Q3 2024 Par Pacific Holdings Inc Earnings Call
Good day and welcome to the Parpecific Third Quarter, 2024 earnings conference call. All participants will be in listen only mode. Should you need assistance please signal conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions.
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Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Ashimi Patel, Vice President and Vester Relations. Please go ahead.
Ashimi Patel: Thank you Chad. Welcome to Partipset Fixed Third Order, or any conference call. Joining me today are Will Monteleone, President and Chief Executive Officer, Richard Creamer, EVP of refining and logistics and Sean Flores, FTP and Chief Financial Officer.
Before we begin, note that our comments today may include four lip and statement. Any four lip and statements are subject to change and are not guaranteed the future performance or event. They're subject to risk and uncertainties and actual results may differ materially from these four lip and statement.
The accordingly investor's synopsis on due reliance on poor-looking statements and we display any obligations to update or revise them. I refer you to our investor presentation on our website and to our violence with the SEC, for non-gap reconciliation and additional information.
Ashimi Patel: I'll now turn the call over to our President and Chief Executive Officer, William Monteleone.
William Monteleone: Thank you, Ashimi, and good morning, everyone.
William Monteleone: Third quarter adjusted EBITDA was 51 million and adjusted net loss was 10 cents per share.
William Monteleone: Operational performance was strong with record quarterly refining throughput, record logistics adjusted EBITDA, and continuing in-store retail improvements.
Ashimi Patel: The durability of our results in a challenging refining market reflect the benefits of our diversified business model and the unique markets we serve.
Ashimi Patel: The current refining margin environment is testing breakeven levels for many operators and is driving the next wave of supply rationalization starting in 2025.
Ashimi Patel: Refining fundamentals suggests more balanced supply and demand than current margins.
Ashimi Patel: Simultaneously, global inventories remain below five-year averages in most regions.
Small changes and balances are driving outsized changes to margins.
Ashimi Patel: We are not waiting for the market to turn our way.
Ashimi Patel: and are focusing on the things we can control. We're targeting to reduce 2025 fixed operating expenses by $30 to $40 million, positioning our company to thrive in both high-cycle and low-cycle environments.
Ashimi Patel: In retail, quarterly same-store fuel volumes declined by 1.4%, while merchandise sales grew by 3.8% compared to the third quarter of 2023.
Ashimi Patel: While same store sales volumes were down, total fuel volumes were up approximately 100,000 gallons over this period, reflecting the contributions of our new stores.
Ashimi Patel: Investments and Billings Reliability are delivering encouraging results.
Ashimi Patel: Initial objectives were to drive reliability first and then work towards cost competitiveness.
Ashimi Patel: We are accelerating focus on cost considering the current backdrop while planning to complete the major FCC inoculation unit turnaround during the first half of 2025.
Ashimi Patel: In Hawaii, we broke ground on the SAF project and are on track for startup in the second half of 2025.
Ashimi Patel: We are encouraged by the improving renewable fuels backdrop on the West Coast and the Pacific Basin.
Ashimi Patel: This capital-efficient project remains an important element of our future growth.
Ashimi Patel: Despite softer market conditions, our strong financial position affords us the capability to invest in our business and grow its long-term profitability.
Ashimi Patel: Executing the Billings Initiatives and delivering the YSAF project are focus areas to grow the earnings power of our business.
Ashimi Patel: I'll now turn the call over to Richard to discuss our refining logistics operations.
Richard Creamer: Thank you, Will.
Richard Creamer: The refining segment third quarter combined throughput was a new par quarterly record of over 198,000 barrels per day, reflecting strong reliability in summer utilization.
Richard Creamer: While achieving this record throughput, each of our refining teams has demonstrated their dedication to operating safely and continuously driving reliability improvement.
Richard Creamer: In Hawaii, throughput was 81,000 barrels per day and production costs were $4.58 per barrel. The refinery team responded exceptionally well to reliability challenges and delivered 97% operational availability year to date.
Richard Creamer: Shifting to Wyoming, throughput was 19,000 barrels per day and production costs were $7 per barrel.
Ashimi Patel: Wyoming's third quarter operational performance reflects the team's ability to consistently deliver competitive results.
Ashimi Patel: Moving to Washington throughput was 41,000 barrels per day and production costs were three dollars and fifty cents per barrel. The Washington team is delivering highly efficient and reliable operations while in this challenging market environment.
Ashimi Patel: Finally, Billings delivered a strong 57,000 barrels per day of crude throughput with production costs of $11.61 per barrel. The Billings team safely completed the planned coker outage during the third quarter.
Ashimi Patel: Our focus on mechanical availability and reliability has enabled us to optimize and extend our upcoming turnaround schedule.
Ashimi Patel: Billings will be our only 2025 turnaround.
Ashimi Patel: with Hawaii and Wyoming shifting to 2026.
Ashimi Patel: And in Washington, we've implemented various mechanical integrity programs enabling us to extend the turnaround cycle by two years to 2028 and transition to a six-year cycle. These actions enhance the capital and operational efficiency at all of the sites.
Ashimi Patel: Looking to the fourth quarter, we expect throughput in Hawaii between 80 and 83 thousand barrels per day. Wyoming between 15 and 17.
Ashimi Patel: Washington between 38 and 41, and Billings between 48 and 52, resulting in system-wide seasonal throughput between 182 and 193 thousand barrels per day.
Speaker Change: I'll now turn the call over to Shawn to cover the financial results. Thank you, Richard. Third quarter adjusted EBITDA and adjusted earnings were $51 million and a loss of $6 million or 10 cents per share.
Shawn: The Refining Segment reported adjusted EBITDA of $20 million compared to $60 million in the second quarter.
Shawn: In Hawaii, the Singapore index averaged $11 per barrel, and our crude differential was $6.51, resulting in a combined index of $4.49 per barrel.
Shawn: Why margin capture was 136% including the product crack hedge gain and price like benefits totaling 10 million dollars.
Shawn: Excluding these benefits, Hawaii capture was 106 percent.
Shawn: We are increasing our benchmark capture guidance to a range between 100 and 110%, which incorporates over $20 million of annual margin improvement related to the June working capital refinancing.
Shawn: Looking to the fourth quarter, we expect Hawaii crude differentials to land between 575 and 625 per barrel.
Shawn: In Billings, our U.S. Gulf Gust Index averaged $14.14 per barrel. Margin capture was 88%, reflecting higher crude costs of approximately $20 million.
Ashimi Patel: primarily driven by an increase in light crude mix during the second quarter turnaround activities and the one-quarter five-fold lag on posted crude differentials.
Ashimi Patel: Third quarter margins were also influenced by market dynamics in the Pacific Northwest, which weighed on clean product netbacks in eastern Washington.
Ashimi Patel: Looking ahead, fillings feedstock costs are expected to improve as we return to a heavier crude diet in the fourth quarter. With COCR maintenance activities completed, fourth quarter production costs are expected to return to prior run rates of approximately 55 million dollars.
Ashimi Patel: Moving to Wyoming, capture to the Gulf Coast index was 97 percent, including a negative FIFO impact of five million dollars. Adjusting for FIFO, Wyoming capture was 115 percent, consistent with typical summer premiums.
Ashimi Patel: Lastly, in Washington, our P&W Index averaged $15.48 per barrel. Margin capture was 11%, reflecting a challenging jet fuel and VGO market along the West Coast.
Ashimi Patel: Despite the margin backdrop, the combined refinery and logistics operations in Tacoma generated positive adjusted EBITDA during the third quarter. With a low operating and capital cost structure, our Tacoma business competitively serves the Pacific Northwest through low margin cycles.
Ashimi Patel: The logistics segment reported adjusted EBITDA of $33 million in the third quarter compared to $26 million in the second quarter, driven by record refining throughput of nearly 200,000 barrels per day and over 216,000 barrels per day of product sales across our system.
Ashimi Patel: Our retail segment recorded just under $21 million during the third quarter, compared to $19 million in the second quarter. Strong retail performance was driven by expanding fuel margins and continued growth in merchandise sales.
Ashimi Patel: Corporate expenses in adjusted EBITDA were $23 million in the third quarter or approximately $1 million improvement compared to the second quarter.
Ashimi Patel: Excluding these two items, cash from operations was 27 million during the third quarter.
Ashimi Patel: Cash used in investing activities total $28 million, primarily related to capital expenditures.
Ashimi Patel: Moving to financing activities, we repurchased $22 million of common stock during the third quarter while reducing ABL borrowings by $14 million.
Ashimi Patel: Our share repurchase strategy will remain dynamic, adapting to changes to our medium-term cash flow and liquidity outlook.
Ashimi Patel: Gross term debt as of September 30th was $546 million, near the bottom end of our term debt leverage targets of three to four times our retail and logistics EBITDA.
Ashimi Patel: Total liquidity as of September 30th was $633 million, consisting of $184 million in cash and $450 million in availability.
Ashimi Patel: With targeted minimum liquidity between $250 and $300 million, our balance sheet is strong and well positioned to achieve our strategic growth objectives through the margin cycle.
Ashimi Patel: This concludes our prepared remarks. Operator, we'll turn it back to you for Q&A.
Speaker Change: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: And the first question will be from John Royal from J.P. Morgan. Please go ahead.
Ashimi Patel: Hi, good morning. This is Alejandra Magana on for John Royal. My first question is on share buybacks. How could we think about the buybacks in light of a worsening crack environment, but also recognizing
Ashimi Patel: that you've been responsive to price and look to buy back stock on the share price dips. Would you use the balance sheet to increase your buybacks today given the price levels are attractive?
Ashimi Patel: Hey Alejandro, it's Shawn. I'll start and I'll let Will chime in. You know, I think our liquidity position remains strong at $630 million. I referenced the minimum liquidity targets of $250 to $300.
Ashimi Patel: What we've said is it's it will be based on our medium-term cash flow and liquidity outlook.
Ashimi Patel: Our views of fundamental value certainly hasn't changed during this cycle, and we'll continue to balance, I think, the opportunity of buying back our stock at really attractive prices.
Ashimi Patel: with the value of maintaining a strong balance sheet to support not only strategic growth, but some of the capital investments that we have over the next six to nine months.
Speaker Change: Got it. Thanks for that. And then just switching gears.
Speaker Change: Logistics had a very strong quarter, and while refining throughput was a record, it's a short history since you've acquired billings and these types of throughputs are likely repeatable. Can we expect that you can do 30 plus million of logistics EBITDA in a low 90s utilization environment going forward, or are there any other moving pieces that may not be repeatable?
Speaker Change: about $29 million a quarter. But keep in mind, in Q2 and Q3, we are typically running at full rates and maximizing sales volume. So typically, you'll see higher than mid-cycle margins in the summer environment.
Speaker Change: Got it. Thank you.
Speaker Change: And the next question will be from Matthew Blair from Tudor Pickering and Holt. Please go ahead.
Matthew Blair: Do you have any examples of projects that you're undertaking to do this?
Matthew Blair: In terms of measuring this progress, would this come through in refining OpEx, or are there any other line items that we should be keeping an eye on?
Will Monteleone: Hey Matthew, it's Will. I'll take this on.
Will Monteleone: The two major areas are reductions in corporate expense related to getting down to one IT system. So we are still in two systems related to the billings acquisition and have excess costs impacting our corporate spend.
Will Monteleone: So I think that's roughly half.
Will Monteleone: and then the other half is a mixture of refining and logistics costs. So I think you'll principally see it impact refining op-ex.
Will Monteleone: and that's probably the two locations where you'd see it flow through the income statement.
Speaker Change: Sounds good, thanks. And then, could you talk about your long-term outlook for the Washington refinery? We've seen some competitors on the West Coast announce their intention to close and, you know, fundamentals have been a little tough lately. You know, how do you see the the long-term outlook for Tacoma?
Will Monteleone: Sure.
Speaker Change: Certainly difficult fundamental backdrop on the West Coast is reflected in our quarterly results.
Speaker Change: The way we think about Tacoma is ultimately it's a low-cost
Speaker Change: player in that market. When you look at our operating costs and the $3.50 per barrel range and the capital efficiency that plant has, it's one of its major advantages. And I think in addition it has feedstock advantages versus its peers who are principally buying waterborne crude.
Will Monteleone: So, two unique attributes of that facility that I think present it to minimize cash consumption through the cycle and poor margin environments like we're in, but allow it to participate in the upside.
Will Monteleone: which I think are inevitable along the West Coast as you think about the supply rationalization changing in big chunks while demand is not moving in the same manner.
Speaker Change: Great, thank you.
Speaker Change: Thank you.
Speaker Change: Great, thanks. Maybe a couple quick ones. Despite investor concerns over recent months on Asian refining margins and economic backdrop over there, your Hawaiian asset continues to exceed expectations. Can you talk about how you're seeing the environment out there and what continues to sustain the relatively strong performance out in Hawaii?
Speaker Change: Sure, Ryan. I think the work that you see in the performance in Hawaii is really evidence of, you know, five plus years of effort, you know, by our team and I think you see that in Hawaii and I think you see that in Wyoming.
Will Monteleone: But as you think about Asia, you know, I think ultimately our Hawaii business has improved to where even at mid-cycle or probably below mid-cycle conditions like we're seeing,
Will Monteleone: Ultimately, we can still generate positive adjusted EBITDA, and this is due to our cost structure there as well as our commercial agreements.
Will Monteleone: So I think those are the key factors that are in place. If you think about Asia broadly,
Will Monteleone: Policies are limiting exports, so that's at the margin changing real time. I think some of the supply demand balances for distillate in the Pacific Rim.
Will Monteleone: I think that's worth watching, but ultimately I think a key factor for distillate balances heading into the winter in Asia.
Speaker Change: Great, thanks.
Speaker Change: Maybe a second one. Thanks for the update on the upcoming turnaround schedule and some of the adjustments you've been able to make.
Speaker Change: Can you provide any additional color on what you've been able to do to spread out the turnaround schedule for some of your assets there? What might this mean for kind of the right way to think about average annual turnaround capital requirements across your system and maybe for the overall kind of annual capital requirements for your business?
Speaker Change: Yeah, Ryan, this is Richard Creamer.
Speaker Change: I think the work that we've done over the last couple of years on improving our mechanical integrity Programs and systems has allowed us to stay on top of some of the reliability opportunities that we've had in the past
Speaker Change: and has allowed us to correct those and now we're at a position where we can take advantage of some of that work and extend these turnaround periods on out which gives us a longer period to amortize those turnaround costs out.
Will Monteleone: Yeah, Ron, this is Shawn. We're continuing to sort of guide towards 40 million dollars of amortized turnaround expenditures over the cycle.
Speaker Change: Great, thank you.
Speaker Change: And the next question is from Neil Mehta from Goldman Sachs. Please go ahead.
Neil Mehta: Yeah, thanks so much. Maybe just to build on the Washington comments, because it was a very tough quarter there with very low capture rates.
Neil Mehta: And I don't think that's representative of the normalized earnings power of Washington. So maybe you could just talk about where there's some one-time dynamics.
Neil Mehta: And since the quarter, you've seen West Coast cracks strengthen, particularly L.A. JET. So, maybe you could talk about how we should think about that asset inflecting as we move into 2025.
Will Monteleone: Sure, Neil. It's Will. I'll take a couple of these and maybe Shawn will add on a few, but specifically, you know, what Shawn was calling out that's outside of our indexes, jet and West Coast VGO. So, I think on the jet side.
Neil Mehta: You're correct, we saw significant pressure on West Coast Jet during the third quarter.
Neil Mehta: and I think part of this is related to overall jet balances shifting as you're seeing the West Coast refining fleet
Neil Mehta: pivot its distillate or its diesel production forged jet given the increase in RD penetration.
Neil Mehta: I think nonetheless the marginal barrel of jet still needs to be imported long haul from Asia to balance the West Coast market. So I think you're seeing that
Neil Mehta: play out in the third quarter. And as you're seeing run rates come down in the fourth quarter,
Neil Mehta: and coinciding with my prior comment on the tightness in jet in the Asian market that we're seeing emerge in the fourth quarter, I think those are the factors that are really impacting the ramp-up in LA jet prices and probably West Coast jet prices.
Neil Mehta: The VGO market, you know, is really more of a global phenomenon and I think as you've seen Vangode ramp up, you've seen a lot of excess VGO buildup in the Atlantic Basin and that's trickling over in the Pacific Basin. As they move towards finished fuel production, I suspect that's going to change balances.
Neil Mehta: but again I think very dynamic and ultimately our positioning there as a low-cost operator both capital and operating expense as well as feedstock advantage are really the keys that we think sustain that over a long period of time and I think it will inevitably be margin
Neil Mehta: opportunities where we can capture them.
Speaker Change: Thanks, Will. A follow-up is, as you think about the Billings Refinery, that has been impacted by some of the inventory dynamics around asphalt.
Speaker Change: normalize margins now that we've worked through those inventories, operational run rates, just your pulse check on that asset would be helpful. Thanks.
Speaker Change: Sure.
Speaker Change: I think overall I'm big picture.
Speaker Change: I still remain very pleased with Billings and I believe in its capability to deliver the mid-cycle cash flow contributions that we set out to when we underwrote the transaction.
Speaker Change: I think our operating expenses have been higher than our $10 per barrel target, but I think there's a path to getting back towards that.
Speaker Change: once we get through the major cat cracker turnaround here in 2025.
Neil Mehta: and then I think ultimately the the view that we can balance heavy crude
Neil Mehta: Throughput and medium and light crew throughputs to optimize transportation fuel yields versus asphalt over time I think remains the last leg of improving our ability to both achieve and exceed the initial mid-cycle guidance we provided.
Speaker Change: Well, Craig, I'd sneak one more in here, which is, you know, the stock's obviously been under enormous pressure this year after a very good run.
Speaker Change: I can't help but think there's so much embedded value in the retail business that isn't reflected in the valuation here. How do you think about, you know, helping investors understand the value of the retail brands and pulling some of that forward?
Speaker Change: Yeah, absolutely. I think our retail business, as you can see, has been a significant financial contributor for us over the last five years. It's grown nicely.
Speaker Change: and I think ultimately is a premium multiple business to our manufacturing and distribution business.
Speaker Change: You know that said I think it's quite strategic to us. We're happy with that business
Speaker Change: and we think it has some significant growth opportunities. And so I think what you'll see as we consider growing that business, we may look at alternatives that would improve our capabilities there.
Speaker Change: but I think as you think about the strategic benefits and the markets we operate it has significant value to us probably above and beyond just the multiple arbitrage that you're referencing.
Speaker Change: Okay. Thank you, sir.
Speaker Change: Thanks, Neil.
Speaker Change: And the next question will be from Jason Gabelman from TD Cowen. Please go ahead.
Jason Gabelman: Morning. Thanks for taking my questions.
Jason Gabelman: I wanted to touch on CapEx spend this year and next year. It seems like CapEx is trending a bit light. You'd have to maybe double spend from 3Q to 4Q to reach guidance.
Jason Gabelman: Is that what the market should expect? And then as you think about 25 CapEx, given spend on the SAF project and additional turnaround, perhaps some capital spend tied to the cost reduction initiatives. Can you just...
Jason Gabelman: talk us through the year-over-year bridge to 25th Avenue. Thanks.
Shawn: Sure, Jason. It's Shawn.
Jason Gabelman: I think you're right. We expect our cash CapEx to track near the low end of our guidance for 2024, which was 220 to 250. Year-to-date through 930, CapEx in turnaround was 146.
Jason Gabelman: I guess the one thing I'd point out for 24 is just keep in mind our renewables project in Hawaii is more backend weighted, so you should see some elevated capex in the fourth quarter.
Jason Gabelman: and our year-to-date accrued cash at cash capex is trending about 20 million dollars higher than cash so I wanted to point that out as as you think about 2025.
Jason Gabelman: And then, you know, I think we're going to provide official CAPEX guidance in late December like we typically do, but directionally, I would point out.
Jason Gabelman: You know, we expect about $80 to $100 million of turnaround expenditures, primarily related to the billings, FCC and ALKI work, as well as pre-spending in Hawaii and Wyoming for the 2026 events.
Jason Gabelman: And then we'll have about $30 to $40 million remaining on the Hawaii Renewable Conversion Project in 2025.
Shawn: So, again, we'll put out more specific guidance in December on maintenance, sustaining, and other growth capital.
Jason Gabelman: Okay.
Speaker Change: Thanks and my other question is on the balance sheet and you know the stock has weakened following moving inventory financing to on the balance sheet and it seems like the company is trying to split out that financing in the ABL versus what you consider structural debt.
Speaker Change: within that term debt line item. So can you just talk about if that's kind of the right way to think about it and why taking this approach to balance sheet management is...
Speaker Change: is maybe a bit better than what you had when that inventory was off balance sheet.
Speaker Change: Sure.
Speaker Change: Yeah, I think we certainly view the ABL funding separately from term debt. We've maintained our term debt leverage target of three to four times.
Speaker Change: The logistics and retail EBITDA that's been in place for for multiple years and
Speaker Change: I think we're at the low end of that range, you know, as we sit today on the ABL and working capital funding.
Speaker Change: This sort of solely supports our inventory management and working capital needs.
Jason Gabelman: And I think it's worth pointing out that over the past year, our working capital funding and really financing has decreased materially. When you go back and look at the balance sheet, the intermediations would show up in current liabilities.
Jason Gabelman: A year ago that was an $850 million liability, today as of 9.30 it's $165 million.
Shawn: And so...
Shawn: Intermediation in Hawaii as of 9 30 we're about 175 million dollars below our year ago levels so
Shawn: I think we've, not only do we view the ABL funding as purely working capital funding supporting our accrued purchases, the funding itself has significantly decreased over the last year.
Speaker Change: Great. Thanks for the answers.
Speaker Change: And again, if you would like to ask a question, please press star then 1.
Speaker Change: The next question is from Manav Gupta from UBS. Please go ahead.
Manav Gupta: Hey, I just have one question. Can you provide more details around, you know, what's your outlook for the differentials for the Hawaii region in particular? How do you see those spreads moving out in the next six to nine months?
Speaker Change: I think you can see the modest reduction in our expected landed crude differential in the fourth quarter. Keep in mind that
Shawn: You know, 90 plus days lagged versus real-time market conditions.
Speaker Change: So that really reflects crude market conditions during the third quarter, per se. If you roll forward, as you've seen, the
Speaker Change: Curve, you've seen degradation costs come down, seen freight start to soften, and just big picture you've seen kind of the physical market soften. So I would give you the directional guidance that we are seeing improvements in our landed crew differentials as you look forward.
Speaker Change: None of those are final at this point, but I think directionally the major factors that impact our landed cost accrued are trending favorably.
Speaker Change: Thank you so much.
Speaker Change: Thank you. And the next question is a follow-up question from Jason Gabelman from TD Cowen. Please go ahead.
Speaker Change: Thank you for watching. I will see you next time.
Jason Gabelman: Yeah, sorry, just one more for you on Hawaii. I know it benefits from product tanker rates and those have been strong the past couple years. Can you just talk about what you're seeing in the product tanker market quarter to date in 4Q and what you expect moving forward?
Will Monteleone: Jason, it's Will. I think in the fourth quarter we've seen softening on the product anchor rate side for clean product.
Will Monteleone: and ultimately I think, you know, we're starting to see it stabilize.
Will Monteleone: at current levels. I would still characterize it broadly as
Will Monteleone: You know, kind of in the probably $6 per bale range versus all it pre-
Will Monteleone: COVID-type world where it was 350.
Will Monteleone: And so I think you're still seeing.
Will Monteleone: elevated versus history, but not near the peaks that we would have seen probably at close to $11 a barrel during the height of really some of the significant trade flow disruptions that were happening during the Russian initial stages of the Russian invasion.
Speaker Change: Great, thanks for that.
Speaker Change: And ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back over to Will Monteleone for any closing remarks.
Will Monteleone: Thank you, Chad. Our unique asset portfolio is well positioned while delivering upside during mid and peak cycle conditions.
Will Monteleone: Your management team is focused on improving our cost structure and executing our growth objectives to drive the enterprise forward. Thank you for joining us today. Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.