to be 15 to 16000 barrels per day. This forecast includes October downtime associated with the catalyst change out that has been successfully completed.
I'll now turn the call over to Jim to discuss the retail results.
Thank you Richard as Bill mentioned, the retail segment reported record adjusted EBITDA of $20 million for the quarter.
<unk> to $14 million in the third quarter of 2021.
Our same store sales volumes decreased by one 9%.
Paresh favorably to reported industry decreases of more than 4%.
Merchandise revenue increased by four 7% over the third quarter of 2021.
While continuing COVID-19 related impacts kept pressure on both fuel and merchandise sales volumes. These headwinds were more than offset by promotional efforts and resilient margins.
Store transaction counts continue to recover with recent indicators, suggesting visits higher by approximately 2% year over year.
Our early fourth quarter results suggest robust margins continue to offer strong profitability.
Initiatives to upgrade our store portfolio continue as we entered into an agreement to acquire three existing stores in the greater Spokane market.
We anticipate closing this acquisition in early December .
We also expect to break ground on a on two new locations in the fourth quarter. The first fuel location in Hawaii, and the second a flagship Nam Nam branded convenience store and fueling facility in Spokane.
We hope to open both of these locations by the third quarter of next year.
Now I'll turn the call over to will to address company financial results.
Thank you Jim.
Third quarter, adjusted EBITDA, and adjusted earnings were $214 million and $172 million.
$2 88 per fully diluted share.
We generated record quarterly cash flow from operations of $341 million driven by normalized working capital in combination with strong earnings.
Logistics segment, adjusted EBITDA contribution was $22 million up sequentially from the second quarter by approximately $1 million.
Refining segment, adjusted EBITDA was $188 million compared to $228 million in the second quarter.
Focusing on Hawaii <unk>.
Third quarter, Singapore, 312 declined approximately $10 per barrel to $26 43.
Each stock costs were approximately $7.80 premium to Brent.
Combining 312 and feedstock indexes, the overall margin environment compressed about $14 per barrel versus the second quarter. However.
However, we were able to maintain a relatively flat adjusted gross margin of $19 per barrel in both quarters.
Product crack hedging was a modest cost in the third quarter compared to the $51 million second quarter impact.
Climbing prices also drove improved capture on a lag priced contracts.
On a percentage basis, adjusted gross margin improved to approximately 104%.
And bind market indicators.
October market conditions remained strong at 312, averaging over $23 per barrel.
We anticipate fourth quarter landed crude differentials will be between $8 50, and $9 per barrel versus ice Brent, reflecting steep backwardation and increasing freight costs.
We have continued our crack hedging framework and currently have approximately 25% to 30% of our Q4 sales hedged at levels consistent with current market conditions.
As Richard referenced we have some planned maintenance activities that we expect will reduce finished gasoline production by approximately 500000 barrels during the quarter.
And Washington market conditions declined by approximately $13 per barrel, but remained seasonally strong at $33.
Looks like Hawaii. Despite this nearly $13 per barrel drop in the index, we were able to maintain roughly flat adjusted gross margins of approximately $20 per barrel.
Improving capture rates were largely driven by increased sales strong biggio market conditions wider inland crude discounts relative to an S.
And then proving asphalt net backs and a declining price environment.
Acworth nation remains a partial offset to these improvements.
Looking forward October has been volatile with regional refining outages driving an average P. M. W. Two one of approximately $41 per barrel.
WCS differentials continue to widen providing additional feedstock benefits compared to N S.
Well I mean market conditions declined approximately $9 per barrel.
Compared to the second quarter to $46 per barrel adjusted gross margins declined to approximately $19 per barrel, which includes approximately $14 $6 million LIFO expense or $8 70 per barrel.
Well I mean market conditions remained strong with the October <unk>, averaging $51 per barrel.
Laramie generated hedge adjusted EBITDAX of $26 million unhedged, adjusted EBITDAX of $40 million and net income excluding unrealized derivatives of $17 million for the third quarter.
Capital expenditures totaled approximately $18 million and exit production as of September 30th was 104 million cubic feet a day equivalent.
During the quarter net debt improved by $14 million down to $50 million.
Shifting back to the purpose of a cash flow statement.
Par Pacific's third quarter cash flow from operations, excluding turnaround funding was $341 million working capital, excluding turnarounds reversed as expected with an inflow of $44 million.
The largest drivers of the working capital inflow or normalizing, a our balances relative to activity levels and reduce collateral posting to support commercial and hedging activities.
Capital expenditures totaled $9 million during.
During the quarter, we reduced our gross debt by approximately $14 million, including open market repurchases totaling approximately $10 million face value.
Gross debt sits at $519 million and our cash position grew by approximately $220 million and leaves us well capitalized to complete the recently announced billing transaction.
Our quarter end liquidity totaled 495 million made up of $409 million in cash and $86 million and availability with.
With the strong market backdrop, we expect to continue building liquidity in anticipation of funding the billings acquisition in 2023.
Previously messaged, we are revising our debt target between $500 million to $600 million of gross term debt based on incorporating the billings logistics contribution into our forward thinking this.
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.
If you ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Okay.
And the first question come from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, Bill and well congrats on the results.
Thanks, Matt good morning.
I'm just looking at the extremely strong margins in Hawaii I guess two quick question for will could could you go through the the the moving parts here you know what what kind of benefit did you realize from the.
A few all lag.
I think you've talked about the hedging impacts, but maybe you could you could cover that again and just how does how should we think about all the moving parts in Hawaii in Q3.
Sure.
So I think Matthew three three buckets to think about so called out the product crack hedging benefit.
Roughly a $5 50 per barrel improvement compared to the second quarter.
I think the second factor I referenced was the price lag benefit with the falling prices that we saw during the quarter roughly a $30 per barrel decline in.
<unk> prices and that was approximately $7 50 per barrel improvement and price lag.
And keep in mind second quarter, you had rising prices third quarter, you had falling prices. So.
Again those two.
Combined end up with a $7.50 benefit.
In the third quarter and then again this was partially offset by roughly $2 50 per barrel higher backwardation cost.
During the third quarter.
So all in all of those are the big moving pieces on capture during the quarter.
I think drove the strong result.
Sounds good and then Theres been a fair amount of industry chatter on the prospects for rising product exports out of China.
Could you talk about how youre thinking about that issue and the risk to parse why are your margins.
Yeah, Matthew this is bill.
Certainly been a lot of conversation a lot of rumors, but I think the Chinese policy really hasnt changed that much which is to internalize their refining capacity to supply the domestic markets and as you probably know they've also.
Espouse that they want to eliminate.
Exports.
By the end of 2025.
They have also keep in mind that a lot of their exports are actually going into the tanks of jets and into ships that are in the in the market.
Because to the extent that they are supplying and they're leaving the market they count that as an export but overall, we haven't seen any major changes I mean, obviously with the zero Covid policy. It does affect demand there and they do have more linked but so far they've been fairly disciplined so I think it's all rumor at this point.
I think the entire industry.
Really needs to be more focused on global demand and weather economic conditions.
Decline in the face of the rising interest rates that the central bank, Sir are creating and how that impacts the market, but to date, we've seen nothing our demand strong.
<unk> to be strong and we really haven't seen any changes in the markets today.
The biggest change is really the spread between distillate and gasoline in the market.
Which as I mentioned is.
At historic levels, and I think that really relates to the war and concerns about.
Heating oil demand in the winter.
What would you expect that spread to widen theres talk to Russia.
Product exports would be band I think I think Russia exports about 1 million barrels a day of diesel.
I would imagine that that would also be constructive for diesel cracks in 2023.
Yeah, I think youre right, but I would also just keep in mind that the economy may be cooling off I think the biggest factor really is going to be Chinese demand and that's going to be a factor not just for the Pacific basin for the whole global market.
And if the gyro COVID-19 policy as amended in any way in Chinese demand starts to pick up that's what I think youre going to have a real challenge to supply the world and then I think the near term issue is really just going to come down to a degree days.
Sounds good thanks for all the color.
Yes.
The next question will come from Carly Davenport with Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for taking the questions I wanted to just start on the strong retail results can you talk about the drivers of the strength there how much of that would you say was related to macro factors like Hawaii reopening versus things that were more idiosyncratic like the plans that you've talked about in terms of increasing market share across your retail markets and then just.
Yes on the plans to increase store count any views on kind of where forward EBITDA potential could be going forward.
Let me take those one by one just to talk about market context.
Probably the better way to think about it.
Is what happened in Q2, because I think Q2 was weak rail.
Relative to trend Q3 was obviously strong relative to trend and if you put the two together the single biggest factor was just rising.
Crude oil prices drove rising pump prices and that in turn had two impacts in Q2, one was suppressed demand yet some demand destruction and two margins were down and then in the third quarter, we had a reversal of that and that's probably the single biggest factor going on.
While theres been I wouldn't say, there's been a substantial pickup in demand in Hawaii related to the reopening of Hawaii.
Because keep in mind the state really reopened for the mainland last year. So we're actually still where even beyond a year and so the year over year comparisons reflect pretty strong demand in terminal mainland visitors.
And actually we've started to see a pickup in international visitors in Hawaii This year.
Where we really haven't seen a pickup as the Japanese visitors than they are.
They stay longer they.
They do drive more and they spend more which drives employment.
And the Japanese visitor still is kind of in the 20% of pre pandemic range. So that's probably the biggest factor there, but I don't think that's a substantial factor in the two Q3 Q trends I think the macro factors related to price where the biggest factors.
Going to your second question on new stores.
With respect to new stores, when we're working through whether it's an acquisition or its a newbuild.
I think you can assume that we're investing at a level where operating cash flow from that store is going to be in the five to seven times.
Operating cash flow range.
Got it great Thats helpful. Thank you and then just on the refining side.
Well I think you mentioned the $8 50 to $9 premium to Brent for crude costs in Hawaii for the fourth quarter, recognizing that you buy forward quite a bit and can you just talk a little bit about how you expect that premium to evolve over the next couple of quarters based on developments that you've seen in the market more recently.
Sure Yes.
I think.
In General I think we've seen the market softened a little bit from what's called peak levels that reflect that kind of fourth quarter differential.
I think the biggest factors that are driving waterborne.
Differentials for us today to come down to.
<unk> spreads or the market structure and then also freight.
Keep in mind, the freight markets have been disrupted quite a bit by the rebalancing in crude trade flows around.
Russian crude movement and so I think those are the two biggest factors but.
But I would say in general.
Yes.
Peak demand that we saw and really the barrels that are landing in that we're consuming in the fourth quarter were consume artwork procured.
In the third quarter, which I think is you know really the timeframe, where you saw the highest spot prices in the tightest kind of physical market conditions.
And I think since then you've seen a bit of softening there.
And that's been consistent with the flat price decline.
So again I think we'd expect to see.
Starting to see some some lower differentials moving forward.
I still think we're going to be in an elevated waterborne crude differential market given the factors I laid out.
Understood. Thanks for the color.
Okay.
The next question will come from John Royall with Jpmorgan. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
If you could just go through and in some more detail on the downtime you mentioned.
During the quarter in Hawaii it.
It looks like there was a throughput and an opex component of the impact there. So I'm just a little more color will be helpful on that.
I'll, let will handle the opex John the downtown was really just related to some unplanned maintenance.
Which for some work that we performed on our crude and vacuum unit and that drove some reduced rates through the quarter.
And then on the Opex side John .
The biggest drivers there were really increased energy cost.
We had some tank cleaning.
During the third quarter I expect some of that is going to continue in the fourth quarter, but it should roll off.
And then again, some additional unplanned expense related to the.
The work that we're performing on the crude in a vacuum units. So the gahr absolute opex ended up close to $38 million for the quarter, which is on the higher side.
For us and so.
So again I think those are the primary drivers.
Okay, great. Thank you and then.
On working capital you guys had the $120 million headwind into Q you'd guided to a partial reversal there you've got about 44 million back and you went through some of the moving pieces in.
Your remarks, but.
Do you see more of that reversing in <unk> or in any other moving pieces, we should think about in <unk>.
No price going up would have an impact.
And any other drivers there for <unk> working capital.
Yeah, I wouldn't point to any specific items that we think are idiosyncratic and that we sort of clearly point to reversing its going to be highly dependent on on crude price change in the quarter. So.
Don't have any specific items that we'd referenced this quarter for you.
Okay.
Thank you.
Okay.
The next question will come from Ryan Todd with Piper Sandler. Please go ahead.
Okay.
That's good thanks.
No one on the kind of the balance sheet music cash your balance sheet took a huge step forward during the third quarter.
You're at the lower end of your targeted 500 or $600 million of gross debt.
Can you talk about your approach to the balance sheet from here.
How you'll look to and how you'll approach.
I assume youre still it would appear you're probably still generating a lot of cash during this quarter.
How would you look to use potential excess cash going forward and particularly within the context of the upcoming billings transaction.
Okay.
Sure. Thanks, Ryan I think in general our approach is going to be to continue to build cash and liquidity in anticipation of that transaction closing as we get a finer point on the transaction close date.
And our cash position into that I think will begin to think about our alternative.
Cash deployment alternatives I think you've heard bill referenced there are a number of other growth alternatives that were studied.
But I think the medium term objectives here are going to be to build our cash position to be well funded more capitalize to close the billings deal and integrate that successfully.
Okay.
Great and then maybe just.
A high level as you think about your growth strategy in particular, I mean, you've grown.
You've done a series of successful unattractive transactions building out your pad for a pad five.
<unk> here I know it probably feels early since you just announced one in and they haven't closed yet but maybe.
Maybe could you talk about longer term how are you.
Is the plan to continue to acquire and look for opportunities to build critical mass in those markets or how might your longer term growth strategies evolve from here.
Well as you noted.
Our our key focus right now is just successfully closing the billings transaction and that's that's going to take some time and commitment on the part of our team.
And as Jim mentioned, we actually are closing a small retail deal at the same time.
That's obviously easier to tuck in but.
We both of those are elements of our growth strategy and as we've said in the past.
We intend to be a growing company, we intend to put capital to work I think we've demonstrated high returns on investments through acquisitions, we'll continue to look at that but we also have a lot of organic projects. So I think youll see us investing in renewables around our existing footprint.
And we have a much more robust footprint once we close billings.
We'll continue to look at building out the logistics system, which also will be growing substantially with billings.
And we'll continue to add to our retail footprint.
Putting all that together.
I would not preclude, but we're not particularly focused on extending the number of community served through additional refinery acquisitions at this point.
Thanks very much.
Again, if you have a question. Please press Star then one our next question will come from Jason <unk> with Cowen. Please go ahead.
Hey, Thanks for taking my questions first wanted to ask on the renewable diesel projects you're pursuing.
First the smaller co processing after call Mike can you remind us.
The quantity and any earnings guidance, you could give on that and then on the Hawaii project.
Any more details on the potential capacity of that SaaS project.
Any thoughts on feedstock sourcing.
It would be helpful. Thanks.
Sure So with respect to the Tacoma project Thats about 500 barrels per day and that is an R&D project with respect to Hawaii.
Keep in mind Thats actually.
Largely a sustainable aviation fuel project I mean, we will be producing some other.
Their products as part of that but we're really focused on Saf in Hawaii.
It's probably.
It's probably going to be.
About 4000 barrels per day in capacity based on the size of the units that we're converting.
And it's it's premature at this point to really get into feedstock sourcing for Hawaii.
Thank you.
Okay, and then secondly, maybe just a quick one on turnarounds.
22 was a limited year of turnaround activity for you do you have any major turnarounds coming up next year.
No we don't.
Okay Super Thanks.
Thank you.
Okay.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Mr. William Pate for any closing remarks. Please go ahead Sir.
Thank you operator.
A high distillate yield our system is perfectly situated for the current market environment and we really look forward to closing the billing transaction next spring I.
I want to congratulate our team on another strong operational and financial quarter have a good day.
Yeah.
Conference is now.
The conference has now concluded concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
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