HF Sinclair Corporation Holly Energy Partners L.P. Q1 2023 Earnings Call
Welcome to you each at Sinclair Corporation, and Holly Energy Partners fourth quarter, 2022 conference call and webcast hosting the call today is Tim go incoming Chief Executive officer of each art H F. Sinclair He has joined.
By a tennis.
Sharp Chief Financial Officer, Steve Ledbetter, EVP of commercial salary Papa EVP of operations and Matt choice SVP of lubricants and specialties, along with John Harrison Chief Financial Officer of Holly Energy partners. At this time, all participants have been placed in.
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We ask that you please limit yourself to one question and one follow up. Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note that this conference is being recorded it is now my pleasure to turn the floor over to Craig Biery, Vice President Investor Relations Craig you may begin.
Thank you Jack Good morning, everyone and welcome to Hff's Sinclair Corporation in Holly Energy Partners first quarter 2023 earnings call. This morning, we issued press releases announcing results for the quarter ending March 31 2023.
You would like a copy of these press releases you may find them on our website at Hs Sinclair Dot com and Holly energy Dot com.
Before we proceed with remarks. Please note the safe Harbor disclosure statement in today's press releases in summary, it says statements made regarding management expectations judgments or predictions are forward looking statements.
These statements are intended to be covered under the safe Harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings.
The call also May include discussion of non-GAAP measures. Please see the earnings press releases for a reconciliation to GAAP financial measures.
Also please note any time sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript and with that I'll turn the call over to Tim go.
Good morning, everyone.
Today, we reported first quarter 2023, net income attributable to HFF Sinclair shareholders of $353 million.
Or $1 79 per diluted share.
These results reflect special items that collectively decreased net income by $41 million.
Excluding these items adjusted net income for the first quarter was $394 million or $2 per diluted share compared to adjusted net income of $176 million or <unk> 99 per diluted share for the same period in 2022.
Adjusted EBITDA for the first quarter was $705 million an increase.
<unk> of approximately $328 million compared.
Compared to the first quarter of 2022.
In our refining segment first quarter 2023, EBITDA was $544 million.
Compared to $208 million in the same period last year.
This increase was primarily driven by higher refining margins in both the west and.
Continent regions as well as a result of steady demand tight supply and favorable favorable crude spreads.
Crude oil charge averaged 499000 barrels per day in the first quarter of 2023 compared to 525000 barrels per day in the first quarter of 2022 due to heavy turnaround maintenance during the period.
Of the three refinery turnarounds, we conducted in the first quarter of 2023 I am pleased to report we successfully completed all three on time and on budget.
While this is a significant accomplishment in itself. We also addressed many of our end of cycle reliability issues on the refinery equipment that was available during these downtime.
Our drive to improve our operating reliability is built around the maintenance strategies that we execute during these turnaround cycles.
In our renewable segment, we reported adjusted EBITDA of $3 million.
In total sales volume of 46 million gallons for the first quarter of 2023.
We continue to work to increase utilization at our renewables facilities and expect to achieve normalized run rates in the second half of 2023.
Which will allow us to optimize advantaged feedstock from a pretreatment unit.
Our marketing segment reported EBITDA of $6 million and total branded fuel sale volumes of 328 million gallons, representing <unk> <unk> per gallon margin in the first quarter of 2023.
We continue to see strong value in the Dino brand as the marketing business provides a consistent sales channel with margin uplift for our produced fuels and we expect to grow our branded sites by 5% or more per year.
Our lubricants and specialty products segment reported EBITDA of $99 million for the first quarter of 2023 compared to EBITDA of $145 million for the first quarter of 2022.
This decrease was largely driven by the positive FIFO impact from consumption of lower priced feedstock inventory in the first quarter of 2022.
We continue to be pleased with the strong performance of our lubricants and specialty products segment and continue to focus on sales mix optimization of our base oils and finished products.
<unk> reported EBITDA of $88 million in the first quarter of 2023 compared to $73 million in the same period of last year.
This increase was mainly driven by contributions from the Sinclair transportation assets, which were acquired in March of 2022 as.
As well as higher revenues from our Woods Cross refinery process units, partially offset by higher interest expenses.
Overall, we returned $334 million in cash to shareholders through share repurchases and dividends during the first quarter.
As of March 31, 2023, we have $420 million remaining on our share repurchase authorization.
We remain fully committed to our long term cash return strategy of returning 50% or more of our net income to our shareholders, while maintaining a strong balance sheet and investment grade credit rating.
This morning, Hff's Sinclair made a nonbinding proposal to acquire all of the common units of highlighted Holly energy partners LP not already owned by IHS Sinclair pursuant to our stock per unit merger transaction that would result in AGP, becoming an indirect wholly owned <unk>.
Obsidian area of Hs Sinclair.
We believe the proposed transaction simplifies our corporate structure reduces costs and further supports the integration and optimization of our portfolio.
Please refer to the separate press release for specifics related to this proposal.
Looking forward as I make the transition to CEO of HFC unclear.
I'd like to take this time to share with you my near term priorities for the company.
First we must continue advancing our operations excellence.
This means improving the safety and reliability of our plants, which we believe will result in higher utilization rates and lower operating expenses.
This is our top priority and we have recruited many reliability subject matter experts over the last few years and we are implementing our operations excellence management system to guide us through this journey.
But as I mentioned earlier, it will take time working through our turnaround cycles to make the necessary improvements to our equipment.
Second we have completed a number of transformative acquisitions and we continue to focus on the integration of those assets into our portfolio with the goal of capturing more operating efficiencies and margin opportunities across our asset base.
We already realized annual run rate synergies of roughly $100 million from the Sinclair acquisition and we believe there is more to capture from this acquisition as well as in our lubricants and specialty products segment.
Third I'm focused on free cash flow and I'm committed to continuing our cash return strategy that I mentioned earlier.
Returning excess cash to shareholders through dividends and share repurchases, while maintaining an investment grade balance sheet is fundamental to maximizing shareholder value over the long term and positioning the company for future success.
With that let me turn the call over to Ed.
Thank you Tim and good morning, everyone, let's begin by reviewing <unk> financial highlights.
Net cash flows provided by operations for the first quarter of 2023 totaled $178 million, which included $164 million of turnaround spend in the quarter.
Hff's Sinclair stand alone capital expenditures totaled $92 million for the first quarter of 2003.
As of March 31, 23, Hs and clears total liquidity stood at approximately $3 billion comprised of a standalone cash balance of $1 36 billion, along with our Undrawn $1 65 billion unsecured credit facility.
As of March 31, 'twenty, three we have $1 7 billion of Standalone.
Debt outstanding with a debt to cap ratio of <unk>.
Debt to cap ratio of 16% and net debt to cap ratio of 3%.
HCP distributions received by HFC included during the first quarter of 'twenty three totaled $21 million.
HFC Sinclair owns 59 6 million Hep's limited partner units, which following the acquisition of Sinclair Transportation represents 47% of Hep's Outstanding LP units at a market value of approximately $950 million as of last night's close.
Let's go through some guidance items.
With respect to capital spending for full year 2023, we still expect to spend between $250 million to $280 million in refining.
<unk> $25 million to $35 million in renewables.
$35 million to $50 million in lubricants and specialty products.
To $30 million in marketing.
<unk> hundred $80 million in corporates, and $530 to $630 million with turnarounds and catalysts.
At <unk>, we expect to spend between 25% to $35 million in maintenance and $5 million to $10 million in expansion and joint venture investments.
Yes.
For the second quarter of 2023, we expect to run between 550 to 580000 barrels per day of crude oil in our refining segment and we have planned turnaround schedule at our <unk>.
<unk> and <unk> refineries during the period.
And lastly, as Tim mentioned, please refer to our separate press release, we issued this morning for specifics related to our proposal to acquire the outstanding Hep's public units as negotiations are currently ongoing we're unable to speak to specifics around the proposal during Q&A.
And with that let me turn the call over to John for an update on HCP.
Thanks Adnan.
<unk> generated solid first quarter earnings supported by a safe and reliable operations and strong volumes in both our crude and refined products transportation and storage systems.
<unk> first quarter 2023, net income attributable to Holly energy partners was $58 million compared.
Compared to $50 million in the first quarter of 2020 to the.
The year over year increase was primarily attributable to earnings related to the Sinclair transportation assets as well as higher revenues from our Woods Cross refinery processing units, partially offset by higher interest expense and operating costs.
Aep's first quarter 2023, adjusted EBITDA was $108 million.
Compared to $85 million in the same period last year, a reconciliation table, reflecting these adjustments can be found in Hep's press release.
HCP generated distributable cash flow of $84 million, and we announced a first quarter distribution of <unk> 35 per LP unit, which is payable on may 11th to unitholders of record as of May one.
Capital expenditures during the quarter were approximately $8 million, including $4 million of expansion $3 million in maintenance and $1 million of Reimbursable Capex. We ended the quarter with approximately $556 million in liquidity comprised of $7 million of cash and $548 million of availability under our $1 two.
Billion revolving credit facility.
For 2023, we are focused on safe and reliable operations, while we negotiate the proposal from HFF Sinclair.
We're now ready to turn the call over to the operator for any questions.
Certainly.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone.
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Thank you.
Our first question comes from the line of Roger read with Wells Fargo Securities. Your line is open.
Yes. Thank you good morning, everybody and Tim welcome welcome to the lead role here.
Thanks, Roger I appreciate it.
So.
Just one question for me starting with the proposed AGP consolidation.
Hi.
Why now and can you give us a little bit of the.
The back and forth between the two entities in terms of determining the right value here and the decision to go all units excuse me all stock for units instead of a combination of things.
Yes, Roger as Adena mentioned earlier.
We just put the proposal out.
Last night, we're not able to talk about.
Yes.
Because it's a public negotiation, but what I can tell you is we believe this proposed transaction simplifies our corporate structure and reduces our costs and it further supports the integration and optimization of our portfolio.
It also provides an opportunity to unlock cash that is currently being held at the MLP level for LP distributions at a debt reduction and this cash will become available for Dino as long term capital allocation strategy.
Okay.
And then my unrelated follow up.
You mentioned in the renewable diesel should be at full run rates second half of this year, obviously Q1 was a little bit of a bump in the road to say the least what.
The factors talked about before or the hydrogen issue.
As well as just the startup kind of challenges. So I'm curious between where you are today and where you'd expect to be midyear onwards, how to those two items get solved.
Roger Thank you this is <unk>.
First of all I think we're pleased with the performance of our renewables.
Segment in the first quarter on an adjusted EBITDA basis, we were positive which is.
Which we're pleased with.
With respect to some of the challenges that we've talked about in the past couple one of them has been the reliability of the second one there has been.
Hydrogen availability, so with respect to operational challenges we've made very good progress in the first quarter withheld improved yields in some of our.
Particularly in our Cheyenne assets and we continue to work on a longer term solution for our hydrogen problems. So we're seeing on the process optimization as well as the long term solution on hydrogen are two important priorities for us with respect to run rates I think.
Have made steady progress, but we're really looking at that.
Half of the year, we're looking to achieve normalized run rates.
With respect to the second quarter I would also point to your attention. The fact that we have turnarounds in two of our facilities that are co located with refineries both barco.
And Navajo.
Would impact run rates in the second quarter, but that also gives us an opportunity to really continue to work on addressing operational issues and come out really the better shape. After these turnarounds.
Yeah, and Roger I'll, just chime in as well just for some color.
We're not we're not happy with the results of the renewable diesel business, yet, but we are happy with the progress and so.
Showing positive adjusted EBITDA this quarter.
As.
Evidence that we're moving in the right direction as Anna mentioned, we had several turnarounds.
This quarter, we have a few more here in the second quarter that will continue to improve the hydrogen infrastructure and in the rest of the utility infrastructure that is around these renewable diesel plant as well as what as mentioned just a better understanding of how to how to run these plants better is going to contribute and help us deliver.
In the second half the run rate that we're expecting.
Yes fair enough could I just ask the one clarification since the hydrogen obviously there is a long term solution if youre going to run at higher rates does that imply you do have a <unk>.
Short to medium term solution in place.
Well I think I think the medium term the short and medium term solution is to just continue to optimize the operation of the B assets and like I said, we've seen good progress there but.
Really the longer term solution is.
Hydrogen supply.
<unk>.
Hydrogen another thing is.
As we look at our just conventional diesel cracks, sometimes we obviously have to make decisions around <unk>.
Economics, and Thats part of the optimization equation.
Yes, we think our short term salute that to get to our normalized run rate in the second half we have solutions that we can work through to get to that and then of course, we are working long term solutions to our hydrogen supply issues that we're not ready to talk about today, but are in the process of being worked.
I appreciate that thank you.
Our next.
Comes from the line of Matthew Blair with Tpa, which your line is open.
Hey, good morning, everyone.
Tim I was hoping you could elaborate more on the opportunity to improve refinery operations.
You mentioned for the three planned turnarounds in Q1 you addressed.
I think it was end of cycle issues could you talk about provide any examples of the problems that you are finding them.
What youre doing to fix them.
Yes, Matt this is Tim I'd be happy to.
I've mentioned before that you've got.
Resource and capability opportunities to improve <unk> got systems and processes to improve.
The third leg in the triangle is we've got to improve the equipment itself right I'd like to say it equipment doesn't know were talking about it until we actually do something with it and during the turnarounds we have the ability to.
To take that.
Those maintenance strategies that actually affect the equipment, that's usually not available except for turnarounds.
Let me turn it over to our new EVP of operations Valerie Pompa. She has over 30 years of operating experience and we're really glad to have her on our team you want to talk a bit more about turnarounds.
Our first quarter turnaround so some examples going back to hydrogen not Navajo specifically we spent.
A significant amount of our scoping effort on hydrogen improvement project.
Really gained Adam trading reliability around our hydrogen system.
And so our strategy.
That goes from an equipment strategy that Tim mentioned aimed for reliability are short term PM programs NPM program improvements and then during the turnarounds that gives us opportunities to upgrade whether it be exchange errors.
Equipment that has reached a point, where it's time to change it upgrade and focus really on just getting our utilization and availability.
Higher.
To meet our demand.
I think as a summary, Matt.
<unk> been doing a great job of driving these improvements we implemented over 15 risk reduction projects during the turnarounds and over three very large yield improvement projects. During the turnaround. So we're expecting improved operations as we start of run conditions here.
Sounds good and then on the lubricant side.
Was there a material LIFO impact in Q1, 'twenty three and can you talk about the factors that supported better lubricants profitability quarter over quarter, even though Youre index declined.
Okay.
Yes, hi, there.
I'll take this one as Atlas.
So with respect to our FIFO impact there was 502 impacts was about 14.
$1 million, but even with that.
In mind, we're still very pleased with our results. When you look at the profitability of the business. There's really a couple of notable drivers.
Especially as the summer season comes through we also think that.
Awesome I appreciate that thank you.
Hey, guys first question, it's been a year or.
So as a follow up there yes, yes.
Hey, I wanted to go back.
Shareholder returns for a second.
Two kind of related questions on that first.
I know the Sinclair family still owns a decent chunk of that.
Gives them two board seats any indication if they.
Want to hold.
Continuing to hold the two seats of one.
And how you think about buybacks with that with those levels of ownership that they would need and then somewhat related to that.
Previously guided to a 50% payout ratio.
Cash starting in Q does that still hold in this environment or are you thinking about that definitely thanks.
Okay.
Thanks, Jason Let me take your first question on the family obviously, we can't speak for the family.
We don't know what their intent is we wouldn't be able to speak for it but what I can tell you is this has been published in the documents.
When or if their share count drops below 15%.
There.
There are two seats on the board goes down to one seat on the board such as just so you know that is built into the into the into the deal and I'll turn it over to Anne to talk about.
Capital return question.
Davidson.
I guess the short answer is we're still we're still endorse our our capital return strategy with our payout ratio targeted.
50%, we don't guide on pace, obviously with this transaction ongoing and under negotiation.
There are periods, where we're blacked out but.
No change to our overall strategy and go with 50%.
Okay and then.
My follow up just on refining dynamics.
You noted a couple of plants coming back online in the Rockies region have you seen that impact.
Product price premiums, you're getting there and then separately.
What's your outlook on Brent Ti, we've seen that come in a bit here whats, what's driven that and do you expect it to remain tighter going forward. Thanks.
Yes, Jason we've seen.
Plants coming back online both from planned and unplanned.
Events in the first quarter, we definitely see the impact in the in the markets I mean for example in Denver.
When has been watching over the last.
Several months.
<unk> been very high.
And those cracks have come down from the very high levels, but I would tell you there is still attractive and there is still.
Certainly stronger than the Gulf coast cracks given that regional premiums that I mentioned earlier and I'll point out the same thing with Phoenix Phoenix is seeing very strong cracks and actually we're seeing very strong crack still right now in Phoenix.
While there.
A lot of still planned and unplanned downtime occurring in that area. So we're very pleased with that we still think even with all of our plants running.
This summer Jason that these rocky.
<unk>.
Markets in the southwest markets will continue to be very very strong and very attractive for us as you can see in the latter in the latest.
Margin indicators that we published here at the beginning of the month, we still see the west.
Gross margins has been very strong on Brent Ti It has come in obviously the OPEC cuts.
Put some pressure on the on the Brent Ti I think you also saw that the Ti is now being included in the basket that they used to talk about the brand I think that has a little bit of an impact on narrowing that spread but we still think the Brent Ti spread is based on freight rates.
Transportation, we still think that's going to be three to $4 a barrel and long term.
So no change there.
Yeah.
Alright. Thanks.
And we have a follow up question from Paul Cheng with Scotiabank. Your line is open.
Okay. Thank you.
Kim could you give us an update where you guys in terms of the pathway for the CFS have you already we see it.
And secondly that.
Got it.
Uh huh.
And secondly, do you.
You have a number you can share about the <unk>.
Opportunity cost loss in the first quarter due to the downtime both paying and nonpaying.
Paul Thanks for your follow up question I can tell you we have lcs that validation.
This is scheduled in the second quarter.
Those will.
We had all three of our <unk>.
Renewable diesel plant and.
Depending on the outcome of those validation visits we could move from the provisional to the actual <unk> so well.
We're hopeful that that will occur.
Fifth we will start seeing the benefits from that in the third quarter.
From an opportunity cost standpoint, Paul we don't we don't provide that level of guidance, but I can tell you that from a turnaround and from an unplanned basis, we've seen a lot of opportunities to improve and Thats why.
Proving the safety and reliability of our assets is our number one priority we believe thats the biggest impact we can have.
On this company's results.
And the good news is we have control over it.
We've got the people, we've got the processes and we've got the.
The focus and determination.
To work on those again I point to the Lubes business is an example of how we've done that pointing to the renewable diesel business.
You can see that.
Progress that journey happening as well and then.
I'll also say that same journey is happening on the refining side as well.
Alright, great. Thank you.
There are no further questions at this time I would now like to turn the call back over to Tim go for final comments.
Thank you Jack I, just want to wrap up with a couple of points first I would like to recognize the impact that Mike Jennings has made on our company.
Over the last three years, he has led us through a global pandemic.
<unk> built a renew renewable diesel business from scratch.
The Puget Sound refinery and acquired the Sinclair oil company to transform this company into HFF Sinclair.
His leadership dedication and compassion for our employees has set the tone at the top and he has been a great mentor to me personally.
Michael will be missed but his legacy will never be forgotten.
Second I want to thank the board for their confidence in me to lead this company going forward.
I am excited about the opportunity and challenge ahead, some things won't change like our long term commitment to return cash to our shareholders, but some things will have to change like the need to improve our operational performance of our refineries and our renewable diesel business.
I am pleased to welcome the new members.
Our leadership team and together, we look forward to growing this business and creating additional value to our shareholders our communities and our employees.
With that thank you very much for your time today.
This concludes today's conference call. We thank you for your participation you may now disconnect.
Okay.
Okay.
Yeah.
Okay.
Yeah.