Q2 2023 Par Pacific Holdings Inc Earnings Call
Good day and welcome to the par Pacific second quarter 2023 earnings call all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to see me Patel Director of Investor Relations. Please go ahead.
Thank you Sarah.
I'll come to par Pacific's second quarter earnings Conference call. Joining me today are William Pate, Chief Executive Officer, Paul months, Liana, President, Sean Flores, SVP, and Chief Financial Officer, Richard Kramer EVP 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.
Subject to risks and uncertainties and actual results may differ materially from these forward looking statements.
Accordingly, investors should not place undue reliance on forward looking statements and we disclaim any obligation to update or revise them.
I refer you to our investor presentation on our website and to our filings with the SEC for non-GAAP reconciliations and additional information.
I'll now turn the call over to our Chief Executive Officer, William Pate.
Thank you Ashish.
Good morning to our conference call participants.
This quarter was an exciting period in our company's growth, we made progress on many strategic objectives and reported excellent financial results second.
Second quarter, adjusted EBITDA was $151 million and adjusted net income was $1 73 per share.
While the market continues to be supportive of our business. Our financial results were attributable to solid commercial and operational execution at each of our business units.
We closed the billings acquisition on June one and welcome to the par Montana team to our organization.
Initial performance has been very strong with June operational and financial results well above our acquisition forecast.
As previously noted success in billings depends on improving reliability, our confidence is growing that the billings refinery will exceed our acquisition case, which assumed 50000 barrels per day of throughput.
Our Montana team has identified numerous projects to improve mechanical integrity utility and infrastructure improvements and other important elements of reliability.
Or generally small capital high return projects.
The June results demonstrates that improve reliability drives significant site profitability.
We also made considerable progress on our renewables initiative.
The Hawaii Distillate Hydro Treater conversion project is progressing well and we continue to advance engineering on the Tacoma Saf Green hydrogen project.
The third quarter is shaping up to be another strong quarter global inventories tightened in July due to solid demand for refined products.
As a result market cracks have been improving throughout the first half of this quarter.
We're also benefiting from growing local demand.
Our retail units posted exceptional same store sales growth during the second quarter illustrating the strength of our franchises and overall market growth.
June 30th liquidity of $464 million reflects our strong capital structure.
During the quarter, we were able to fund the billings acquisition with cash on hand, and availability from our new asset backed loan facility.
Since the closing we have steadily reduced our debt and rebuilt our liquidity.
Before wheel covers our commercial and operational performance in more detail I also want to note that the board of directors has authorized management to repurchase up to $250 million of common stock.
At this stage in our company's evolution, we will use this authority opportunistically as we have sufficient liquidity to achieve our ambitious growth objectives, while also repurchasing common stock at attractive prices.
Now I'll turn the call over to will.
Thank you Bill.
The refining and logistics business units delivered a strong quarter executing planned maintenance sufficiently and achieving excellent throughput.
Bind throughput of Hawaii, Washington, and Wyoming resulted in record quarterly throughput of 142000 barrels per day.
In addition, the billings team delivered a strong initial contribution with total crude charge of nearly 63000 barrels per day for the month of June .
And Hawaii second quarter throughput increased 84000 barrels per day.
<unk> costs were $4 33 per barrel.
The Singapore index averaged $13 72 per barrel during the quarter and our landed crude differential was $5 29.
Slightly better than our guidance.
This resulted in a combined index of $8 43 per barrel.
<unk> to the combined index was approximately 143%.
Selecting continued price lag benefit in a falling crude price environment.
Both freight rates low levels of backwardation, and a modest product crack hedge benefit.
And Washington second quarter throughput was 41000 barrels per day and production costs were $3 98 per barrel.
M W index averaged $25 per barrel during the quarter.
Captured declined to 25%.
And a greater than $5 per barrel tightening of WCS crude differentials during the period as well as asphalt and VGL weakness.
And Wyoming second quarter throughput was 17000 barrels per day and production costs were $8 30 per barrel.
Slightly elevated due to minor planned maintenance.
U S. Gulf Coast Index was $21 65 per barrel during the quarter.
Wyoming capture was approximately 95%, including a negative FIFO impact of $3 million, partially offset by Rockies regional strength.
And finally, Montana production costs totaled $8 seven per barrel, reflecting the strong June throughput.
Like our Wyoming location, we plan to use the U S Gulf Coast Index as a benchmark for the Montana location.
Index averaged $23 20 over the course of June and capture with 134%, reflecting strong regional Rockies differentials to the Gulf Coast.
Like Wyoming, Montana capture is highly seasonal.
Looking ahead to the third quarter, we expect Hawaii to run between 83, and 88000 barrels per day, Montana between 52 and 57.
Washington between 40, and 42 in Wyoming between 17, and 19000 barrels per day.
Due to unplanned downtime during July of our Hawaii reformer unit, we expect a margin impact of $1 50 to $2 per barrel.
We expect our third quarter, Hawaii crude differentials to average between $5 and $5 50 per barrel <unk>.
<unk> flat to the prior quarter.
In total we expect systemwide throughput of approximately 200000 barrels per day or 92% utilization.
Our retail segment generated another strong financial quarter with growing fuel volumes and expanding merchandise revenues second.
Second quarter same store sales fuel volumes and merchandise revenue ramped up nicely growing 11% and 12% respectively versus the 2022 levels.
These same store sales reflect rebound in Hawaii economic activity as well as the growing strength of our Hurley and non brands.
The successful execution of the billings transaction reflects months of planning and coordination.
I'd like to congratulate and thank the entire par, Montana and par Pacific team for driving a well planned operational integration.
We pride ourselves on crisp integrations and this was another great team effort.
Our initial time on the ground in Montana is largely confirmed our initial assessment.
We believe we will optimize operations and achieved the initial synergies as well as consistently moves throughput above our baseline.
With respect our renewables initiatives.
In July we began trial runs for our Tacoma co processing operation less than $2 million project reduces our RVO exposure and we expected less than one year payback period.
We have started fabrication on our previously announced Hawaii Saf project and.
And we also continue to dedicate time and resources to scope and a larger co located green hydrogen and Saf facility at our Tacoma refinery we.
We expect to make a final investment decision on this project early next year.
I'll now turn it over to Sean to review our financial results.
Thank you our second quarter, adjusted EBITDA, and adjusted earnings were $151 million, and 106 million or $1 73 per share.
The refining segment reported adjusted EBITDA of $129 million in the second quarter compared to $153 million in the first quarter.
We got off to a strong start in billings generating adjusted EBITDA of $43 million during the first months of our ownership.
Our second quarter refining results included $12 million benefit in Hawaii for price lag in product crack hedging, partially offset by a negative FIFO impact in Wyoming, a $3 million.
We have continued our product crack hedging framework in Hawaii for approximately 25% of our third quarter sales is it a $15 per barrel premium to Brent.
Our logistics segment reported adjusted EBITDA of $26 million in the second quarter compared to $18 million in the first quarter. The sequential improvement was driven by increased marine throughput in Hawaii, and Washington, and a $3 million contribution in June from the Montana logistics system.
The retail segment reported adjusted EBITDA of $18 million in the second quarter compared to $17 million in the first quarter through the first half of the year, our retail businesses generated $35 million and adjusted EBITDA compared to $15 million during the first half of last year.
As will mentioned our strong retail earnings were supported by growing same store sell volumes and merchandize revenue.
Corporate expenses and adjusted EBITDA were $22 million in the second quarter compared to $19 million in the first quarter.
Our second quarter expenses included $3 million related to our renewables development and other onetime costs.
We advanced engineering on our renewables project in Tacoma, we expect to incur an additional $2 million to $3 million per quarter above our baseline corporate expense guidance of $17 million to $19 million.
Cash provided by operations during the second quarter totaled $173 million net changes in working capital resulted in a cash inflow of $88 million, primarily driven by the initial build and trade payables at par Montana.
Cash outflows from investing activities totaled $624 million. This includes $280 million for the remaining billings based purchase price is $328 million for the billings hydrocarbon inventory and other working capital items.
Cash outflows from financing activities totaled $20 million in the quarter driven by repayments of borrowings on our Hawaii deferred financing facility.
Second quarter, ending liquidity was $464 million, including $191 million in cash and $273 million in availability.
Concurrent with the billings acquisition, we completed the upsize of our asset base loan facility, increasing total bank commitments from $150 million to $600 million.
Strong cash flow from operations during the quarter allowed us to pay down the ABL from $215 million on June 1st to 41 million on June 30th.
Total gross debt was $595 million at the end of the second quarter, an increase of just $45 million from our pre acquisition levels.
And lastly, with the billings acquisition closed we are increasing our 2023 capex guidance by $20 million. So a total of 90 to 100 million for the full year.
This concludes our prepared remarks, operator, we'll turn it to you for Q&A.
Yeah.
Thanks, Yeah, we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Anytime you question has been addressed and you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Matthew Blair with T. P. H. Please go ahead.
Hey, Yeah, good morning, Bill willing and Sean how are you guys.
Great Hey, Matthew.
The initial contribution from the billings refinery appeared quite strong which causes it to unusual for for a June period.
But could you walk through the major drivers for US and were there any one time benefits that we should be aware of and then finally when do you think the next major turnaround will be scheduled for billings.
Sure. Matt This is will ill take the operational aspects and then let Sean address some of the financial.
Components.
I would say overall the biggest drivers of strong throughput again, I think we were able to really run it match rates through the crude unit in the FCC, where we're able to feed additional crude into that unit.
So again I think saw strong performance from the team there right out of the gate I think we are also you know an above mid cycle margin environment for both Gulf coast cracks as well as the Rockies regional differentials.
And then ultimately the feedstock inputs for Canadian heavy barrels as well as the light barrels that we run where I would say in line with our.
Acquisition model. So again I think it was really a combination of.
Strong operations from the team and above mid cycle environment.
With respect to the turnarounds, we do have planned turnaround activity in 2024, I would expect it to be about a 30 day.
Outage I think one thing I'd point out for you in billings that's unique is again.
Even when we have certain units down we're unlikely to take total crude charge down to zero. So again, we're able to feed crude to the cat unit.
And so ultimately it's going to be a little bit different than our other facilities, where we have plant wide outages. John do you want to take any onetime aspectual financial yes.
Yes, I think we'll hit on most of the financial components, Matthew I know you track the Rockies market pretty closely I think we saw.
Both Rockies gasoline and diesel.
Peak in June both were very favorable to the Gulf coast. They remained strong but it likely has peaked in June .
Great. Thanks for all the color and then.
The next question might be for Bill.
Talking about raising the buyback authorization to $250 million, you mentioned that it would be an opportunistic approach could you talk about your current opportunity set and how you view it between M&A buybacks.
Buybacks and a potential dividend.
Sure Matt.
We obviously focus on our avenues of growth first and when we think about growth as will mentioned, we think there's a real opportunity just investing in reliability. You'll note that we were projecting.
Throughput at 92% of system capacity by investing in reliability over time, we think we can get that number up there's opportunities and we demonstrated in the past in Hawaii, and we think there's significant opportunities to run the way we did in June kind of year round and in.
Montana with the with some investment in addition to that we'll also be looking at building out our logistics system.
We also continue to grow our retail system, we've got a couple of new to industry.
Site that will be opening this year, one in Hawaii and one in Washington.
And then of course, we'll be investing in renewables around our existing footprint.
In addition to that I mean, obviously, we're looking at extending into other communities within our market, but that's not something that.
We really look at unless unless an opportunity pops up.
And we will take all of that into account and at the same time give consideration to.
R R.
D to repurchase our stock as well.
Great. Thanks for all the color and congrats on the strong results.
Thank you.
Our next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Yeah, they'll team I'll add my congrats to you and it was really strong start to the year.
It leads to my first question, which is you've talked about a mid cycle view on a free cash flow per share or EBITDA basis. In the past can you talk about how that view is evolving in light of execution and the margin environment and how it how can we frame what a blue sky could look like for the business a couple of years out.
If you continue on this trajectory.
So I think I think one way to think about it Neil is.
The mid cycle that we quoted was kind of based on a 15 19 average and it was also based on an acquisition pace and billings of 50000 barrels a day.
We've noted in the past that if we can get our utilization our throughput up and built by 1000 barrels a day I think that added close to 10% of the net present value of our evaluation of a billings or close to $30 million and net present value. If you think about it in the context of the purchase price for the steel so theres a real.
Opportunity for growth.
Associated with getting our throughput up and we've increased our throughput in Hawaii and that actually adds value as well I think the.
Averages as well if you think about that 15 19 average we've improved our capture in Hawaii and I don't have the number in front of me, Sean may have specifics pretty materially over that average as well.
I think that that also was we took that into account in some extent, but I think we're actually capturing more.
Value in Hawaii than we did.
When we quoted that through that mid cycle. So I think there is improvement on the to summarize improvement on the Hawaii side improvement on the Montana side looks very achievable and within our control and then overall, we'll wait and see what the market gives us.
That's great and then that's the follow up is just talk about Hawaii, It's a unique market, it's a niche market it's tied into it.
It's tied into Singapore, where there's been some strength in many margins here just what are you seeing on the ground. There how should we think about the back half outlook for for that that Hawaii business.
The Hawaii business.
It's strong and it's been it's been stronger in the second half of the year I think as you noted the first half of this quarter, we have seen improvements.
Now that there's a major change in Singapore cracks other than just following global cracks, Singapore, it's been right up against the Arb.
With Europe , and so new capacity, that's been coming online has generally been flowing west to Europe .
And the inventories in Singapore continues to be very tight frankly inventories globally are tight and so I think local products local production tends to be.
Be directed toward local supply.
<unk> have opened a couple of new refineries in the last nine to 12 months, but those tend to be highly oriented towards the pet Chem market.
What are their more recent highly complex refineries I think it was 400000 barrels a day, but only 50000 barrels a day was actually go into transportation fuels. The rest was routed for pet Chem and I think one of the things. We're seeing is a fairly significant divergence between naphtha, which is flowing into the pet and market in fairly weak in the.
Transportation fuels in Asia, which and that spread probably about as wide as we've seen in terms of if you just think about the gasoline naphtha spread in Asia.
And I think that's a reflection of relatively strong demand for transportation fuels in Asia and in somewhat of a weakening demand in the pet care market, which is driving naphtha prices are creating a glut of naphtha in the in the global market.
Bill if you could build on that what how that ties into Hawaii, whether in the basis that you see in hone.
Why relative to Singapore.
Sure well I mean again, we generally are producing transportation fuels for our local market. So we're somewhat insulated from the naphtha market I mean, we do on occasion get little linked and we export and that'll.
That'll that'll happen periodically where we have a bulk sale naphtha, but for the most part we're focused on.
Using our reformer and our other upgrading capacity to take all of our intermediates convert those into transportation fuels and or supplying the local heating fuel market or the energy market. The electricity market. As you know there is fueled by fuel oil. So we're in pretty good shape and tend to it tends to enhance our capture.
Relative to the Singapore market.
Thanks, Tom.
Our next question comes from James Larkin with Piper Sandler. Please go ahead.
Hi, Good morning, this is Jamie <unk> filling in for Ryan Todd.
Hey, good morning, Jimmy.
So I guess just continue on our Hawaii, we've seen the Atlanta deaths.
Following over the last couple of quarters, what do you guys see as like maybe the outlook in the back half of the year kind of going forward into 2024 for those.
And the differentials.
You want to cover that will sure.
So Jimmy I think.
No Youre correct keep in mind that the.
Wide crude differentials operate on probably a 90 day lag so the market conditions that were in effect.
And the 90 day period prior to the third quarter is really what's showing up in our financials. So I think in general that's.
I would say the second.
Second quarter was a period of time, where you probably saw some access physical crude blinked out there and overall backwardation was relatively narrow.
And ultimately we it was a good opportunity to buy in some crude and drive that dip down into the low fives.
I think yes, obviously the market has changed I think as you think about the Saudi production cuts that have impacted both medium sour and heavy barrels quite a bit I think.
Probably most notable would be the fifth.
Deferring that unique relationship where you're actually seeing Dubai barrels traded a premium to the dated Brent which is quite unusual given the quality differences, but it tells you where the world is today.
So again I think youre looking at a probably a tighter crude market in the back half of the year than where we've where we've sat.
And obviously very dynamic.
And I think we'll continue to remain flexible on our crude purchasing.
And ensure that we balance.
And get the right barrels ended at the best price so.
Thank you.
Probably the best guidance I can give you on the crude market and the factors to watch.
Sure. Thank you and then turning back to Montana really quick so the capture was 134% in the quarter.
I know you said that this is highly seasonal and obviously you know Rockies has been quite strong and.
I'm just wondering you know with WCS kind of rebounding, even if we see Rockies moderate what have you guys you know.
You updated your kind of base case acquisition for throughput have you made any upper.
Updates to kind of where you expect capture just based on that.
Hey, Jim it's Sean.
I think our Montana capture long term outlook is 100% to 115% range versus the Gulf Coast 321.
130.
4% captured in June and I would just refer to the comments I made about Rockies cracks relative to Gulf Coast, we saw.
Gasoline trade north of $20 per barrel premium to Gulf dose in June and diesel was $40 per barrel premium I think since then.
Gasoline traded off in the Rockies by about five Bucks.
Relative to Gulf Coast, and diesel north of $10. So still very very strong cracks, both Gulf coast and Rockies, but I think we're.
I think June was the peak.
Okay.
Great. Thank you.
Okay.
Your next question comes from Jason <unk> with Cowen. Please go ahead.
Hey, good morning.
Sticking with sticking with the billing assets, so just to clarify one.
Is 55000 barrels a day a good kind of base case number.
Moving forward on throughput and then can you talk about opex as well moving forward.
$8 a barrel I think is below the acquisition case up $10 a barrel what drove the difference in that $8. A good number to think about moving forward.
Sure Jason it's will.
We gave you the third quarter guidance, which is $52 57, So I think 55 at the midpoint.
Is reasonable based on.
Where we sit today on the Opex side, the $10 per barrel number was based on a 50000 barrel per day throughput number. So I think the majority of the improvement was really just driven by increasing the overall throughput so.
We're down in the 55 range Youre, probably in the middle there is probably the right way to think about it so not a lot of.
Variables, there that moves with the incremental throughput. So obviously another factor when you think about the value we see in driving throughput up into the into the low sixties.
Great.
And then my follow up.
Going back to Hawaii, it's been a beneficiary I think of elevated product tanker rates.
Can you talk about the outlook for those rates moving forward have you seen them come come off at all what's been what's been driving the strength so far in the first half of the year and your outlook for the second half.
Sure.
So I think on the product tanker side, yeah, you've probably seen.
I'll lump sum movement of EMR ship from let's call It Asia and to the West Coast, probably peak in those three to $3 $5 million range, probably hovering around $2 million today, it's been there for the last couple of months. So it's been stable in that range, which is still.
Elevated relative to history.
So again I think thats.
Generally what we're seeing in them overall.
Ultimately the price lag impact that we saw we've had three quarters in a row of benefit of declining CRU.
Crude oil prices as well as compressing diesel cracks and as we've talked about the third quarter right now you've got quite a bit of strength on both crude and diesel cracks expanding so which is fundamentally positive for our business, but just keep in mind as you think about the capture dynamics that as a factor that's been a tailwind for us for the last three quarters.
So again, that's going to move quarter to quarter, but overall.
Still I think have very strong capture rates in Hawaii.
Do you have a sorry just to follow up on that do you have a rule of thumb how to convert that went out the $2 million in tube into a dollar per barrel.
As we think about the Hawaii benefit.
I mean, I think it's embedded in the capture percentages, Jason So I wouldn't give you a idiosyncratic rule of thumb.
0.2, I think there's so many pieces moving I think we're trying to get you to.
A single point.
Ultimately takes into account all the moving pieces that are.
And play.
Alright, great. Thanks, a lot.
Our next question comes from John Royall with Jpmorgan. Please go ahead.
Hi, Good morning. This is Alejandro Macondo on for John Royall.
We were just wondering well any of the working capital impact from billings, a reverse in future quarters.
Hi, there it's Sean.
We saw a positive working capital impact in June in Montana, I mentioned that in prepared remarks, I'm not expecting a reversal of that in Q3, if anything I think we could see incremental benefits I think most of the.
Our working capital cycle flush out in June .
Okay. Thank you and switching gears can you just provide an update on how the Laramie business is performing year to date and the expectation of a dividend and the first quarter of next year.
And how do they think about holding versus trying to monetize the stake with where gas prices are today.
Yes.
Yeah. Thanks for that question <unk> continues to perform well I mean, obviously gas prices have come off but they've got pretty good hedges in place, which ended the blunt some of the.
Some of the cash flows when they peaked last winter and the supporting the business now.
As I've mentioned in the past the distributions are probably less of a function of where gas prices are in more of a function of whether we're drilling and.
And we don't have a rig in the field right now we are completing some wells and that's going well. So I expect some production to come online for for the winter.
But with the lack of any development drilling in.
In 'twenty three I think the expectation is there would be a dividend next next spring.
Got it thank you.
Yes.
Okay.
Our next question comes from Manav Gupta with UBS. Please go ahead.
Hey, guys in the opening comments you mentioned some opportunities around.
Green hydrogen can you talk a little bit more about what kind of opportunities in <unk>.
Group here that can give in terms of green hydrogen sourcing.
Yeah. So manav. Thanks for the question, where we're assessing an opportunity in Washington at our Tacoma facility.
Using hydropower and partnering with the local municipal utility.
And we would be using that hydropower too.
Drive, an electrolyzed or to generate hydrogen, which then would be used to supply the hydrogen necessary for a sustainable aviation fuel facility.
Just because it's on track.
Given the given the cost of the hydropower.
Just a clarification on the Electrolyze. It include operate Electrolyze. It you would do that or would you hire somebody to do that for you.
We're still assessing that we will certainly be an equity participant in that Electrolyze here, we may bring in a partner, we're still considering our options with respect to the development there, but it is on our property and it would be adjacent to a sustainably aviation facility fueled facility and we'd be operating.
Operating both units.
That is absolutely great to hear because we do think that in the sort of scope for green hydrogen eventually for you know sustainable aviation fuel don't even Rd.
Glad you are taking the.
Leadership role in that.
Have a quick follow up for you billings also added some logistical assets. So how should we think about the logistics segment EBITDA run rate going forward.
Cover that Sean, Yes, Hey, Manav, it's Sean.
Signaled $35 million of logistics contribution from from the Montana system and that includes the refined product terminals, our crude pipeline and the refined product pipeline that runs from billings to eastern Washington.
Thank you so much.
Okay.
Our next question is a follow up from Jason <unk> with Cowen. Please go ahead.
Yeah, Hey, I just wanted to ask about the status of the Hawaii SAP project I know you've laid out.
Return metrics.
On the last call just wondering how if if.
Those metrics are still fair to think about as you're progressing the project and specifically how youre thinking about.
Cid acquisition. Thanks.
Sure. Jason This is bill I think the return ranges that we gave you in the past I think still hold today. So again I think we're targeting an IRR in the 40% range.
And ultimately where we're targeting to sequence, having the Saf plant online.
Online in 2025 in conjunction with our Hawaii broader plant turnaround.
So again, a lot of work going into that today on feedstock sourcing.
Again I think.
We think we are in an advantaged location.
Largely because of the oilseed opportunity in the state of Hawaii, and then also.
We believe we've got some advantages in sourcing.
Waterborne feedstocks from <unk>.
Latin America. So again I think that's ultimately going to be the solutions that we're thinking about for our feedstock strategy is and why overtime.
Got it thanks.
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 Sarah and thank you to everybody for joining us today I want to congratulate our team on an excellent quarter. There are a lot of opportunities within our portfolio and we look forward to sustained future growth of our earnings profile have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.