Q3 2023 Par Pacific Holdings Inc Earnings Call
Good morning, and welcome to the par Pacific third quarter, 2023 earnings conference call.
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And now I would like to turn the conference over to a shimmy Patel director of Investor Relations. Please go ahead.
Thank you Maher Lisa welcome to par Pacific's third quarter earnings Conference call. Joining me today are William Pate, Chief Executive Officer, four months, Leann, President Sean floor, as SVP, and Chief Financial Officer, and 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 will.
I'll now turn the call over to our Chief Executive Officer, William Pate.
Thank you Ashish.
We're pleased to share outstanding third quarter results with you this morning.
Key highlights include record earnings and improved capital structure and achievement of our principal billings integration objectives.
We reported record quarterly adjusted EBITDA of $256 million.
The accretive impact of billings was illustrated by our third quarter adjusted net income of $3 15 per share 10% above the comparable result in 2022.
This was our first full quarter of ownership of the billings refining and logistics system, which contributed quarterly adjusted EBITDA of more than $85 million as.
As previously noted our principal acquisition objective is to increase annual throughput through consistent reliable operations.
In this regard we exceeded our acquisition target of 50000 barrels per day with quarterly throughput above 55000 barrels per day.
We are also well ahead of our acquisition synergies target due to commercial activities and corporate overhead reductions.
Our other refining and logistics units recorded strong profits due to solid operational execution and favorable market conditions.
Right the pressures of rising wholesale prices on street margins, our retail system continued to post excellent same store sales growth and strong profitability.
Across the board our team continues to exhibit near flawless operational and commercial execution.
With the strong earnings we also improved our capital structure.
During the quarter, we were able to build liquidity reduced debt and refinance one of our intermediation facilities, while also repurchasing $27 million of our common stock.
We have also retired all prior year rent obligations.
At this point, we have a strong balance sheet with limited financial obligations other than investing in our base assets and pursuing our strategic growth initiatives.
On the growth front, we are focused on low cost high return renewables projects.
And Tacoma, we successfully tested our co feeding operation and we're also moving forward with the engineering of our green hydrogen and S. A F units in.
In Hawaii, we remain on schedule with our renewable fuels project.
Overall, we continue to invest and expand in this critical sector aligning with our long term sustainability goals.
As we enter the winter distillate cracks continue to be strong across our markets and gasoline cracks have declined with the conclusion of the summer driving season.
While our Rockies markets remained well above Gulf coast cracks billings in Wyoming have strong seasonality profiles due to the winter decline in upper Rockies demand. However, the strong distillate orientation of our Hawaii operations will continue to reduce our sensitivity to winter seasonality.
And it leaves us well positioned for the winter quarters.
I'll now turn the call over to will to provide a detailed analysis of our commercial and operational performance.
Thank you Bill.
Finding logistics business units delivered strong asset reliability during peak season, driving a record quarterly financial contribution.
Total throughput was 198000 barrels per day, which included a full quarter contribution from billings of 55000 barrels per day.
And Hawaii third quarter throughput was 82000 barrels per day.
Production costs were $4 50 per barrel.
Really Singapore index averaged $23 39 per barrel.
Our landed crude differential was $5 50 per barrel consistent with our guidance.
We expect our fourth quarter, Hawaii crude differential to average between $6 and $6 50 per barrel.
Third quarter capture for the combined index was approximately 75%.
Reflecting unfavorable price lag crack spread hedging and previously mentioned performer maintenance.
And Washington third quarter throughput was 41000 barrels per day production costs were $3 77 per barrel.
BMW index averaged $35 per barrel during the quarter.
Capture improved to 35%, reflecting a reversion to the typical capture range, despite rising prices impacting asphalt net backs.
Wyoming team set a quarterly throughput record of 19500 barrels per day, driving production cost to $6 46 per barrel.
Quarterly U S. Gulf Coast Index was $29 $60 per barrel and Wyoming capture was approximately 125%.
Adjusted gross margin result includes a favorable FIFO impact of $13 million and strong seasonal rockies market conditions versus the Gulf coast.
On pain of throughput was 55000 barrels per day and production costs totaled $10 83 per barrel, which was elevated by approximately $1 25 per barrel due to coker maintenance.
Captured through our Gulf Coast Index was 89% slightly below what we would expect in the seasonally strong third quarter due to reduced asphalt and secondary product net backs and a rising price environment.
Four months into our ownership of the billing system, whereas excited as we were on day. One we're pleased with the operations and commercial execution resourcefulness creativity and dedication of the operations and commercial teams have been excellent.
Total synergies are exceeding initial expectations and we remain focused on improving plant reliability.
As you can see from the team's strong operational results. The plant is more than capable of running above 50000 barrels per day.
Our objective is running consistently above 60000 barrels per day.
Looking forward, we are laying the groundwork for delivering consistent reliability.
When we made the billings acquisition, we guided to amortize turnaround expenditures of approximately $20 million per year.
Given a five to six year turnaround cycle. This implies approximately $120 million over the course of a cycle.
During 2024 and 2025, we expect the turnaround all major units broken down roughly between the two years.
During the 2024 turnaround, we will also be making $25 million of capital investments to improve reliability.
Based on modest improvements in reliability. These investments should result in a one to two year payback and mid cycle margin conditions.
The retail segment generated a strong financial quarter with growing fuel volumes and expanding merchandise revenues.
Third quarter same store sales fuel volumes and merchandise revenue grew 9% and seven 7% respectively versus 2022 levels.
We also recently opened our first new to industry site and the Spokane market and initial results are promising.
In addition, we have one new site coming online during the fourth quarter and Hawaii.
For the fourth quarter, we expect Hawaii to run between 83, and 88000 barrels per day on Panama between 47, and 50000 barrels per day in Washington between 38% and 40000 barrels per day in Wyoming between 16, and 18000 barrels per day.
As we look across our capital project portfolio, we see many high return projects that will allow us to consistently deliver annual throughput of 200000 barrels per day or more.
In addition, we are progressing our renewables initiatives.
<unk> project remains at the forefront and we expect the renewable fuels units come on line in 2025.
The majority of long lead equipment items have been ordered and returns continue to look robust on the project given the attractive low capital conversion cost of less than $1 50 per gallon of capacity.
I'll now turn it over to Sean to review our financial results.
Thank you, we'll third quarter, adjusted EBITDA, and adjusted earnings were $256 million and $194 million or $3 15 per share.
The refining segment reported record quarterly adjusted EBITDA of $234 million in the third quarter compared to $129 million in the second quarter.
Our third quarter refining results included an unfavorable price lag impact of $22 million and our product crack hedge loss of $26 million in Hawaii, partially offset by a $13 million FIFO benefit in Wyoming, we have.
Continued our crack hedging framework in Hawaii with approximately 25% of our fourth quarter sales hedge a $22 per barrel premium to Brent.
Our logistics segment reported adjusted EBITDA of $29 million in the third quarter compared to $26 million in the second quarter. The sequential improvement was driven by increased throughput across our system and a full quarter contribution from the Montana business.
The retail segment reported adjusted EBITDA of $17 million in the third quarter compared to $18 million in the second quarter. Despite rising wholesale prices are stores generated strong profitability on growing fuel volumes and merchandise revenue.
Cash provided by operations in the third quarter totaled $269 million net changes in working capital resulted in cash inflow of $70 million most of which we expect to reverse during the fourth quarter.
Cash outflows from investing activities totaled $6 million, including capital expenditures of $23 million and an inflow of $13 million related to the final working capital settlement with par Montana.
Strong free cash flow during the quarter drove record ending liquidity of $778 million.
With gross term debt at the midpoint of our stated target of $500 million to $600 million, we're focused on streamlining and reducing our cost of working capital during the quarter. We closed a $120 million letter of credit facility that will support our Hawaii refinery.
Youll see facilities to reduce our crude funding costs by approximately $3 million per year or <unk> <unk> per barrel.
In early October we terminated the intermediation agreement at our Washington refinery and increased our ABL capacity from 600 million to $900 million.
The Washington, working capital folded into the ABL, we expect to reduce annual funding funding costs by approximately $6 million or <unk> 40 per barrel.
Our expanded ABL facility now supports all three mainland refineries and our retail business.
Through the end of October we have repurchased $37 million or one 1 million shares at an average price of $33 44.
As we head into the new year, our balance sheet is well positioned to achieve our strategic growth objectives, while opportunistically repurchasing our common stock at attractive prices.
This concludes our prepared remarks, operator, we will turn it back to you for Q&A.
Okay.
Thank you very much we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Ryan Todd from Piper Sandler Ryan. Please go ahead.
Great. Thanks, maybe starting out I mean margin capture was was solid and the numbers look good in the third quarter can you talk about some of the moving pieces as we think about as we look at the fourth quarter.
WCS differentials have widened out quite a bit you gotta reformer back up and running and secondary product trends, particularly in basketball. So how should we think about directional trends in margin capture as we look as we look into the fourth quarter.
Yeah. Thanks. This is a this is Sean I'll I'll hit each region separately I think starting in Hawaii, we would reiterate our guidance of 100% capture over the medium to long term.
As you noted we.
We booked a pretty sizable headwind on price lagging crack hedging in the third quarter and then we also had the reformer activity I think when you back all that out of the Q.
Q3 capture it would imply about 120% gross margin capture in the third quarter. So.
We still feel very good about a 100% guidance in Hawaii, given the moving pieces there.
For Tacoma, we've guided towards mid 40% capture obviously, the WCS widening out will be a boost in the quarter.
And I would also point to the sort of headwinds that we're continuing to see in the secondary product market, namely asphalt.
In Wyoming, and Montana, I think bill and we'll both mentioned the seasonality of both of those businesses.
Not unusual to see capture in the 60% to 70%.
Our range in Q1, and Q4, although I will say the upper Rockies Mark.
Really Spokane billings Missoula.
<unk> quite well quarter to date, so I suspect the Montana capture will hold in a bit better than Wyoming.
Okay. Thank you that was that was really helpful and then.
On free cash flow generation was strong with the quarter.
Supporting both debt reduction and share buyback.
As we look forward can you talk about.
How you think about priorities for the use of cash going forward is there is there more debt reduction that we should anticipate and then how do you look at a balanced and shareholder returns and growth capital going forward.
Hey, Ryan this is bill.
Certainly as I mentioned in my prepared comments, we have a balance sheet at this point, where we've got a lot of flexibility.
We really have minimal obligations with respect to financial needs. So the question really is how do we have that want to invest in growth and when we think about share repurchases. We really look at that as another opportunity to invest in it as an opportunity to invest in our own company and so I think what Youll see is if the market's weaker we're probably you are probably going.
See us investing repurchasing more equity over time and as the market strengthens youll, probably see less of that and then we will continue to pursue our strategic growth initiatives and that's everything from some of the retail locations that will mentioned.
That are proving to be quite successful to investing in our refineries to improve reliability. We continue to be in markets that are short product and so improvements in reliability translate directly into profitability for us at this point.
Obviously, we'll be looking at strategic opportunities to the extent that they are apparent in available within our existing markets.
Perfect. Thanks Bill.
And our next question comes from Matthew Blair from T. P. H Matthew you May proceed.
Thank you congrats on the strong operations in Montana could you talk about what Youre doing today to run it at 55000 barrels per day.
The original target of 50, and then moving up to the 60 Mark.
Could you give any sort of examples of our projects.
Projects, they'll be implementing or things will be changing in order to raise production further.
Sure. Matthew This is will so I think as we've demonstrated I think you saw the June results. We were above 16, and you can see for the quarter, we averaged 55 and so that I think the story in Montana really is not at all.
Mechanical availability right. We can we've demonstrated we can run the plant and the <unk>, it's really about doing it reliably and in through the season.
So again, our focus is not so much on expanding the capabilities at the facility, but focusing on.
Identification of areas that have been reliability challenges in the past, we've experienced unplanned outages and so this could be everything from.
Really improving I'll just call it the design of certain pieces of pumps and compressors to muddling up certain units that we think will reduce corrosion risks so.
Again, a lot of this comes down to.
Not necessarily reengineering the plant so you get more throughput, but really making sure we just experienced fewer unplanned events.
Okay.
Sounds good and then on the retail side same store volume number of eight 6% year over year, It was pretty eye popping.
You talk about what what's driving those gains.
Sure sure Matthew It's will again, so I think it's a it's really two.
Two factors I would point to I think in Hawaii, Youre still seeing us lapping some softer comparable periods in the in the 2022 timeframe, where Hawaii at least was still somewhat impacted by Covid. So it was a little bit slower to come out in the mainland.
So again, I think youre seeing some benefit on the macro side.
They're for Hawaii.
Some product to that market and then I think secondary.
Secondarily on the mainland.
Rebranded.
All of our stations and the Pacific Northwest region, and and I think we're seeing a nice response and I think are growing at an attractive brand in that region. So.
I think both markets are growing nicely.
And I think those are the two major factors driving the attractive and consistent same store sales growth that we've been delivering.
Great. Thanks for your comments.
Okay.
Yes.
We have a question from John Royall from J P. Morgan John go ahead.
Hi, good morning, Thanks for taking my question so.
So was hoping for your view on refining in China.
We've been reading there potentially been some run cuts there and I know there are limits on crude imports right. Now do you expect that to tighten up the supply market in Asia, and just any thoughts on your outlook for the product market measure would be helpful.
Hey, John This is bill certainly the.
The run cuts in China, which I think are related to crude imports as related to export quotas, but ultimately just related to how the.
The economy is managed and what you've seen there is consistent with some of the conversions I think.
<unk> had a number of larger new refineries come online in the last three years to four years, they're all really integrated into the petrochemical chain and then at the same time, you've seen closure of blending facilities and teapot simpler refineries and as a result.
Theres been a balanced production change with respect to transportation fuels and a fairly significant increase in terms of feedstock for the petrochemical chain and I think what we're seeing today is the government managing the their refining complex to <unk>.
Supply their local market.
While there are economies weak I think a lot of it is related to global demand.
And the reopening of the economy for the local consumers actually resulted in probably more demand for transportation fuels. So we've seen I think through the year fairly consistent.
Exports and then the recent tightening, but I don't I don't know that anything has made theres any major changes that they tend to be.
Not as active in the Singapore market as they were a couple of years ago. I mean, a lot of the teapot have really withdrawn in terms of their export capabilities and so you're really left with Chinese national companies that are managing the exports of any excess product in the Chinese market out into the international market.
All results in just a more balanced and a kind of a more rational entry into the market of any excess production. They may have.
Great really thorough and helpful. Thank you and then.
Apologies. If this one is maybe more housekeeping, but just on interest expense or a couple of moving pieces. There you talked about a $6 million in savings annually from essentially.
Essentially moving the intermediation agreement into your a B L. But you did have an increase in <unk>, which is obviously related to the billings acquisition.
So is that 21 million quarterly run rate minus.
I guess a million and a half.
For the intermediation is that the right way to think about the quarterly run rate going forward.
Hey, John it's Sean.
The quarterly run rate going forward as we get into early next year will be closer to the $15 million to $16 million.
Per quarter level, the $6 million of funding savings from flipping from the remediation and ABL is really split between.
Interest savings and a reduction in cost of sales just due to the envelope the elimination of the intermediation fee.
As we guide towards interest expense for next year.
It'll likely hold around $15 million.
Great. Thanks very much.
Our next question comes from Neil Mehta from Goldman Sachs. Neil. Please go ahead.
Thank you so much a bell he's done a great job around M&A, particularly around the billings transaction, where you time that very well.
And just curious what your thoughts are around the market right now are there other opportunities for opportunistic bolt on or better opportunity when when refining margins are below mid cycle.
I think the latter is definitely the case.
Frankly with the market as strong as it is right. Now every every refinery is profitable and I think it's really challenging for parties, who might be a refinery is non strategic to think about.
Parting with that asset.
The other thing is our footprint just bigger and I think we've been very clear about where we want to operate and where we don't want to operate I.
I don't think we would be very competitive on the east coast or the Gulf coast or even the mid con we want to be supplying transportation fuels.
In the in the upper Rockies in the Pacific and pad born pad five and so it's harder for us to get transactions done going forward, but certainly the market environment is not very receptive to that.
And as I was noting earlier, if you think about most of our strategic growth objectives.
And I should have included renewables by the way, which is a very significant part of how we think about our growth.
They're really all organic is putting capital to work in and around our existing asset base and investing in our our plant and our people.
Yeah that that makes a lot of sense of that.
A big picture question in the last five years, the stock has done very well you've kind of repair the balance sheet scaled the business.
And now are very competitive refining footprint that talk about how you're setting up the business for the next five years.
As you know phase two of this.
Company's development look like.
Well, it's exactly what I just said I think we have the footprint, we have the assets and the people and we're going to invest in and around that footprint. So it's things like the Tacoma project or it's the conversion of the hydro treater in Hawaii to start too.
Produce renewable fuels in Hawaii.
It's bolting up our retail business as will mentioned, our northwest retail business is ramping very nicely and growing well.
And it's building on what we have I mean, I think there's also logistics opportunities, but within our asset base. There are plenty of opportunities to put capital to work.
And then more broadly the best opportunity to put capital work may be simply repurchasing our stock.
Yeah, Okay, great. Thanks, Bill appreciate it.
We have a question now from Jason Gamble won from TD Colin Jason. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I wanted to first ask.
A couple of specific financial questions on the quarter.
You mentioned that you paid down your entire rent liability was there any cash that came out of a system in <unk> related to that and if so how much and then also was there any loss profit opportunity in Montana from the Coker outage I know you'd mentioned, yeah, opex impact, but I'm wondering if there was.
Anything on the margin side and I have a follow up thanks.
Hey, Jason It's Sean I can cover both of those on your second question on the LPL in margin for the Coker outage there were.
Was an impact of.
Roughly $10 million to $15 million and so I think when you pull that out it would imply capture in the high 90% range.
And on the.
The settlement of all of the prior year rent obligations.
We did sell some of this in the fourth quarter and that really.
Sort of is.
Why I reference the.
Reversal of the working capital inflow of $70 million.
During the fourth quarter.
Got it understood and then my follow up is just on the outlook for the West coast market with another refinery expected to close.
Early next year can you talk about your ability.
To sell more products into that market, both from Hawaii, and Tacoma and potentially take advantage of what could be.
More margin volatility to the upside, particularly in the summer.
Sure Jason it's will.
I think just broadly.
I think west coast markets really function together between the Pacific Northwest and gone into California, There's clearly some spec differences there.
A fair amount of points of integration there across the systems that each of the major players operate so.
Just generally I think we're going to participate in.
The changes in supply and demand better.
Better occurring on on the West Coast as you think about potential refinery closures.
And so.
I think that's probably the best way to think about it versus our.
Specific ability to manufacture say carb spec gasoline or something like that.
Said, we do operate marine equipment and do pretty consistently.
Participate and play in the physical markets in both California.
Portland.
In the Pacific Northwest broadly in through Hawaii, and also Tacoma. So.
I think we will continue to actively participate as that market changes.
Okay understood. Thanks.
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And now we have a question from Manav Gupta with <unk>. Please go ahead.
Okay. Just specifically wanted to ask you about you mentioned earlier that the gasoline demand is acting they seasonally and I was just wondering if that's how you feel or have you seen anything which could be a structural issue for gasoline going ahead in the video seasons are you operating.
Do you believe that as we clear these winter months and the demand, we're not going to seasonal way and rebound from current levels.
Sure Manav, it's will I would say, we haven't seen anything structural the seasonal trends that we're observing are consistent with our experience operating in the upper Rockies. So again, we've been actively participating in that market through our Wyoming refinery for the better part of the last seven or eight years and so I think.
It's not unusual to see.
A tapering in demand as you see really tourism and just overall activity start to taper off and also weather.
Again, it becomes a little softer.
On the flip side of that we're seeing positive trends on the diesel demand side.
Particularly as you're in October and November timeframe, where you're in the harvest cycle. So overall I think demand in each of our markets are strong structurally and the seasonality is nothing new.
Okay and a quick final opinions can you tell us a little bit more about the green hydrogen project stuff that youre doing.
Sure Manav, it's will so we're looking at developing a facility that would be co located with our Tacoma refinery.
Where we'd pair green hydrogen production facility with the sustainable aviation fuel plant.
And again I think we would co located so that we could.
Sure and utilized logistics assets, we have on site there that we think are particularly strategic.
So again I think our view is we've got some.
Attractive ingredients here for a project it should be successful in a market that's focused on decarbonising with strong credit incentive schemes.
Strong logistics assets to access feedstock.
Some some of the lowest cost power in North America. So again, that's why we're spending time on this in and ultimately think we've got a particularly competitive project here that is worth getting smarter on and getting the engineering and a push we can make a decision.
Thank you so much.
Thank you very much and 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 Maher lease.
Very pleased with the accretive financial contribution of the billings acquisition as well as just the impressive performance of all our business units. The trailing 12 month adjusted net income of $9 34, a share signifies the value that we've created for our shareholders and I want to thank you for your support today have a good day.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.