Par Pacific Holdings Inc. Q1 2023 Earnings Call
Good day and welcome to the purpose of the first quarter 2023 earnings Conference call.
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I would now like to turn the conference over to MS. Shang If apparel director of Investor Relations. Please go ahead.
Thank you Rocco welcome to par Pacific's first quarter earnings Conference call. Joining me today are William Pate, Chief Executive Officer, well monthly on President, Sean Flores, SVP and Chief Financial Officer.
Richard Kramer E V P of refining and logistics before we begin note that our comments today may include forward looking statements any forward looking statements are subject to change and are not guarantees of future performance or events.
They are subject to risks 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 that 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.
We are pleased this morning to discuss another quarter of strong performance.
Our first quarter adjusted EBITDA was $168 million and adjusted net income was $2 25 per share.
These results bring our last 12 months adjusted net income to $10 62 per share.
With this quarter's robust earnings we continue to improve our balance sheet.
Shawn will go into our liquidity in more detail, but we ended the quarter with more than $660 million of cash on hand, which exceeds our funded debt for the first time.
Our balance sheet leaves us well positioned to close the acquisition of Exxonmobil as billings refinery on June 1st.
During the next few months our team will be focused on a successful integration of the billings assets, including bringing on board the experienced operating team.
The refinery has been operating well this year and conditions in the Rockies remain profitable entering the summer season.
This transaction will also significantly expand our logistics network in the Rocky Mountain region.
Global product inventories are presently load well balanced with little sign of significant inventory builds.
And demand is increasing due to the reopening of the Chinese economy and increased movement within China and global Air travel continues to increase.
Despite these positive factors global market cracks declined in April due to rising concerns over an economic slowdown as well as reduced refinery costs related to falling natural gas prices in Europe .
Cracks approaching mid cycle levels, our refineries remained profitable and we're focused on small debottlenecking projects, we see no change in our local demand profiles in these de bottlenecks generate significant profitability due to the amount of imported products supplying our markets.
We continue to advance our renewable fuel initiatives and are working diligently on small scale projects that provide maximum flexibility given uncertainty surrounding feedstock sourcing government credit pricing and market dynamics.
All of our projects are designed near our existing locations, allowing us to leverage our people technology and infrastructure. This lowers the cost of these projects and also affords us an ability to flex production in response to changing market conditions.
Last week, we announced further details on our Hawaii sustainable Aviation fuel project, which is expected to be commissioned in conjunction with the refineries 20 twenty-five turnaround.
This 60 million gallon per year project is forecast to be completed for less than a $1 50 per gallon of annual production capacity, including a feedstock pretreatment unit.
This is well below cost metrics implied by recent industry renewable fuel projects. The Hawaii project costs are low due to the availability of an underutilized hydrogen unit and established logistics. This unit will also produce low carbon naphtha and LPG to supply local power plants and other customers seeking to decarbonize.
The Hawaii energy sector.
We're also working with Hawaii agricultural entities to develop locally grown oilseed crops. In addition, we've received permission to import tariff free vegetable oils into the foreign trade zone in which our Hawaii refinery is located.
I'll now turn the call over to will to discuss our commercial and operating performance.
Thank you Bill the refining logistics first quarter market backdrop remained seasonally strong total refining throughput was 133000 barrels per day.
Hawaii throughput of 76000 barrels per day was reduced due to downstream unit constraints, which we addressed during an early April outage. We are currently running closer to 86000 barrels per day.
During the quarter our per barrel production costs were $4.54 in Hawaii.
$4 25 in Washington, and $7 41, and Wyoming.
The first quarter, Singapore, 312 index declined approximately $1 60, the 'twenty one 'twenty two per barrel.
Landed feedstock costs were approximately $7.90 premium.
Brent compared to the initially provided estimate of eight to 850.
Combining the 312 and feedstock indexes. The overall margin environment was flat versus the fourth quarter. However, why adjusted gross margin expanded by nearly $5 per barrel, resulting in the capture of 144% of the combined index.
Our strong capture was driven by softening backwardation and strong commercial execution.
We recently made changes to our benchmark indices for Washington, and Wyoming to reflect local market conditions and enhanced historical correlations.
And Wyoming switching to the RVO adjusted U S. Gulf Coast 321 index results in a historical capture in the 90% to 115% range.
Using the New Index 2022, Wyoming capture was 93% in the first quarter.
Capture is 104% or 111%, excluding the impact of a $1 90 per barrel FIFO head.
In Washington.
Switching to the RVO adjusted P. M. W 3111 results and historical capture percentages in the 45% to 55% range 2022 full year capture was 51% in first quarter 2023 capture is 44%.
Washington first quarter capture was negatively impacted by narrowing asphalt margins typical for the winter periods.
Looking ahead to the second quarter, we expect to why to run between 82, and 85000 barrels per day, Washington between $40 and 42 in Wyoming between 15, and 17000 barrels per day.
Minor planned maintenance at each location is incorporated into these estimates.
In total despite the work we are performing we expect a throughput mid point of 140500 barrels per day up 6% from the first quarter throughput.
And Hawaii, thus far the Q2, Singapore 312 is averaged $14 per barrel.
Over the course of April the largest factor impacting our market indices has been declining European distillate cracks, while the spread between Singapore and Europe has actually narrowed.
Partially offsetting the declining market indices, we expect second quarter average crude to land between $5 50, and $6 versus Brent and approximate $2 per barrel improvement versus the prior quarter.
The retail segment generated another strong financial quarter with growing fuel volumes and expanding merchandise revenues.
First quarter same store sales fuel and merchandise volumes ramped up nicely growing 7% and 11% respectively versus 2022 levels.
The integration of our three store acquisition has gone well and construction is on track for our two new to industry sites.
Billings refinery acquisition remains on track to close on June 1st while early we're encouraged by the recent strong operational performance of the billings refinery. We look forward to working closely with the operating teams and supporting the growth of the axon brand across the Rockies.
Current market conditions are favorable and supportive of our underwriting assumptions.
In addition to billings, we are progressing the Hawaiian project.
We expect strong returns and highlight this is an excellent example of the creativity of our teams to redevelop an underutilized part of our refinery.
We are working off take solutions for our low carbon intensity products and are confident in the strong demand for these emerging fuels.
I will now turn it over to Sean to review our financial results.
Thank you will first quarter, adjusted EBITDA, and adjusted earnings were $168 million and $138 million or $2 25 per share net income during the first quarter was 238 million or $3 90 per share.
Our first quarter GAAP results include a gain related to the settlement of prior year rent of $95 million and positive mark to market adjustment on our estimated rent obligation of $39 million and a gain related to the cash distribution from our upstream affiliate Laramie of $11 million.
The refining segment reported adjusted EBITDA of $153 million in the first quarter compared to $146 million in the fourth quarter.
Finding results include a net price lag benefit of $9 million a product crack hedge gain.
$4 million in Hawaii, partially offset by a negative FIFO impact of $3 million and while.
We have continued our product crack hedging framework in Hawaii for the <unk>.
<unk> <unk>, 20% of our second quarter sales volumes hedged.
At current Singapore cracks, we expect our hedge position to generate a nice tailwind for gross margin captured during the second quarter.
Our logistics segment reported adjusted EBITDA of $18 million for the first quarter compared to $16 million in the fourth quarter.
The sequential improvement was driven by increase in bolt product movements in Tacoma and reduction in maintenance costs in Hawaii.
The retail segment reported adjusted EBITDA of $17 million in the first quarter compared to 25 billion in the fourth quarter.
As a reminder, our record retail segment results during the third and fourth quarters last year were supported by a rapidly declining flat price environment for wholesale gasoline and diesel.
Our street fuel margins moderated during the first quarter as wholesale prices stabilize our retail network continues to generate profitability in excess of our mid cycle expectations.
Corporate expenses and adjusted EBITDA were $19 million in the first quarter compared to a quarterly run rate last year of $15 million.
First quarter expenses include $1 5 million of nonrecurring costs, including consulting engagements and $1 million on research and development related to potential renewable investments.
Pro forma for billings, we expect recurring corporate costs to range between 17 and $19 million per quarter.
Cash provided by operations during the first quarter totaled $139 million net changes in working capital resulted in a $13 million inflow after excluding mark to market activity related to environmental credits.
Cash outflows from investing activities totaled $2 million with $11 million cash distribution from Laramie, largely offsetting capital expenditures of $13 million.
Cash inflows from financing activities totaled $34 million driven by borrowings on our Washington working capital facility.
Altogether, we ended the first quarter with record liquidity of $750 million, including $661 million in cash and 89 million in availability.
In February we completed a comprehensive refinancing of our term debt or the issuance of a $550 million term loan b.
The new seven year credit facility simplifies our capital structure and is expected to reduce our average cost of term debt by 100 basis points.
In April we replaced our legacy asset based revolver with a new ABL facility that will expand from $150 million to $600 million in total commitments at the closing of billings.
With the expanded ABL capacity and over $660 million in cash at the end of the first quarter. Our balance sheet is well positioned ahead of the billings acquisition.
And lastly, with the announcement of the planned renewable fuels investment Hawaii, we are increasing our 2023 capex guidance by $10 million to a total of $70 million to $80 million for the full year.
We expect the balance of the investment of approximately $80 million to be spent throughout 2024 and early 2025.
This concludes our prepared remarks, operator, we'll turn it back to you for Q&A.
Thank you we will now begin the question and answer session.
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Today's first question comes from Matthew Blair of Tudor Pickering Holt. Please go ahead.
Hey, Yeah. Good morning, we'll bill and Sean I Hope Youre doing well I want to follow up on the Hawaii Rd, and Saf project Bill I think you mentioned that you redevelop in an underutilized part of the refinery could you clarify is this expected to be.
Stand alone.
Or D units.
Or is this like more of a co processing arrangement.
And is there going to be any impact on the existing petroleum diesel production at the plant.
And then finally could you talk a little bit about the feedstock mix that you're targeting.
And if you have any idea on what kind of carbon intensity score you might get for this production.
Yes, sure Matthew to be to be very clear, we're taking an existing unit and.
We will be adding some components to that unit and converting.
A distillate hydro treater into use.
Unit that will process vegetable are converted into renewable fuels.
SaaS as well as R&D, and we can flex back and forth between principally between those two products depending on the market conditions.
That that unit.
Should not create any loss profit opportunity because we think we can divert the high sulfur diesel that's going into that unit today and drop that down and produce more jet.
So we shouldn't have a significant change.
Change in the overall production of our conventional fuels at the unit and it should be supplemental.
With respect to our feedstock will you want to cover our feedstock sources sure so Matt with respect to feedstock sourcing.
And I think we've got a range of alternatives for foreign sourced vegetable oils Tallow and then also given our Tacoma logistics footprint, you know the ability to source inland.
Vegetable oils and fats and in other materials, there that would be a good fit for the Hawaii unit again as we referenced the.
$90 million project includes pre treatment and again, our objective is to bring the pretreatment online with the unit simultaneously, which will allow us feedstock flexibility.
Ci scores are going to vary quite a bit depending on the ultimate selection and the economics are around the pricing of those feeds.
Sounds good thanks for all the details and then.
What what do you think the chances are of a dividend in 2024. After you bring billings online and integrate the asset.
Or do you think that'd be pushed out a little bit further due to the spending on the.
SaaS project.
Matthew This is bill I don't think the Saf project will impact our view on capital allocation. It's signet, it's not significant enough to really change how we think about our balance sheet, but I think the key thing is we want to get through billings operate billings for <unk>.
A period of time understand what our working capital requirements are at that point.
And ensure that we fully integrated and have a good sense for the profit generation capability of that unit under our leadership and at that point and only at that point, we start thinking about capital allocation options.
Okay. It sounds good thanks.
Thank you. Our next question today comes from Neil Mehta with Goldman Sachs. Please go ahead.
Hi, good morning, and thanks for taking the time this is nicholas lets around for Neil Mehta.
The first question just on Singapore margins I was wondering if you could provide any additional insight into the weakness we've been seeing and any additional thoughts you can share on the outlook for the remainder of the year.
Yes, Nicole this is bill.
You know its really since the Ukrainian War started I think Singapore margins have taken their cue from European margins, because I think what happened is building up towards the war in natural gas prices started to go up in the European barrel became the marginal barrel and really set the floor and you can almost look at Singapore margins.
They've actually been relatively stable and if anything even in the declines in April they seem to be following the European margin down the east West Arb or the difference between.
Between the price in Singapore, and the price in Rotterdam, if anything it tightened over that timeframe and it's it's fairly efficient at this point and I think looking forward, giving given where the capacity is coming online which is largely in the middle East and then somewhat in the Atlantic Basin I think it is going to continue to be determined.
By what happens in Europe .
We're not seeing major changes in terms of Chinese export activities, which used to be a big factor in Singapore margins they've been fairly stable.
The demand has picked up certainly they've added some capacity.
Last at the last half of last year, and a little bit in the early part of this year, but that doesn't seem to be impacting the margins nearly as much as the factors going on in Europe , and so I think as we think through the remainder of the year, it's largely going to turn on.
The impact of any global economic slowdown the.
The impact of natural gas prices and how those affect in particular European operating costs and then well.
Where the new production that's coming on line in the Middle East goes does it go east of Suez are west of Suez and I think that's going to be determined if you look at pricing today.
Kind of at in different point, where the net backs to those are somewhat indifferent between going to Europe and going to Asia.
Great. Thank you for the color there very helpful.
All up is just on the Hawaii captured I think on the quarter. It was mentioned was closer to 144, 100%.
Can you is there any way to provide a sense of the split in capture improvement from.
From a commercial performance versus the backwardation benefits that you guys are mcwhirter.
Yes, I think nickel at the right the right way to think about it as really over over the long term I still think our target there is close to 100% and so again I think a backwardation benefit in the quarter versus the prior quarter was.
A significant improvement versus where we were in the fourth quarter.
I think the other factor I'd just point out that as a market force that is impacting our captures that freight rates for clean products are higher right now and again I think you can look at you know pre.
Let's just say pre war ultimately youre looking at something that was closer to four to $5 per barrel for delivering refined product into the west coast, the United States and you know today, it's in the eight to $9 per barrel range. So again that is a factor also that is impacting our capture that is market related.
So I think those are the two points I'd make and I still think over the long term, 100% is the right target for you to be thinking about nickel.
<unk>. This is Sean I would I would point you to the <unk> spread that we quote on our IR website.
It improved by a $1 10 quarter to quarter.
Which would have benefited Hawaii and then I'd also call out the product crack hedge gain in my prepared remarks was a $4 million benefit this quarter now the slight headwind last quarter.
Very helpful. Thanks, so much.
Thank you and our next question today comes from Ryan Todd with Piper Sandler. Please go ahead.
Great. Thanks.
In advance of the Billings acquisition can you walk through some of the balance sheet developments, you've had you've got a new upsized the ABL.
You've got a lot of cash on hand, and then you've got the.
The billings acquisition, which should close over the next months, how would you look to fund.
The acquisition of asset and the associated associated inventory in terms of kind of cash versus.
Credit facility and how much cash would you like to carry longer term on the balance sheet.
Sure.
Thanks. This is this is sean.
I'll start with the recent ABL refinancing.
We previously had a 142 $5 million ABL.
We recently took that out with a new $150 million ABL, which will be upsized. The 600 and closing that's really to cover.
Billings inventory in NAR.
That ABL will also sit on top of Wyoming in our retail business.
And so as we think about sort of billings funding on June one we have pre funded the base purchase price of 310 million up to the $30 million deposit. So we have a remaining 280 on the base purchase price.
We're estimating around two and a half million barrels of inventory hydrocarbon inventory to be purchased at close and ultimately the value will depend on the market value of refined products and crude at that time.
But I think the easiest way to think about it as total.
Sort of commitments at June one will be in the $550 million range.
We're estimating $350 million cash use and then 200 million draw on the ABL facility.
Great and then I mean, maybe this is part of what you had said earlier about wanting to take some time to figure out what the requirements are but any thoughts in terms of how much cash you'd like to carry longer term on the balance sheet.
Yeah, I mean, I think we feel pretty comfortable with our liquidity pro forma billings typically we would manage liquidity in the in the $200 million to $250 million range pre billings suspect that will increase as our sort of inventory exposure.
And sort of aggregate exposure to market pricing increases so.
Bob.
I think more to come on sort of target liquidity levels, but I would just point you to a higher than the $200 million to $250 million level that we historically carry.
Okay, and then maybe just one on Laramie, you had a decent distribution from Laramie in the quarter.
With that business shifting the equity method of accounting now, what's what's the right way to think about Conor.
Contributions are distributions.
From Laramie going forward.
Yeah, I would I would expect minimal impact from Laramie based on the current market environment.
And would it suggest that you exclude sort of from your modeling going forward I think any future cash distributions will be evaluated at year end and potential payouts will likely occur sometime next spring similar.
What just occurred in March of this year.
Oh, great. Thank you.
Thank you and our next question today comes from John Royall with Jpmorgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
So could you just talk about the improvement in the landed crude differential in Hawaii $2 per barrel was the it was pretty significant what are what are the drivers. There is it anything about shipping costs or local crude dips or just any color you can provide there would be helpful. Thanks.
Sure John This is will.
So keep in mind in Hawaii. The landed crude diff is 60 to 90 days lag. So when you really think about the <unk>.
Q2 consumption, you're really looking back in the Q1 period. So again I think the biggest factors you saw time spreads backwardation soften up quite a bit.
The Q4 Q1 timeframe and then I think you also saw F.
F O b.
Crude diff softened quite a bit.
Effectively sellers of crude at the load port.
Ultimately.
Impacting and receiving more of the increased freight costs. So because of the two biggest drivers for the $2 per barrel improvement really just time spreads and softening on.
Load port.
Discounts on crude.
Okay. Thank you and then a.
Follow up is on the ERP yesterday, if a project in Hawaii.
You have the project are at $1 50 per gallon of cost.
Is there anything you can provide in terms of expectations and maybe an EBITDA per gallon on a mid cycle basis or anything on.
Earnings or cash flows that are you.
You would expect once you have the project up and running.
Sure. John This is will so I think based on current market conditions and credit prices in.
Feedstock inputs I think we'd be looking at something that's close to a 40% IRR for the project and again, that's part of why we're excited about it and pushing forward with it.
A nice supplement to our existing fuels business.
Great. Thank you very much.
Thank you and our next question comes from Manav Gupta.
With UBS. Please go ahead.
Good morning, guys I think at the beginning of the call. You also highlighted that the billings transaction is not only about the refinery. It's also about associated logistics infrastructure help us slightly better understand once their lead closes how should be give you the incremental benefit of the logistics assets that are coming in as part of the beef.
Okay.
Yes.
Estimating $30 million to $35 million of logistics contribution and if you recall.
We are acquiring seven refined product terminals pipeline infrastructure that feeds into the into the refinery as well as significant tankage position. So it's a nice.
Bolt on addition to our core logistics business.
And just just sort of a reminder, our sort of base mid cycle logistics is that $80 million contribution. So this is a material.
Incremental sizing at 30% to $35 million.
But I think also second question is you have a little bit of a unique system and you know me.
Site into Hawaii market in your refining and distribution system help us understand how the demand is stacking for products on a year over year basis. Because you said you have a unique position.
Hawaii market. So if you could elaborate a little lumpy.
Okay.
This is bill and will can jump in after me correct it but.
Generally speaking on a year over year basis, I'd say demand is up we tend to track first of all just visitor counts and you can see those on a daily basis in the.
The mainland market came back several years ago, and if anything it's well above 2019 at this point.
A lot of the international market ex Japan came back.
In the middle of last year and that was that was really driven by.
Tourists coming in from South East Asia and Australia.
The.
Big group that really hasn't come back yet.
Are the Japanese visitors and there is significant component they tend to stay longer.
There they spend more.
They drive more so where we see factors are.
That Japanese tourist arrival in it while its been trending up it's still 30% to 40% of pre pandemic levels and based on conversations I've had with.
Other participants in the Hawaii economy, I think my view would be it's probably grinding its way back and won't be fully back until the end of this year I think about the holiday season of this year and I think that's related as much as anything to activity in Japan and.
There's also I think a factor is the strong dollar which tends to dissuade Japanese tourists from coming to Hawaii right now, but my our expectations that it will continue to increase and that will continue to drive up demand.
Keep in mind at this point.
And this has been the case for a year the demand factors are driving up the import business, because we're really already producing as much as we can from the refinery and every barrel we produce is going into the local market.
So our focus has been on getting our throughput up to increase that throughput increased the refined products that we're manufacturing and back out some of the imported barrels that we're bringing in.
Thank you for the detailed response.
Yeah.
Thank you, ladies and gentlemen, as a reminder, if you would like to ask a question. Please press Star then one.
Today's next question comes from Jason Gammel with Cowen. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I wanted to go back to the kind of crude tanker.
Price dynamics that are going on you know you mentioned that the.
The higher.
Higher product tanker rates can maybe be impactful to your export.
Economics.
California, but I guess the question is you know I was under the impression that diesel and Hawaii placed on import parity. So I would think the higher rates.
From a product standpoint, or actually a net benefit to the company. So can you just maybe talk about the dynamic and if that logic is flawed.
No Jason I just to clarify your the latter part of your statement was what I was trying to message, which was ultimately that the higher tanker rates are a net positive for our capture in Hawaii, given import parity pricing.
Right great. Thanks for clarifying that and then.
Just talking about the tightening.
Backwardation in the crude market and softening crude tanker rates do.
Do you expect kind of the.
Atlanta crude cost to go back to a historical level in the second half of the year.
Okay.
Yes, Jason I think you know.
Lots of factors moving the market the obviously the OPEC production cut.
Is that is it.
Factoring in the broader macro conditions I think are worth Warren we're following closely but again when you think about it.
Ultimately I think right now we're seeing some softening on the freight side for crude which again is probably.
Something that will help keep us down in the range that we're at today and then I think we need to watch that.
The structure of the time spreads, but again I think we.
We're at a level today, where the current or the Q2 range is probably reasonable again I think you got to watch market conditions may change quickly I'm, just like cracks too. So I think that's probably the most the best guidance I can give you at this moment.
Okay, and then lastly, just on the outlook for turnarounds.
You guys have done a good job of running units are running the plants to capture high margins. This year as you look beyond this year. One is kind of the next major turnaround that you're eyeing for.
For the company.
Yeah.
Sure Jason It's will I think you know again, we've got a clean run in 'twenty three.
And again I think most of the work we're contemplating is going to be in the 2025 timeframe. At this juncture again I think we're still working to firm up some of the schedules and whether there'd be any impact in the second half of 'twenty four right now and again I remind you will come up we'll come out with a schedule for billings once we close and give everybody a sense of.
Where the turnaround expectations are there for that unit.
Alright, Thanks, a lot.
Thank you ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to William Coote for any closing remarks.
Thank you Rocco.
I want to thank everyone for joining us this morning.
We have record financial results, we're certainly not standing still.
In the next few months, we'll be looking forward to closing the highly accretive billings acquisition and also breaking ground on our latest renewable fuel project. Thank you everybody have a good day.
Thank you ladies and gentlemen, this concludes our conference call today and we thank you all for attending today's presentation.
Now disconnect your lines and have a wonderful day.