Q4 2022 Par Pacific Holdings Inc Earnings Call

Good morning, and welcome to the par Pacific fourth quarter 2022 earnings Conference call.

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I would like to turn the computer she Patel director of Investor Relations. Please go ahead.

Thank you Anthony all kinds.

It was a par Pacific's fourth quarter earnings conference call. Joining me today are William Pate, Chief Executive Officer, well months, Liana, President, Sean Flores, SVP and Chief Financial Officer.

Richard Kramer EVP of refining and logistics and Danielle not easy SVP and Chief retail officer.

Before we begin our comments today may include forward looking statements any forward looking statements are subject to change and are not guarantees of future performance or a bad aricept.

They are subject to risks and uncertainties and actual results may differ materially from these forward looking statements accordingly.

Accordingly, investors should not place undue reliance on forward looking statements and we disclaim any obligation to update or revise that and 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 Chief Executive Officer, William Pate.

Thank you Ashish good morning to our conference call participants.

2022 was a breakthrough financial year for our company early last year product cracks rebounded from pandemic lows and remained strong throughout the rest of the year.

Adjusted EBITDA was $643 million and adjusted net income was $475 million or $7 93 per share.

Nearly all our adjusted net income was converted into cash from operations for the year.

We used our free cash flow to strengthen our balance sheet, we paid down nearly $65 million in funded debt and built our cash on hand by more than $375 million. Consequently, our year end net debt declined to approximately $25 million.

Our team also announced a comprehensive refinancing of our funded debt. This month further reducing our cost of capital.

This financing coupled with our strong liquidity leaves us well positioned to close the billings transaction.

Targeting a June 1st closing.

Entering 2023, our markets continue to be tight.

Global product cracks remained strong due to increasing demand principally due to China, which has abandoned its zero COVID-19 lockdown policy.

As evidence of growing demand Chinese refiners have curtailed exports in the first quarter.

Additional European sanctions on Russia, and petroleum products have tightened freight markets and increase the cost of exports improving overall refining economics. These.

These trends are somewhat offset by declining natural gas prices, which tend to reduce refinery operating cost and product cracks.

The Chinese reopening has combined with overall increased global air travel to boost jet fuel demand a key element of our sales light and.

In Singapore, the re grade for the difference between the price of jet fuel and ultra low sulfur diesel has narrowed considerably and occasionally flipped positive for the first time since 2019.

We're making significant progress on our renewables projects in this area. Our focus remains on smaller scale projects that afford us maximum flexibility given uncertainty surrounding feedstock sourcing government credit pricing and overall market dynamics for.

For example, our Tacoma Kofi project will cost less than $2 million, but it will cover 50% of our D for shortfall.

We expect this project to be running next quarter.

We're also completing the engineering for the conversion of a unit in Hawaii to produce sustainable aviation fuel.

We believe we can complete this 60 million gallon per year project, including feedstock pretreatment for less than a $1 50 per gallon of annual production capacity.

Our upstream affiliate Laramie also completed a refinancing this quarter redeeming, it's preferred stock and replacing their existing term loan facility with a new credit facility.

We expect an approximate $10 million distribution in March in conjunction with this financing.

I want to congratulate will months' Leone, and Sean Flores in their new roles as president and CFO , respectively.

Many of our colleagues are passionate and highly focused on our corporate mission and strategy. The key reason for our growth and success I.

I will now turn the call over to will to discuss our commercial and operational performance.

Thank you Bill.

Diving into the fourth quarter results.

Like to thank our team members for their many contributions to our collective success over 2022.

Despite the complexities of daily operations, you all manage to run at a remarkable 98% mechanical availability for the year.

Well the retail team generated a strong financial performance and laid the foundation for future growth.

Thank you to the team for your dedication and hard work.

The refining and logistics fourth quarter market backdrop remains firm rewarding refining utilization rates.

Refining throughput was 134000 barrels per day or 86% utilization.

During the quarter our per barrel production costs were $5.42 in Hawaii.

Washington was $3 57 in Wyoming was $7 80 per barrel.

Production costs per barrel are impacted by minor planned maintenance activities in Hawaii, and Wyoming with modestly impacted throughput and opex.

For the full year why production costs were $4.86 per barrel, Washington was $4 per barrel in Wyoming was $7.32 per barrel.

Despite increases in energy costs, the first quarter, Washington, turnaround and planned small maintenance in Hawaii and Wyoming.

And an $80 per barrel, Brent and for dollar Henry hub price environment we.

We would expect to why production cost between $4 25, and $4 50 per barrel, Washington, near $3.50 per barrel and Wyoming between $7 and $58 per barrel.

From an overall reliability and operation standpoint, we have no major planned maintenance activities in 2023.

Shifting to commercial matters.

The fourth quarter, Singapore, 312 index declined approximately $4 per barrel to $22.84.

Landed feedstock cost for approximately $9 15, a premium to Brent compared to the initially provided estimate of $8 50 to $9 per barrel.

Combining the 312 and feedstock indexes, the overall margin environment compressed by about $5 per barrel versus the third quarter.

Adjusted gross margin declined by a commensurate amount, allowing us to maintain capture rates near 100% of the combined index.

And Washington market conditions declined by approximately $5 per barrel.

It remained seasonally strong at $28 per barrel with very strong conditions early in the quarter.

Despite this nearly $5 per barrel drop in the index, we were able to increase adjusted gross margins to approximately $22 per barrel.

Improving capture rates were largely driven by wider inland crude discounts relative to an S and softening in backwardation.

Wyoming market conditions declined by approximately $8 per barrel compared to the third quarter. However, Wyoming adjusted gross margin only declined by approximately $2 per barrel largely due to lower FIFO inventory impacts.

Looking ahead to the first quarter, we expect Hawaii to run between 78, and 82000 barrels per day, Washington between 40, and 42000 barrels per day in Wyoming between 15 and 17.

In total this results in a seasonally strong total throughput midpoint of 137000 barrels per day or 89% utilization.

In Hawaii, the Singapore 312 is averaged $23 per barrel with notable strength in gasoline and jet fuel offsetting gas all softening.

On the feedstock side, we expect Q1 average crude to land between eight and $8 50 versus Brent a modest improvement from the fourth quarter levels.

As a reminder, average landed feedstock costs operate on about a 90 to 120 day lag versus prompt quarter market conditions.

In Washington, the P. M. W. 5221 index has averaged approximately $30 per barrel quarter to date.

Wyoming indexes, averaging $49 per barrel with notable counter seasonal strength largely due to regional refinery outages.

Moving to the retail segment first of all I'm very excited to announce that Danielle not AUC has joined our team to lead the retail business unit.

Y'all has a wealth of experience and convenience retail and I'm excited to work closely with her to take our operations to the next level.

The retail segment generated a record financial quarter with stabilizing fuel volumes and expanding margins across both fuel and merchandise.

Fourth quarter same store sales fuel and merchandise volumes ramped up nicely growing 1% and four 5% respectively versus 2021 levels.

We completed the three store acquisition and also have two new to industry sites under construction.

The L. A in Nam Nam brands are well positioned in their respective regions for future growth.

<unk> 2023 focus areas are maintaining strong operational liability successfully integrating billings growing our retail brands and progressing our renewable projects.

With respect to <unk>, we continue to be impressed with the high quality of the refinery and logistics team.

Significant transition efforts are underway for a June one transaction closing and we remain confident in our synergy targets.

I'll now turn it over to Sean to review our financial results.

Thanks, well fourth quarter, adjusted EBITDA, and adjusted earnings were $175 million and $133 million or $2 20 per share.

Full year, adjusted EBITDA, and adjusted earnings were $643 million and $475 million or $7 93 per share.

Refining segment reported $146 million of adjusted EBITDA in the fourth quarter compared to $188 million in the third quarter.

First quarter adjusted EBITDA includes a net price lag benefit in Hawaii of $10 million offset by a negative FIFO impact of $4 million in Wyoming, and a product crack hedge loss of $4 million in Hawaii.

We have continued our crack hedging framework in Hawaii, and currently have approximately 25% of our first quarter sales volumes hedged at levels marginally higher than the current market conditions.

The logistics segment reported $16 million of adjusted EBITDA in the fourth quarter compared to $22 million in the third quarter. The softer logistics results were primarily driven by one time pipeline maintenance activities in Hawaii, resulting in increased operating costs and marginally lower asset utilization.

Retail segment reported record quarterly adjusted EBITDA of $25 million during the fourth quarter compared to $20 million in the third quarter as we referenced previously the strong retail results were driven primarily by increased margin and fuel and merchandise sales.

Shifting to the cash flow statement cash provided by operations during the fourth quarter totaled $132 million, excluding net working capital outflows of 48 million.

Working capital outflows were primarily driven by increased rens settlement activity as we effectively cash settled 60% of our 2022 net rent obligation during the quarter.

Cash outflows from investing activities of $50 million during the fourth quarter include the impact of a $30 million deposit for the upcoming billings acquisition.

Total liquidity at year end was $577 million made up of $491 million in cash and $86 million in availability.

Next I'd like to provide an update on our recent capital market activities earlier. This month, we announced the successful pricing and allocation of a $550 million senior unsecured term loan the new facility will simplify our capital structure reduce our cost of term debt by approximately 100 basis points and better position the company to <unk>.

Pursue future growth opportunities.

Facility is expected to close by early March and the proceeds will be used to take out our existing term loan b and senior secured notes.

As Bill mentioned 2022 was a breakthrough year for our company, we generated over $450 million of cash flow from operations, which we used to bolster our balance sheet, our federal net operating loss carryover reduce our cash tax liability by approximately $100 million and was a key factor in achieving our.

Debt reduction objectives.

Last year, we paid down $64 million of term debt repurchased 8 million in stock and increased our cash position by $379 million, which we will use to fund the upcoming billings acquisition.

As a growth oriented company, we will continue to identify attractive development opportunities to enhance our integrated supply network across our core markets.

This concludes our prepared remarks, operator, we will turn it back to you for Q&A.

Yeah.

We will now begin the Q&A session.

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At this time, we will pause momentarily to assemble our roster.

Our first question will come from Neil Mehta with Goldman Sachs.

No go ahead.

Hey, Good morning. This is nicolette saucer one for Neil Mehta, Thanks for taking our question and congrats women's Sean on the new respective roles. So the first question here would be on billings and as we approach the targeted QQ close date for the transaction can you just talk about what key factors, we should be looking out for ahead of close and then any thoughts around expected timing within the quarter.

Hi, Nick what it's will good morning, So again I think key factors, we've laid out to date, we're targeting a June one closing again, we're on track for that and I think focused on the key items that relate to the achieving that date again, the carve out audits and ultimately standing up the technology.

Allergy instance, it's necessary again I think in terms of.

The overall project are again I think we remain confident in our synergy targets. We spent a lot of time on the ground with the team and again are you now believe that the overall overhead commercial and operating.

Targets are.

Feasible and again I think our focused on and again as identified on top of that opportunities for us to deploy.

Deploy low capital items that will generate high returns to increase reliability.

Thank you for the color and then the second question here is just on Hawaii and I think most are trying to get to a better sense of normalized longer term EBITDA for the business can you talk about what factors may be driving a higher capture rate outlook for Hawaii refining that may be more structural coming forward.

Sean do you want to cover the capture and let me let me just say first of all neglect that.

Refined products market in Singapore continues to be very strong and generally it's trading kind of with the European market on the basis of arbitrage economics, but.

Just to give a little color of the 312 peaked at $45 a barrel in June of 2022.

And it's been trading in the high teens to the low twenty's for most of this year. What we're seeing overall is just gasoline and jet has improved as diesel comes off highs.

The market seems to have built in a premium right now for Chinese Chinese demand rebound related to the cessation.

Cessation of their zero Covid Lockdown policy.

And I think one interesting tell tell is the re grade that I mentioned in my prepared remarks with jet really coming up in trading in parity with diesel I think that's a sign of a healthy market.

Longer term I think the other factors to focus on is Chinese actions continue to be very supportive of their longer term policy message that they will deliver.

We will seize.

The delivery of clean refined product exports by 2025.

John do you want to go and cover the capture yes, Nicholas as far as capture looking forward I think we feel like the the recent capture rates in Hawaii looking back to Q3 and Q4 of last year.

Our sustainable obviously, we had some price benefits in each of those quarters, but as we look ahead.

The easing backwardation environment should offset those those price like benefits that we've gotten in recent quarters and so I expect captured Oh hold on pretty closely with the.

The prior two quarters.

Very helpful. Thank you.

Our next question will come from Matthew Blair with to door Pickering Holt you.

You May now go ahead.

Hey, Good morning, Bill will and Sean and congrats on the Q4 results.

And that release mentioned, the $10 million of distribution coming from Laramie, which it sounds like it stems from the refinancing.

But you know now that the debt is in a better place can you talk about the prospects for future distributions from Laramie to par.

Based on the underlying profitability at Laramie.

Sure.

And yes, you're correct Matthew the distribution is related to the refinancing we essentially.

Completed $160 million.

Funded facility and that took out $135 million of liabilities and permitted 20.

$25 million distributions, so were getting our pro rata share.

Going forward the facility will permit distributions to the extent of our minimum asset coverage ratio, which is based on the.

NPV of the reserve base and then the level of debt. The company continues to perform well and actually in particular, they benefited from the strong market conditions on the west coast over the winter, which I think was part of the reason that facilitated this distribution I wouldn't expect.

Distributions to be you know.

More common than annual but based on an early February strip and current hedge levels, we would expect to receive distributions and most shares going forward just subject to our drilling investment levels.

Any sense based on current strip on on what 2023 distribution might look like to par.

Not at this point, it's really going to depend on how much we commit to drilling and that again will depend on the strip so in AR.

In a somewhat.

Counterintuitive fashion, the lower the price the more likely there is going to be a distribution to higher priced more likely we're going to put money to work to grow our reserve base, which will probably lead to greater distributions post 2023.

Okay and then my follow up is on the Washington, CFS or clean fuel standard program.

I believe it was scheduled to start on January 1st 2023.

So I was hoping you could talk about on the refining side you know do you anticipate that.

The buying these credits would impact your refining capture rate at Washington going forward and then on the renewable side you know do you see this as a as a boost to this co processing project.

You're working on.

Sure. So Matthew I think what we've observed is that the.

Clean fuels or the CCA kind of aspects of Washington's operating very similar to the way it doesn't California, where it's similar to the kind of cap with Iraq.

Impacts.

So, it's principally impacting rack pricing versus the wholesale pmw sub octane price that you see that opus publishes so.

I think.

Again, this is largely a rack impact versus a wholesale price impact.

So that's the first part so I wouldn't expect major impacts to capture it will likely impact working capital and some other items as we think about the overall multiyear settlement timeframes that will play out in this.

So again I think another environmental credit kind of scheme or we're going to need to manage the overall balances.

I think we feel well positioned to ultimately recoup the cost of that given our strong logistics network.

And then I think in terms of the co processing project.

The state is still very early in rolling out some of the specifics around the regs in the way that co processing is going to function. So I think TBD on what our co processing will qualify.

First for ultimately, reducing the carbon intensity of the fuel, but logic would tell you it should over time.

Yeah.

Got it thank you for your comments.

Our next question will come from John Royall with Jpmorgan.

Go ahead.

Hi, guys. Good morning, Thanks for taking my question. So the first question is on maintenance Capex I know you have no major maintenance this year.

Should we expect the maintenance cycle to work once billings is complete the fourth refinery.

But stagger them for you maybe you have one raise your turnaround per year.

And then Relatedly, how should we think about the longer term capex for maintenance in this business.

We have the ability.

I think you said $95 million for billings, but just an update on how we should think about the NIM.

Including billing.

Sure So I think I.

I wouldn't call out any changes to our overall maintenance cycle and turnaround cycle for our existing assets. So again I think just to refresh for you're right. We've typically been running at a maintenance and regulatory capex level of about $40 million a year.

And then we've had but we will refer to as amortize turnarounds of about $20 million a year. So again together that's been about a $60 million a year.

Overall spend obviously, it's lumpy 2020, threes, a year, where you don't see us spending a lot on turnarounds given that the timing.

I wouldn't call it any specific changes to our plans.

The existing asset base again with respect to billings I think we called out on a maintenance and regulatory requirement of about $15 million a year and then turnaround amortize turnarounds are about $20 million a year. So again I'll end, just shy of $100 million of maintenance and turnaround requirements on a norm.

<unk> basis.

In terms of timing for billings were still limited on specifically disclosing the turnaround schedule.

I think what we'd say is we don't see major items in the second half of 'twenty three.

And again I think as we referenced the $20 million a year is it good amortize turnaround number to include our cash is going to be lumpy some years larger than others, but over five year time period that should be a good number for you to plug into your models.

Okay. That's helpful. Thanks, and then on the retail side.

Nice improvement.

Throughout 2022, you spoke about it a bit the opener, but maybe you can just talk a little more on the dynamics there around tourism and any other drivers of that strength and how you think two.

2003, 2023 could shape up.

Sure.

So I think on the retail side I think the Hawaii market again, it's a little bit different than the mainland markets in particular, our store footprints heavily weighted towards the wahoo.

Again, and I think we've not seen a full recovery of in particular Japanese tourism to Hawaii.

Its inching its way back probably moving towards 40%, 50% ranges of pre pandemic levels.

So again I think theres, some positive macro trends on overall shift in mix in tourism in Hawaii.

And then I think as it as it relates to the overall <unk>.

<unk> in the market, we feel good about our overall store portfolio. There the allied brands has been very well received in the market.

And again I think we continue to look for ways to grow in that market.

Again, we've got one new to industry location, that's under construction that should be online. This year and then with respect to the Pacific northwest probably more similar.

Similar to the.

The mainland markets that you felt you fall for others, but again.

Non brand is relatively new in that market.

We've gotten some.

Positive feedback and again, we've got some strong momentum there and look forward to working closely with our with Danielle to grow that business. Further so good foundation I think we still have some some opportunity to continue to improve.

Thank you.

Again, if you have a question. Please press Star then one our next question will come from Jason <unk> with Cowen.

Now golf.

Hey, good morning, I wanted to ask on capital.

Allocation, just given that that target level than you're carrying cash on the balance sheet well in excess of what's needed.

To close the <unk> acquisition, so how do you think about.

Capital allocation priorities of deploying cash.

Moving forward thinking dividend buyback growth.

Comments on offering would be helpful. Thanks.

Hey, Jason this is Sean.

I think as we reference, whereas we're a growth oriented company and our near term capital allocation policies. All CS will reflect that strategy and I think what we said is we want to get through billings, we want to integrate it will mentioned some capital projects that are on the table to increase reliability, which we think will be really is.

Tractors I think after billings has integrated well.

Turning our focus to identifying other attractive opportunities to enhance our network.

And I think after a period of time, if we're unable to identify.

Capital projects, then, we'll certainly evaluate returning capital to shareholders.

Bill anything you'd add.

Okay.

Okay.

Okay got it and in terms of the inorganic growth aspect are there areas that are more attractive either regionally or by asset type.

Jason This is bill.

I've said this before and I'll say it again, we're really first of all focused on closing and integrating billings, but even beyond that we continue to look at the same area.

And we continue to look at the same avenues of growth investing in renewables, which we're doing right now and we expect to continue to do adding to our retail footprint, which we're doing with the new to industry builds as well as the recent acquisition, which is growing quite well and then obviously within our market pad four in pad five we will continue to look at communities.

That additional communities that we can serve through additional refinery acquisitions.

Understood and just one more on.

The inflow of cash from financing I think I've almost $15 million can you disclose what that was and what that was related to.

Yeah, Jason I think it was a number of small items I think what I'd call out is we financed or.

Pre funding on our insurance premiums roughly $15 million to $20 million and so that's sort of it's located in two places youll see it as an inflow in the financing section and an outflow in the.

The cash from ops.

Other small item was just general funding in our working capital and Hawaii under the delayed draw facility, but not a not a big deal.

Okay, great. Thanks, a lot.

It appears there are no further questions. This concludes our question and answer session I would like to turn the conference back over to William Pate for any closing remarks.

Thank you Anthony I want to thank everybody for joining us this morning.

This is an exciting time for par Pacific and with a favorable market outlook, we look forward to closing and integrating the billings acquisition and the continued growth of our company have a good day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.