Q2 2019 Earnings Call

August 1, 2019

Welcome to Hollyfrontier Corporation's second quarter, 2019 conference call and webcast.

Hosting the call.

Today from Hollyfrontier is George Damiris, President and Chief Executive Officer. He is joined by Rich volatile Executive Vice President and Chief Financial Officer, Tom Prairie, President refining and marketing and Jim stop Senior Vice President refining.

At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.

If you would like to ask a question at that time. Please press star one on your Touchtone phone. If it's at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.

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We ask that you please limit yourself to one question and one follow up.

Operator: Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note that this conference is being recorded. It is now my pleasure to turn the call over to Craig Biery, Director, Investor Relations. Craig, you may begin.

Additionally, we ask that you pick up your handset to allow optimal sound quality.

Please note that this conference is being recorded it is now my pleasure to turn the call over to Craig Biery Director Investor Relations, Greg you may begin.

Craig Biery: Thank you, Stacy. Good morning, everyone, welcome to HollyFrontier Corporation's Q2 2019 Earnings Call. This morning, we issued a press release announcing results for the quarter ending 30 June 2019. If you would like a copy of the press release, you may find one on our website at hollyfrontier.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press release. In summary, it says, Statements made regarding management expectations, judgments, or predictions are forward-looking statements. These statements are intended to be covered under the safe harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the press release for reconciliations to GAAP financial measures.

Thank you Stacy good morning, everyone and welcome to Hollyfrontier Corporation's second quarter 2019 earnings call. This morning, we issued a press release announcing results for the quarter ending June Thirtyth 2019, if you would like a copy of the press release, you may find one on our website at Hollyfrontier Dot com.

Before we proceed with remarks. Please note the safe Harbor disclosure statement in today's press release.

In summary, it says statements made regarding management expectations judgments or predictions are forward looking statements.

These statements are intended to be covered under the safe Harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. The call. Also may include discussion of non-GAAP measures. Please see the press release for reconciliations to GAAP financial measures.

Craig Biery: Also, please note any time-sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript. With that, I'll turn the call over to George Damiris.

Also please note any time sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript and with that I will turn the call over to George Damiris.

Thanks, Craig and good morning, everyone.

George Damiris: Thanks, Craig. Good morning, everyone. Today, we reported second quarter net income attributable to HollyFrontier shareholders $197 million, or $1.15 per diluted share. Certain items detailed in our earnings release decreased net income by $175 million on an after-tax basis. Excluding these items, net income for the current quarter was $372 million, or $2.18 per diluted share, versus adjusted net income of $259 million or $1.45 per diluted share for the same period last year. Adjusted EBITDA for the period was $647 million, an increase of $162 million compared to the second quarter of 2018.

Certain items detailed in our earnings release decreased net income by $175 million on an after tax basis.

Excluding these items net income for the current quarter was $372 million or $2, an 18 cents per diluted share.

Versus adjusted net income of $259 million or $1.45 per diluted share for the same period last year.

Adjusted EBITDA for the period was $647 million, an increase of $162 million compared to the second quarter 2018.

George Damiris: This increase was principally driven by strong gasoline and diesel margins across our company, along with our first full quarter contribution from Sonneborn. The Refining and Marketing segment reported adjusted EBITDA of $556 million compared to $385 million for Q2 2018. Strong product margins in all of our regions resulted in a consolidated refinery gross margin of $19.64 per produced barrel, a 19% increase compared to the $16.57 for the same period last year. Our Lubricants and Specialty Products business reported adjusted EBITDA of $29 million, despite weakness in the base oil market. Rack Forward adjusted EBITDA was $64 million for the quarter, and adjusted EBITDA margin was 13% of sales. The strength in Rack Forward earnings was driven by improved finished product margins.

This increase was principally driven by strong gasoline and diesel margins across our company.

Along with our first full quarter contribution from sonneborn.

The refining and marketing segment reported adjusted EBITDA of $556 million.

Compared to $385 million for the second quarter of 2018.

Strong product margins in all of our regions resulted in consolidated refinery gross margin of $19.64 per produced barrel.

A 19% increase compared to the $16.57 for the same period last year.

Our lubricants as specialty products business reported adjusted EBITDA of $29 million, despite weakness in the base oil market.

Wrecked forward adjusted EBITDA was $64 million for the quarter and adjusted EBITDA margin was 13% of sales.

The strength in the rack forward earnings was driven by improved finished product margins.

George Damiris: Our integration of Sonneborn is progressing well, and as of 30 July, we have achieved run rate synergies of $9.9 million and continue to expect long-term synergies of $20 million per year. Holly Energy Partners reported EBITDA of $89 million for the Q2, compared to $82 million in the Q2 of last year. Higher crude oil pipeline volumes around the Permian Basin and our crude pipeline systems in Wyoming and Utah contributed to a 10% increase in volumes year-over-year. During the quarter, we returned $246 million of cash to shareholders through our regular dividends and share repurchases. Looking forward, we will continue our focus on improving reliability across our refining system and successfully integrating Sonneborn, further strengthening our earnings profile.

Our integration of Sonneborn is progressing well and as of July Thirtyth, we have achieved run rate synergies of $99 million.

We continue to expect long term synergies of $20 million per year.

Holly Energy partners reported EBITDA of $89 million for the second quarter compared to $82 million in the second quarter of last year.

Higher crude oil pipeline volumes around the Permian basin.

In our crude pipeline systems in Wyoming and Utah.

During the quarter, we returned $246 million of cash to shareholders through our regular dividends and share repurchases.

Looking forward, we will continue our focus on improving reliability across our refining system and successfully integrating sonneborn further strengthening our earnings profile.

Rich Voliva: With no major planned downtime until September, our refineries are well positioned for strong operational and financial performance in Q3. I'll now turn the call over to Jim for an update on our operations.

George Damiris: With no major planned downtime until September, our refineries are well positioned for strong operational and financial performance in Q3. I'll now turn the call over to Jim for an update on our operations.

I'll now turn the call over to Jim for an update on our operations.

Thank you George for the first quarter, our crude throughput was 453000 barrels per day within our guidance of 445450 5000 barrels per day.

Jim Stump: Thank you, George. For the Q1, our crude throughput was 453,000 barrels per day, within our guidance of 445,000 to 455,000 barrels per day. Crude throughput was impacted by the two-week precautionary shutdown at our Tulsa refinery due to flooding in the Tulsa area. Our consolidated operating cost of $5.73 per throughput barrel was $0.16 lower versus last year. In the MidCon, we ran 264,000 barrels per day of crude. OpEx per throughput barrel was $4.92, and was elevated versus the same period last year due to the two-week outage in late May and early June at Tulsa. Our El Dorado refinery set a quarterly crude charge rate in the Q2, averaging 158,000 barrels per day.

Crude throughput was impacted.

By the two week precautionary shutdown at our Tulsa refinery due to flooding in the Tulsa area.

Our consolidated operating cost of $5.73 per throughput barrel was 16 cents lower versus last year.

And the Midcon, we ran 264000 barrels per day occurred.

Opex grew throughput barrel was $4.92 and was elevated versus the same period last year due to the two week outage in late May and early June at Tulsa.

Our El Dorado refinery set a quarterly crude charge rate in the second quarter, averaging 158000 barrels per day.

Jim Stump: In the Southwest, we ran 109,000 barrels per day of crude and improved our operating expense per throughput barrel to $4.63 versus the $5.25 we recorded in Q2 2018. In the Rockies, we ran 80,000 barrels per day of crude. Our operating expense was about $9.84 per throughput barrel, a 26% decrease over the same period last year. We have planned maintenance at Navajo and a planned turnaround at Cheyenne, both scheduled to begin in September. We expect to run between 440,000 and 450,000 barrels per day of crude in Q3. I will now turn the call over to Tom for an update on our commercial operations.

In the Rockies and around 80000 barrels per day of crude.

Our operating expense was up $9.84 per throughput barrel at 26% decrease over the same period last year.

I will now turn the call over to Tom for an update on our commercial operations. Thanks, Jim and good morning, everyone.

Tom Creery: Thanks, Jim. Good morning, everyone. As Jim previously mentioned, in Q2 2019, we ran 453,000 barrels a day of crude oil. This was composed of 35% Permian and 20% WCS and black wax crude oil. Our average laid-in crude cost was under WTI by $3.35 in the Rockies, $0.25 in the MidCon, and $0.94 in the Southwest. In Q2 2019, gasoline inventories in the Magellan system started the quarter at 7.7 million barrels and ended the quarter at 6.9 million barrels. Current inventories of Group Three gasoline remain relatively static at 6.7 million barrels. This is in keeping with the 5-year average volume.

As Jim previously mentioned in the second quarter of 2019, we ran 453000 barrels a day of crude oil.

This was composed of 35% Permian and 20% WCS black wax crude oil.

Our average laid in crude cost was under Wi Fi.

By $3.35 in the Rockies 25 cents in the mid Con and 94 cents in the southwest.

And the second quarter of 2019 gasoline inventories in the Magellan system started the quarter at 7.7 million barrels and ended the quarter at 6.9 million barrels current inventories of group three gasoline remained relatively static at 6.7 million barrels. This is in keeping with the five year average volume.

Tom Creery: Group Three diesel inventories rose by 1.1 million barrels throughout the period to finish at 8.1 million barrels. Q2, 3-2-1 cracks in the MidCon were $19.99, $31.30 in the Southwest, and $32.19 in the Rockies. In our Southwest and Rocky regions, we saw higher margins as refinery operation issues on the West Coast affected markets in both Phoenix and Las Vegas. Crude differentials compressed across the heavy and sour slates during Q2. In the Canadian heavy market, Q2 crude differentials for WCS at Hardisty averaged $11.13, slightly below Q1 levels. Enforcement on the Enbridge system remained high at 40%, despite the continuation of production cutbacks by the Alberta government.

Group three diesel inventories rose by 1.1 million barrels throughout the period to finish at a 1.8 point 1 million barrels.

Second quarter 321 cracks in the mid con or $19.99 $31.30 in the southwest and $32, a 19 cents in the Rockies and our southwest and Rocky regions, we saw higher margins as refinery operation issues on the west coast affected markets and both Phoenix and Las Vegas.

Crude differentials compressed across the heavy and sour slate during the second quarter and the Canadian heavy market second quarter crude differentials for WCS, what RSP average $11.13 slightly below first quarter levels apartment on the Enbridge system remained high at 40%. Despite the continuation of production cutbacks by the Alberta government.

Tom Creery: The forward market for WCS remains wider as the market foresees incremental crude production, coupled with perceived positive impact from IMO 2020. We continue to be able to purchase and deliver adequate volumes of price-advantaged heavy crude oil from Canada to meet our refining needs. Canadian heavy and sour runs averaged 76,000 barrels a day at our plants in the MidCon and Rocky regions. We refined approximately 160,000 barrels per day of Permian crude in our refining system, composed of 100,000 barrels per day at the Navajo complex and 60,000 barrels per day delivered by the Centurion Pipeline to our refinery at El Dorado.

The forward market for WCS remains wider as the market versus incremental crude production coupled with perceived positive impact from IMO 2020.

We continue to be able to purchase and deliver adequate volumes of price advantaged heavy crude oil from Canada to meet our refining needs.

Canadian heavy and sour runs averaged 76000 barrels a day at our plants in the mid con and Rocky regions. We refine approximately 160000 barrels per day of Permian crude and our refining system composed of 100000 barrels per day at the Navajo complex and 60000 barrels per day delivered by this isnt cerium pipeline to our refinery at El Dorado.

Tom Creery: Midland differentials averaged a quarter at $2.13 under WTI. Currently, we seem to see the same differential trading at around $0.70 below Cushing, as new pipeline capacity is expected to come on stream. We anticipate for the remainder of this year, the differential to narrow as additional pipeline comes on. Our rent expense for the quarter was $31 million, a $25 million decrease versus the $56 million in the same period last year. With that, let me turn the call over to Rich.

Midland differentials averaged a quarter at $2.13 under WCS and currently we're seeing this and see the same differential trading at around 70 cents below Cushing as new pipeline capacity is expected to come on stream.

We anticipate for the remainder of this year the differential to narrow.

Decrease versus the $56 million in the same period last year and with that let me turn the call over to rich. Thank you Tom.

Rich Voliva: Thank you, Tom. As George mentioned, the Q2 included a few unusual items. Pre-tax earnings were negatively impacted by a goodwill impairment of $153 million, a lower of cost or market charge of $48 million, and Sonneborn integration costs of $4 million. A table of these items can be found in our press release. For the Q2, cash flow from operations was $753 million, including turnaround spending of $31 million. HollyFrontier's standalone capital expenditures totaled $50 million in the quarter, producing free cash flow of $696 million.

As George mentioned, the second quarter included a few unusual items pre tax earnings were negatively impacted by a goodwill impairment of $153 million.

The lower of cost or market charge of $48 million and some weren't integration costs of $4 million. The table. These items can be found in our press release.

For the second quarter cash flow from operations was $753 million, including turnaround spending of $31 million Hollyfrontiers Standalone capital expenditures totaled $50 million in the quarter, producing free cash flow of $696 million.

The second quarter's freight strong free cash flow allowed us to return a total of $246 million of cash to shareholders comprised of a 33 cents per share regular dividend totaling $57 million as well as the repurchase of approximately four and a half million shares of common stock.

Rich Voliva: This Q2's strong free cash flow allowed us to return a total of $246 million of cash to shareholders, comprised of a $0.33 per share regular dividend, totaling $57 million, as well as the repurchase of approximately 4.5 million shares of common stock, totaling $189 million. As of 30 June, we had approximately $509 million remaining on our share repurchase authorization. Over the past 12 months, while continuing to invest across our 3 businesses, HollyFrontier has returned over $800 million of cash to shareholders through both dividends and share repurchase, representing a cash yield of 10%. At the end of Q2, our total cash balance stood at $915 million, which is above our target cash balance of $500 million.

Totaling $189 million.

And as of June Thirtyth, we had approximately $509 million remaining on our share repurchase authorization.

At the end of the second quarter, our total cash balance stood at $915 million, which is above our target cash balance of $500 million. This strong cash position along with our Undrawn $1.35 billion credit facility puts our total liquidity at over $2.3 billion.

Rich Voliva: This strong cash position, along with our undrawn $1.35 billion credit facility, puts our total liquidity at over $2.3 billion. As of quarter end, we had $1 billion of standalone debt and a debt-to-capital ratio of 14%. Total HEP distributions received by HFC in Q2 were $37 million, a 2% increase over the same period in 2018. HollyFrontier owns 59.6 million HEP limited partner units, representing 57% of HEP's LP units, with a market value of $1.7 billion as of last night's close. A few guidance items for 2019.

As of quarter end, we had $1 billion of Standalone debt.

And a debt to capital ratio of 14%.

Totally GP distributions received by HFC in the second quarter were $37 million, a 2% increase over the same period in 2018.

Hollyfrontier on 59.6 million EGP limited partner units, representing 57% of Atps LP units with a market value of $1.7 billion as of last night's close.

A few guidance items for 2019, we continue to expect to spend between 470 in $510 million for both Standalone capital in turnarounds, and our refining and marketing business.

Rich Voliva: We continue to expect to spend between $470 and $510 million for both standalone capital and turnarounds in our refining and marketing business, $40 to $50 million at HollyFrontier Lubricants & Specialties, and $30 to $40 million of capital at HEP. We anticipate an elevated cash balance through Q3 ahead of planned maintenance at both our El Dorado and Cheyenne refineries into Q4. In our lubes and specialty products business, due to both the continuing sales impacts of the flooding-related shutdown at our Tulsa facility, as well as previously unplanned maintenance at Tulsa's Lube Extraction Unit in October, we're revising our annual rack forward guidance to $240 to $260 million.

$40 million to $50 million at Hollyfrontier loops and specialties.

In $30 million to $40 million of capital at AHGP.

We anticipate an elevated cash balance through the third quarter.

In our lubes and specialty products business due to both the continuing sales impacts of the flooding related shutdown at our Tulsa facility.

As well as previously unplanned maintenance at Tulsa Lube extraction unit in October .

We are revising our annual rack forward guidance to $240 million to $260 million.

We continue to expect $25 million to $30 million of sonneborn integration costs.

Rich Voliva: We continue to expect $25 to 30 million of Sonneborn integration costs, implying another $9 to 14 million, which will stretch into 2020. In Q2, due to the goodwill asset impairment, our effective tax rate was slightly elevated to 29%. Based on this, we now expect our full year effective tax rate to land at 25% to 27% and to revert back to normalized levels of 24% to 26% in 2020. With that, Stacy, we're ready to take questions.

Implying another $9 million to $14 million, which will stretch into 2020.

In the second quarter due to the goodwill asset impairment, our effective tax rate was slightly elevated to 29%.

Based on this we now expect our full year effective tax rate to land at 25% to 27%.

And to revert back to normalized levels of 24% 26%.

And with that Stacy ready to take questions.

Operator: The floor is now open for questions. At this time, if you have a question or comment, please press star one on your touchtone phone. We ask that you please limit to one question and one follow-up. If you have additional questions, we welcome you to rejoin the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, if you do have a question, you may press star one on your touchtone phone at this time. Thank you. I will now turn the call back over to Craig.

Please press star one on your Touchtone phone, we ask that you. Please limit to one question and one follow up if you have additional questions. We welcome you to rejoin the queue.

[noise].

Thank you I will now turn the call back over to Craig.

Thanks, everyone. We appreciate you taking the time to join US on todays call. If you have any follow up questions as always reach out to Investor relations otherwise, we look forward to sharing our third quarter results with you in October .

Rich Voliva: Thanks, everyone. We appreciate you taking the time to join us on today's call. If you have any follow-up questions, as always, reach out to investor relations. Otherwise, we look forward to sharing our Q3 results with you in October.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time have a wonderful day.

Operator: Thank you. This does conclude today's teleconference. Please disconnect your lines at this time. Have a wonderful day.

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