Q3 2022 CVR Energy Inc Earnings Call
Greetings and welcome to the CVR Energy, Inc. Third quarter 2022 conference calls.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Richard Roberts, Vice President of F. P. N. A N I R. Thank you Mr. Roberts you may begin.
Thank you Camilo good afternoon, everyone.
I much appreciate you joining us this afternoon for our CVR energy third quarter 2022 earnings call with me today are Dave lamp, our Chief Executive Officer, Dan Newman, Our Chief Financial Officer, and other members of management.
Prior to discussing our 2023rd quarter results. Let me remind you that this conference call may contain forward looking statements as that term is defined under federal securities laws.
This purpose any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements.
You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release as a result actual operations or results may differ materially from the results discussed in the forward looking statements.
To take no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise except to the extent required by law.
Let me also remind you that the CVR partners completed a one for 10 reverse split of its common units on November 23, 2020, and a per unit references made on this call are on a split adjusted basis.
This call also includes various non-GAAP financial measures the disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2022 third quarter earnings release that we filed with the SEC and Form 10-Q for the period and will be discussed during the call, but that said I will turn the call over to Dave.
Thank you Richard Good afternoon, everyone and thank you for joining our earnings call.
Yesterday, we reported third quarter consolidated net income of $80 million and earnings per share of 90, <unk> EBITDA for the quarter was $181 million.
Our strong results for the quarter were driven primarily by the refining refining segment due to high distillate cracks and our best in class distillate yield somewhat offset by turnarounds at both fertilizer plants during the quarter.
We are pleased to announce the board of directors has authorized a third quarter regular dividend of <unk> 40 per share and a special dividend of $1 per share both of which will be paid on November 21 to shareholders of record at the close of market on November 14th.
Year to date, the board has authorized regular and special dividends totaling $4 80 per share representing a yield of over 12% based on yesterday's close price.
But in our petroleum segment combined total throughput for the third quarter of 2022 was approximately 202000 barrels per day and light product yield was 97% on crude oil processed bench.
Benchmark crack spreads remained elevated remained elevated during the quarter with group 3211, averaging $43 94 per barrel.
The distillate crack remains significantly above the gas crack in the quarter and we continued to operate our refineries and Max distillate mode.
RIN prices also remained stubbornly high at $8 per barrel, thereby adding approximately <unk> 30 per gallon to fuels costs at the par due to EPA has continued mismanagement of the RFS regulation.
We have filed petitions in the fifth circuit seeking judicial review Lavar EPA is ridiculous and misguided denial of what he would small refinery exemptions for the years 2017 through 2021.
We will continue to fight for the rights we believe.
When he would is entitled to as intended by Congress when they.
When the RFS regulation was passed and became the law of the land, we expect to file for an exemption for 'twenty 2022 soon.
We continued to increase throughput rates as the Winnie would renewable diesel unit in the quarter processing, approximately 18 million gallons of vegetable oil feedstock.
The H.
Hobo spread averaged a negative $1 48 per gallon for the third quarter, an improvement of approximately 50 cents per gallon from the second quarter.
For the third quarter, our financial results also improved for renewable diesel business, which we are.
Which we are currently include which currently includes is included in our corporate and other segment.
In the fertilizer segment, we completed planned turnarounds at both facilities in the third quarter. We currently do drive that any other planned turnaround scheduled for fertilizer until fall of 'twenty four.
Fertilizer markets remain tight and we have seen a steady increase in prices over the.
Past few months, which has carried through to the.
Through the fall and into two we expect to carry through through the fall and into 2023.
Now, let me turn the call over to Dave to discuss our financial highlights. Thank you David and good afternoon, everyone.
For the third quarter of 2022, our consolidated net income was $80 million earnings per share was <unk> 92.
And EBITDA was $181 million.
Our third quarter results include an unfavorable inventory valuation impact of $114 million negative mark to market on our estimated outstanding rent obligation of $38 million in unrealized derivative gains of $20 million.
Excluding the above mentioned items adjusted EBITDA for the quarter was $313 million and adjusted earnings per share to $1 90.
Adjusted EBITDA in the Petroleum segment was $306 million for the third quarter, driven by high utilization rates at our refineries and strong product cracks in the mid con.
Our third quarter realized margin adjusted for inventory valuation unrealized derivative gains and rent mark to market impact was $23 <unk> per barrel, representing a 52% capture rate on the group 3211 benchmark.
<unk> expense for the quarter, excluding the mark to market impact was $98 million or $5 28 per barrel, which negatively impacted our capture rate for the quarter by approximately 12%.
Note. This excludes the approximately $50 million worth of Rins generated by the renewable diesel unit in the third quarter.
The estimated accrued RFS obligation on the balance sheet was $715 million at September 30, and was mark to market at an average Brent price of $1 69.
As a reminder, our estimated outstanding rent obligation excludes the impact of any small refinery exemptions.
Direct operating expenses in the petroleum segment were $5 53 per barrel for the third quarter compared to $4 52 per barrel in the third quarter of 2021.
The increase in direct operating expenses was primarily due to higher repair and maintenance expenses and increased natural gas and electricity costs.
Adjusted EBITDA in the fertilizer segment was $10 million for the third quarter with results impacted by lower production volumes and elevated operating expenses as a result of the two planned turnarounds completed in the quarter as well as approximately 11 days of downtime at the Coffeyville facility due to outages at the third party air separation plant.
The partnership declared a distribution of $1 77 per common unit for the third quarter of 2022.
As CVR energy owns approximately 37% of CVR partners common units, we will receive a proportionate cash distribution of approximately $7 million.
Cash provided by operations for the third quarter of 2000 $20 million to $156 million and free cash flow was $93 million.
Total consolidated capital spending was $68 million, which included $23 million in the petroleum segment $25 million in the fertilizer segment and $16 million on the pre.
Pretreatment unit for they are to you.
For the full year 2022, we estimate total consolidated capital spending to be approximately $204 million to $234 million and turnaround spending to be approximately $80 million to $85 million.
Turning to the balance sheet, we ended the quarter with a consolidated cash balance of $618 million, which includes $119 million of cash in the fertilizer segment.
Total liquidity as of September 30, excluding CVR partners was approximately $746 million, which was comprised.
Primarily of $499 million of cash and availability underneath and cash and availability under the ABL facility of $247 million.
Looking ahead to the fourth quarter of 2022 for our Petroleum segment, we estimate total throughput to be approximately 200 to 220000 barrels per day.
Operating expenses to range between 101 hundred $10 million and total capital spending to be between 30% and $35 million.
For the fertilizer segment, we estimate our fourth quarter 2022, ammonia utilization rate to be between 93, and 98% direct operating expenses to be approximately $60 million to $70 million, excluding inventory impacts and total capital spending to be between five and $10 million.
For renewables, we estimate fourth quarter 2022, total throughput to be approximately 14 to 17 million gallons for the quarter due to a catalyst change direct operating expenses for the fourth quarter are expected to be between $5 7 million.
With that Dave I'll turn it back over to you. Thanks Dane in summary, we had another strong quarter driven by why the refining segment. We are pleased to returning enough returning another $1 40 per share of dividends to our shareholders market conditions are currently very strong across all our businesses and we believe we are well positioned.
And to benefit from the structural changes we are we see taking place.
Darling with refining the strengthen the correct. So this year.
Has largely been driven by tight supply conditions, driven by refined product demand drove driving refined product inventories well below five year average levels.
We lost production capacity as a result of refinery closures and significantly increased operating costs for many refunding refineries outside the United States. We are currently seeing record exports of gasoline and diesel out of the U S. While imports of mostly stayed flat.
In addition planned and unplanned downtime at refineries across the U S has caused refined product supplies tightened further and cracks to move higher.
Despite the declines we are experiencing in gasoline and diesel.
Demand forward distillate correct cracks are heavily backward dated but are currently over $45 per barrel for all of 2023.
On the crude side of the equation inventories are also low.
On the low end of the five year averages and continued releases from the strategic petroleum reserves are impacting differentials shale.
Shale oil production volumes are up and we believe most incremental barrels are going to exports, which is supportive of a wider Brent ti differential.
We are seeing volumes on our gathering system stabilize at around 2000, 125000 barrels per day, and new projects have been announced and are gathering areas that could offer additional upside potential.
Turning to the fertilizer segment nitrogen fertilizer production in Europe has been significantly reduced as a result of an increase in natural gas and energy prices over the past year and this has created an opportunity for U S producers to export fertilizers to Europe as a result domestic.
Fertilizer supply.
Is tighter and we've seen a steady increase in prices since summer.
We have sold product through the end of the year and into the first part of 'twenty three and believe prices for the spring of 'twenty three could be similar to the highs that we saw in the spring of 2022.
We currently believe strong fundamentals in the fertilizer market could persist for several years with turnarounds now complete.
We are looking at the potential brownfield capacity expansions at both our plants, which we think could be done on a much lower cost than greenfield capacity.
Finally in our renewables business, we continue to ramp production ramp up production on renewable diesel unit and have reached design capacity of 315000 gallons produced per stream day of feed and early October before taking the unit down for catalyst change yields have recently been above 90.
Percent for renewable diesel production as a percent of divestiture vegetable feedstock.
The catalyst change currently in process and process, we expect to add additional isomerization catalyst, which should increase catalyst life by a few months construction.
Construction on the PTU is progressing and we are currently expecting a in service date early to mid third quarter of 2013.
With the addition of the PTU, we expect to see between 50 and $1 per gallon increase in our renewable diesel margins.
Looking at the fourth quarter of 2022 quarter to date metrics are as follows group to one two.
Group 211 cracks have averaged $52 50 50.
<unk> 54 for.
Per barrel with the Brent Ti spread at $5 33 per barrel and the Midland differential at $1 90 overdub UTI.
WTS differentials averaged $1 21 over Ti and the WCS differential has averaged $25 77.
Per barrel under <unk>.
First of all fertilizer prices remained strong as well with ammonia prices over a $100 per ton and UN prices over $5 50 per ton.
As of yesterday group 3211 cracks were $46 71 per barrel the Brent Ti spread was $7 87 per barrel WCS was $29 15 under WTO and returns were approximately $8 60 per barrel.
As I mentioned as I mentioned, we believe many factors driving the strong market conditions in our refining and fertilizer business are structural and we are optimistic about the outlook for the rest of the year in 2023.
Our focus remains unchanged, we strive to operate our plants safe reliable environmentally responsible manner.
And continue to grow.
To focus on growing our renewables business.
Our transformation to the segregated to segregate the renewables business remains on track and we expect.
Completion in the first half of 2023.
We also continue to explore opportunities to invest in projects, where we believe we can earn an attractive return both in renewables and in our refining business. We have identified some diesel recovery projects that we believe could increase our industry, leading distillate yield closely to close to 50% on crude processed.
I look forward to providing additional details on these projects as they develop.
With that operator, we're ready for questions.
Uh huh.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you.
Our first question is with Matthew Blair from Keybanc.
Please proceed with your question.
Hey, good morning, Dave and congrats on the strong capital returns to shareholders I had a question on on your WCS share at Coffeyville looks like it stayed fairly low I think just around 6% of your total feedstock slate despite some attractive WCS discounts.
So is that going to be the case going forward that.
Even if WCS spreads widen out.
The refinery, we'll cross that some but then youll resell some WCS at Cushing.
Well I think.
This quarter, we will be maximizing the amount of WCS, we run because as you mentioned the spreads did widen out.
In the first part of the quarter it was actually fairly narrow where we were.
We are better off to sell it. So we have adjusted and then we have some work we had to do on the coker that.
The sulphur plant that took a took some of the WCS all the slate for awhile, we do have a turnaround next year on the coker that will affect our WCS runs, but I expect us to to run up to the maximum we can within sulfur intern limits of our process equipment.
Sounds good and then Dave do you have any expectations for this upcoming.
RVO from the EPA.
Theres, a thought that things actually might look pretty different going forward the EPA might issue.
2023 to 2025, RVO and Theres also some talk about how.
This 15 billion ethanol blending rate requirement.
It's <unk>.
Going away and the EPA might have more flexibility.
To reduce the ethanol requirements do you have any thoughts on that.
Well I do Matt and they're not none of them are any good.
Most of the time I My view is that EPA is completely mismanaged the entire RFS program, starting with this ridiculous denial of all small refinery waivers.
It gives me no confidence that they'll do anything that they say.
I don't know how in the World you can issue an RVO for the next three years. When you don't even know what gasoline demand is or distillate demand is.
A lot of factors can change those as you well know.
I don't know I'm sure you've noticed but RIN prices have drifted up ever since the RVO has been was announced for <unk>.
For 'twenty, one 'twenty two.
<unk>.
It's done nothing but go up.
Just reflected in the fact that they maintain this $15 billion of ethanol in the market basically can't blend that much no. The economics for blending ethanol are very strong right now, particularly with the $1 71 RIN.
<unk> Ren.
But my confidence level on them to do anything that makes any sense. They are worried about the price of gasoline and yet.
We have 30, now probably 35 frankly.
Of course built in for blending ethanol.
Really need a subsidy its profitable to do on its own.
Makes sense thanks for.
For all the color.
Youre welcome.
Thank you. Our next question is with John from John Royall with Jpmorgan.
Please proceed with your question.
Hi, good afternoon, Thanks for taking my question.
If you could potentially get into the potential brownfield expansions and fertilizer.
Further detail there what size, we're talking about everything on.
Cost of return expectations.
Well, we're in the early throws of we just completed two turnarounds big turnarounds for both plants. So after we get all lined out from all of that which were pretty close to we will start the feasibility studies on these but I think youre looking at a modest increase somewhere between less than 15%.
Don't know the exact numbers yet because we just really haven't done the work yet.
But I think I would estimate that there are less than $100 million and each expansion something like that.
Or are we probably won't do them if there are any more expensive than that.
But 15% is a good walking number.
Capacity on East Dubuque is around 100 tonnes a day.
Coffeyville is about $13 50, or so tons per day. So that gives you some numbers to work with.
Okay. That's really helpful. Thank you and then.
Just thinking about the special dividend and kind of how it ties into the balance sheet.
How do you feel about your net leverage right now I think it's a it's just under $1 billion of net debt.
Do you think that's kind of the right level for this business or could you actually drawdown some cash with.
With the special dividend in excess of cash flows and lever up a little.
Well, we think about you know what.
The current ebitdas, its probably we probably could afford some more debt, but a little bit of a concern of what the interest rates are going to be going forward. We do have a one tranche of our bonds that are due 'twenty five.
So we will be looking at refinancing somewhere in 24 on those and we're always keeping the option open to buy down some of that if the if the interest rates are too high it's too early to know what there'll be at this point, but.
We always had the opinion that.
And that we're a cash machine and we pay if we earn it we're going to pay it out to shareholders.
I think we've shown that in the last two quarters that that is truly what we March two.
Great. Thank you.
Youre welcome.
Thank you.
Our next question is from Carly Davenport with Goldman Sachs. Please proceed with your question.
Hey, good afternoon. Thanks for taking the questions I wanted to just start on the capital return side can you talk a little bit about kind of where you view the optimal regular dividend level over time as our potential to grow that in the near to medium term or is that more of a preference to continue to kind of utilize the special dividend as a flywheel and this robust margin environment.
Well currently I think the interesting fact is that I think this is the first time in history, we've had both businesses.
Hitting.
Full stride refining at the same time as fertilizer fertilizer or at the same time as refining.
And that is a little bit on the logic for special.
Because.
Fertilizer cycle will turn at some point and I don't know on refining I think structurally short for quite a long time.
But I think.
We used to have a dividend a regular dividend of brown <unk> 80.
Oh and we.
We would love to get back to that number.
The board looks at it every quarter.
If it makes sense to increase the regular and decrease the specials, but.
Right now with both the hitting at the same time history would tell us that doesn't last forever.
So we remain cautious on that.
Got it that makes sense. Thank you and then the follow up is just on renewable diesel recognize that the process to kind of build that out and eventually break that business out.
It is ongoing but can you talk a little bit about what youre seeing from a unit margin perspective at that business. As you think about how shriek you tracked and then thinking about where for Q Hudson tracking.
Sure.
Q3, I think.
Probably September was a good month for us.
With a hobo as I mentioned was off 50.
And some of the basis had come in some to some degree.
I always thought refining was a wild business, but I'll tell ya renewables wilder than than any of it theres. So many variables in it to go up and down and with low carbon fuel standards at $60 $60, where they start when we started the unit they were almost 200.
That's largely been offset by rent increases but.
We're still optimistic I think September we printed a positive number and we still don't have the pathway completed.
The final pathway for for.
The <unk> so were on the provisional still as we get we get towards getting that certified then we'll pick up another tranche and then.
As I mentioned, we've got the capacity we've demonstrated full capacity, we still have some challenges around that to work out in a refinery, but I think we'll be successful at that.
And we should have a pretty good run in 23, assuming we can we can length of the catalyst life, a little bit by adding some more of a summer catalysts.
To the mix.
So we're very positive on it and with the Pizza U P to use is going to be between 50, and a dollar uptick and that just adds right to the bottom line.
Great I appreciate that color. Thank you.
Welcome.
Thank you. Our next question is from is from Paul Cheng from Scotia Bank.
Please proceed with your question.
Hey, Doug.
<unk>.
Okay.
Hello.
Can you provide any update about the call Jack you mentioned.
Best of luck.
One.
What is the capacity.
Sure.
Hi.
So, which let's say Dan what is the Capex spending will look like.
Paul we are in the early phases of looking at this but we're pretty confident there's at least 6000 barrels available to pick up.
Over top of what we do today.
We're typically yield about 44% on crude.
We're trying to push that number towards 50.
They are the molecules are there it's just we need the we need to debottleneck.
All three of our distillate hydro treaters.
And put some hardware on some of our vacuum towers to to recover this desk.
But I am pretty confident it's there.
It's just a matter of what.
Is it going to cost to get that done and we're still in the engineering studies to figure that out.
And David Dave Watson.
Okay.
<unk>.
Okay.
And while we can't compete any kind of timeline that you can share.
Well, it's going to take us another six months to fully define it I think.
Then.
It's a question of do we need downtime to make the changes and then those will have to consigned with turnarounds or if.
If we deem it.
Where opportunities come up to do it but most likely it's going to take a turnaround to do these because we have to make modifications to the vacuum towers to do it so I'm going to guess two years minimum.
Maybe three.
Yes.
But I'll tell you small.
Still think distillate is short for a long long time.
It just structurally as.
Is going to be around for a long time it appears to us with I M. O 2020 than some of the other factors that have happened on Nat gas and the balance around the world.
Hi, David.
Sure.
Although we knew about so when you're saying that you're going to have a catalyst change in the fourth quarter.
That's only 61 it seems to me at all.
The project seems to be a very strong to Asia is that something that's a surprise.
No that was our design basis was six months at full rate.
I think.
The first load may have gone a little quicker just because of startup.
But.
We've got a good handle on it now and like I said I think we will stretch that out I'm pretty confident we'll get another two months at least so hopefully we will only have one catalyst change niche next year, we're budgeting for two but hopefully we will only have one.
And how expensive when.
When you change the cat.
<unk>.
Catalyst cost about 2 million Bucks in the change.
Change it out is about $3 million.
So $5 million bubble.
Applying a lot of other companies.
Okay.
Anil question that any preliminary estimate for 2020, capex and turnaround expense.
I think that you do have one final one.
And cost of next year.
And then also Pat Watson.
Sure.
Currently on the bonds.
Thank you.
We don't disclose typically.
Al will provide guidance for the next quarter call on what we plan to do in 'twenty three.
As far as the RVO or as far as the RIN short.
Dan do you want to cover that yeah. So the short as of the end of the month or end of the quarter. Paul was 422 million Rins for just under $423 million rents.
$715 million.
And that that has come down Paul up since the second quarter. Because we are we are buying feverishly for the coffeyville.
And to close out the Coffeyville refinery RVO.
And.
Thanks Oliver.
423.
Component the nature of Windows.
Yeah. The other 423 around 295 million rins or <unk> or just under half a billion dollars Paul.
Thank you.
There are no further questions at this time I would like to turn the floor back over to management for closing comments.
Again, we'd like to thank you all for your interest in CVR energy. Additionally, I'd like to thank our employees for their hard work and commitment towards safe reliable and environmentally responsible operations.
We're proud of the work, we do and we're proud of providing.
The American public with the fuels they need to to enjoy modern life and we look forward to reviewing our fourth quarter results and the next Turner next earnings call. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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