Par Pacific Holdings, Inc. Q4 FY2020 Earnings Call

Greetings and welcome to the Par Pacific Holdings Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. It is now my pleasure to introduce your host Ashimi Patel, Manager, Investor Relations for Par Pacific Holdings. Thank you, Ms. Patel. You may begin.

Thank you, Sarah. Welcome to Par Pacific's fourth quarter earnings conference call. Joining me today are William Pate, President and Chief Executive Officer, Will Monteleone, Chief Financial Officer, and Joseph Israel, President and Chief Executive Officer of Par Petroleum. Before we begin, note that our comments today may include forward-looking statements. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties and actual results may differ materially from these forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements and we disclaim any obligation to update or revise 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 President and Chief Executive Officer, Bill Pate.

Thank you, Ashimi. Good morning to our conference call participants. It goes without saying that 2020 was an extremely challenging year for all of us. Last February on our earnings call, it was inconceivable that global consumption of crude oil would drop from 100 million barrels per day to 80 million barrels per day over the span of a few weeks. Our 2020 financial performance reflects the resulting collapse in prices and margins, despite our actions to reduce costs and preserve liquidity. Full-year adjusted EBITDA was a loss of $86.7 million and our adjusted net loss was $4.69 per share. I'm pleased with the way our team responded to the pandemic. We implemented additional layers of safe workplace practices and identified multiple areas to reduce costs. We also finished the year with our best safety and environmental performance. We accomplished our cost control objectives while successfully completing two major turnarounds, and we expect 2021 CapEx to be less than $45 million. Based on this estimate, the current market outlook, and good operational performance we will generate free cash flow for 2021. We had a busy fourth quarter, completing a turnaround in Wyoming, preparing for another in Washington, and bringing our renewables logistics project online. We received the first unit train of ethanol into our Tacoma facility in November and completed the Washington turnaround this month. With no major planned downtime other than the second phase of the Washington turnaround early next year, our refineries have a clear pathway to strong free cash flow generation for several years. During the fourth quarter, several positive developments began to lift business profits despite weak cracks. Unfortunately, these positive developments were offset by a non-cash mark-to-market charge, associated with the steep climb in RINs pricing. Most of the notable improvements related to demand for our products. Hawaii lifted its 14-day quarantine mandate, and passenger count data has been very encouraging. Holiday season arrivals were close to 40% of pre-pandemic levels and that trend has remained steady early this year. Earned Hawaii jet fuel demand is a sweet spot for our production capability at the Par East refinery. In all our markets, we continue to see recovery in ground transportation fuels as COVID-19 related restrictions are lifted. At this time, improving market cracks are the biggest factor in stronger financial performance. On that note, the 2021 calendar strip for our Singapore 3-1-2 market index has improved more than $2.50 per barrel since mid-November. With the outages from the current cold, we expect the North American inventories to rebalance and believe a return to more normal cracks on the mainland is ongoing. Retail was a strong contributor to overall earnings during the quarter and for the year. Overall, our retail business unit adjusted EBITDA has grown at a 28% compound annual growth rate from 2017 to 2020. We started the rebranding of our PNW retail locations to our proprietary nomnom brand. This action allows us to optimize our fuel supply arrangements, launch a loyalty program, and upgrade our point-of-sale to permit the latest pricing and marketing solutions. We are also pleased to announce the sale and leaseback of 22 of our Hawaii retail real estate locations for approximately $116 million at a very attractive valuation. We closed on most of these properties this week. Today we're a stronger company. We're well positioned to return to profitability as the economy recovers and demand returns to 2019 levels. Our leverage to distillate cracks is significant. A $2 per barrel improvement is equivalent to $1 per share of additional free cash flow. We benefit particularly from the jet fuel market with more than four times the exposure to jet cracks than the rest of the industry. The pandemic environment has been challenging for the refining sector with many permanent plant closures. However, we believe that the commercial improvements we have accomplished, coupled with our cost-cutting initiatives position us well as vaccination rates climb, cases drop, and global demand recovers. At this time, I'll turn it over to Joseph to discuss our operations in more detail.

Thank you, Bill. Not many could envision the unprecedented challenges that the refining industry faced last year. And yet, with minimal preparation time, our team has done a tremendous job through 2020 to adjust operations, execute our planned turnarounds, cut our cost structure while achieving our best safety and environmental performance on record. Now with regards to the fourth quarter, in Wyoming, our team successfully completed the planned major turnaround. The refinery, which we started early in November, is well positioned for an estimated five-year cycle before the next major turnaround. Our Wyoming 3-2-1 index in the fourth quarter was $18.45 per barrel and our refinery throughput, including the turnaround impact, averaged approximately 7,000 barrels per day. Our realized adjusted gross margin in the quarter was $1.58 per barrel, mostly driven by an estimated $9 per barrel of turnaround-related missed opportunities. Our production costs were $17.26 per barrel, including approximately $1.70 per barrel of unfavorable turnaround impact. Our cost structure in Wyoming remains favorable. And we are expecting to average under $6.50 per barrel on an annual basis as we increase throughput to meet demand. Weather-related outages mainly in the Gulf Coast and Midwest have created product shortages in the market, which is supporting Rocky Mountain's refining margins these days. Our Wyoming 3-2-1 index has averaged approximately $17 per barrel so far in the first quarter and our target throughput is approximately 14,000 barrels per day as we start preparing for the gasoline season. In Washington, our fourth quarter Pacific Northwest 5-2-2-1 index was $11.26 per barrel on ANS basis. Our refinery throughput averaged approximately 39,000 barrels per day and our realized adjusted gross margin was a negative $0.51 per barrel. Production costs were $3.47 per barrel in the quarter. Earlier in the month, the refinery team successfully executed our planned 20-day turnaround, and no additional major maintenance is planned for the rest of the year. So far in the first quarter, our 5-2-2-1 index has averaged approximately $10.25 per barrel consistent with the off-season environment in PADD V. The index has trended up in the past week due to strong support for West Coast products and especially, L.A. diesel. Our planned throughput, including the turnaround impact, is in the 30,000 to 32,000 barrels per day range. The completion of the renewables logistics project is giving us new capabilities in the strategic Pacific Northwest market. The equipment is currently in ethanol service mainly for our system use, and we are evaluating several growth opportunities there. In Hawaii, our Singapore 3-1-2 index was $2.63 per barrel on Brent basis and our realized crude differential in the quarter averaged $2.25 per barrel premium to Brent. Our throughput averaged approximately 79,000 barrels per day and our fourth quarter realized adjusted gross margin was a negative $0.17 per barrel. Our production costs were $3.27 per barrel. Our Singapore 3-1-2 index continues to slowly improve, averaging over $4 per barrel so far in the first quarter and reflecting demand recovery in Asia. Our crude differential in the first quarter is also trending in the right direction and is estimated around $1.21 per barrel premium to Brent. With our improved cost structure and contracts in Hawaii, we are estimating our implied EBITDA breakeven point around $4.5 per barrel for the Singapore 3-1-2 index with differentials of around $2 per barrel. As a reminder, the index averaged approximately $10.80 per barrel in the three years prior to the pandemic. Our throughput target for the first quarter is in the 82,000 to 84,000 barrels per day range. In summary, 2020 is over. We are proud of the effort, focus, and performance demonstrated by our team during the challenging times. And as we transition to the recovery phase, we are very excited about our improved positioning and margins outlook across our system. And now I'll turn the call over to Will to review consolidated results.

Thank you, Joseph. Fourth quarter adjusted EBITDA and adjusted earnings were a loss of $34 million and $75 million or $1.41 per fully diluted share. Focusing on accounting items first, impacting adjusted earnings and EBITDA, the Washington refining results have been reduced by the $6 million reversal of the prior quarter LIFO layer liquidation. Impacting our GAAP results was an $18 million non-cash asset impairment recorded on the Par West assets. Shifting to segment results. Retail segment adjusted EBITDA contribution was $16.5 million driven by strong margins and seasonally improving volumes. Same-store sales volumes were down roughly 16%, while merchandise sales were approximately flat compared to the fourth quarter of 2019. Gasoline demand in Hawaii increased approximately 5% to the 85% range of pre-COVID levels versus the prior quarter. Merchandise performance, particularly in the Northwest, has remained strong. The Logistics segment adjusted EBITDA contribution was $9 million, down $3 million from the third quarter of 2020. Hawaii activity began to increase with the reopening of the state. However, it was more than offset by reduced contributions from Wyoming and Washington locations. Wyoming volumes were reduced due to the turnaround activities. Washington results were impacted by lower sales activity during the quarter. Looking forward, our Hawaii logistics volumes are stabilizing, and other than the first quarter Washington turnaround activities, we expect steady improvements across this segment during 2021. The Refining segment recorded a segment adjusted EBITDA loss of $50 million. The largest factor impacting the segment was a mark-to-market of environmental credits of $23 million, principally related to increasing RIN prices. Our net RINs expense associated with this quarter's refining operations was $9 million. In addition, the Wyoming turnaround and seasonally reduced sales volumes negatively impacted results. Hawaii and Washington results were negatively impacted by compressed margins on heavy products in a rising flat price environment. The uncertainty surrounding the implementation of the renewable fuel standard, as well as our historical status as an exempted small refiner, makes managing this liability increasingly dynamic. The volatility created by the inconsistent application of the RFS creates substantial hardship for small refiners. It's difficult for any efficient business to run if it's unclear what your costs are. We will continue to avail ourselves of all options to minimize this exposure. Laramie generated adjusted EBITDAX of $15 million and net income of $4 million for the fourth quarter of 2020. Fourth quarter cash consumed from operations was $63 million. Excluding the impact of rents and deferred turnaround expenditures, net working capital was a use of approximately $13 million. Capital expenditures were $21 million, and accrued deferred turnaround expenditures were $9 million, totaling approximately $30 million for the quarter. The working capital reversal referenced in the third quarter has mostly occurred as of year-end. Accrued cash interest equaled $16 million. Full-year cash consumed from operations was $37 million. Full-year capital expenditures were $64 million and accrued deferred turnaround expenditures were $50 million, totaling approximately $113 million, consistent with the midpoint of our provided range. Our year-end liquidity totaled $108 million, made up of $68 million in cash and $40 million in availability. We expect to receive approximately $116 million in proceeds once finalizing the Hawaii retail real estate sale-leaseback transactions. After pay-down of associated real estate obligations, we expect our net cash position to increase by approximately $62 million. In addition, we recently extended the Washington Intermediation and expect to extend or replace the Hawaii facility shortly. With our liquidity on hand, we are well positioned to cash settle the upcoming convertible note if required. Cost control across the organization remained strong during the fourth quarter as we registered our lowest consolidated quarterly OpEx, G&A, and logistics cost of sales number of the year at $101 million. Our Q2 to Q4 average ran at approximately $103 million, which is an annualized reduction of approximately $55 million from 2019. Beyond just OpEx, we exceeded our initial $150 million COVID cash outlay reduction targets by approximately $10 million despite the increase in crude prices from when this target was set. As a reminder, total cash outlays include energy-related cost of sales, OpEx, and CapEx versus previously planned amounts. I'd like to thank the entire Par Pacific team for their focus and dedication across every location for this cost discipline. We expect our overall cash outlays to be down during 2021 versus 2020 as our identified cost savings were partially offset by increases in energy costs, insurance premiums, and projected 2021 bonus compensation versus 2020. Our expectation for 2021 capital expenditures and turnaround outlays is between $35 million to $45 million, including between $10 million to $15 million for the Washington turnaround activities. We anticipate the combination of commercial contract improvements, cost containment, CapEx reductions, and market healing to put us in a position to generate free cash flow during 2021. This concludes our prepared remarks. Operator, I'll turn it back to you for Q&A.

Thank you. We will now start the question-and-answer session. Our first question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, team. And thanks for taking the time.

Good morning, Neil.

Good morning, Bill, Will and team. The first question I had was around Hawaii. It's such a critical part of your story. So can you talk about what you're seeing in terms of real-time recovery in Hawaii demand? And then, any quantification that you can provide around the margin uplift from either improving cracks and then also progress on more favorable contract terms?

Yes, Neil, this is Bill. As I mentioned earlier, we've seen a reasonable recovery across all products in Hawaii. Currently, regarding Par East, we are operating at maximum capacity. We are targeting over 80,000 barrels, which is the highest level this refinery has achieved, and we anticipate it will continue to push those limits. Any increase in demand will likely be met not by additional refining capacity but through imports. We are in a favorable position from a volume perspective. The demand from power generation consumes all our fuel oil, and jet demand is also fully utilized, depending on crude selection. Regarding gasoline, we are currently in an import mode along with our competitors, so I do not foresee a significant change. Fortunately, we are well balanced and do not need to export any products. The focus for us in Hawaii now is not on volumes but on cracks. The market cracks we concentrate on in Hawaii or Singapore have increased by about $2.50 a barrel on a calendar strip basis. Compared to late last year, that's a notable improvement for 2021. Additionally, we've realized some favorable differentials in both Q4 and Q1. I expect those could tighten a bit, but overall, our breakeven is at $4.50, and last week we reported a 3-1-2 at $4.56 with a differential estimate of plus $2. For the quarter, we are around $1.20, which places us in a positive EBITDA position in Hawaii for Q1, subject to any changes in mark-to-market on rents and price lag. Overall, I feel good about our current position.

Thank you. For my follow-up regarding retail, how are you viewing the strategic role of the business after the sale leaseback? You managed to extract some cash from it, but do you consider this business a key part of your strategy moving forward? Additionally, how do you assess the impact of rising crude prices on your retail margins?

Yeah. Let me take the last one first. I mean there's certainly maybe some near-term pressure on the margins given crude oil price increases, but for the year, we expect that any margin compression is likely to be offset by increases in fuel volumes as mobility trends improve. With respect to the strategic nature, as I noted, I mean this business has grown attractively over the last three years. So it's a big financial contributor. Retail also really affects how we think about our capital structure. The stable retail free cash flow actually supports our entire debt service even after the recent sale leaseback. And then, from a strategic perspective, it's attractive in smaller markets to have a controlled short for your refinery production. Now, that's changed a little bit in Hawaii, given the fact that we no longer have any refining competition there. But it's still I think pretty valuable. And where it's most valuable is in markets where you've got product link. And so, I think it's been valuable for us even through the pandemic and it's proving valuable right now in the Northwest with respect to our units. And again, it's not always related to directly supplying the refinery. But through exchanges, you can ensure that you can place your product and realize attractive margins. So it is an attractive strategic asset. I'll just caveat that by saying, look we're not wedded to any of our assets. And obviously, you can engage in transactions with contractual relationships that preserve some of that strategic benefit. And at the right price, some of our business units are always going to be for sale.

Thanks, Bill.

Our next question comes from Phil Gresh with JPMorgan. Please go ahead.

Yes. Hi, good morning. Thanks for taking the question. The first one would just be on the environmental costs in the fourth quarter the $22 million, I believe was the number. Did you have a rough allocation of that across the three refineries?

Sure, Phil. It's Will. Approximately $10 million in Hawaii, $7 million in Wyoming, and about $6 million in Tacoma.

Okay. Great. Thank you. And just what are your thoughts on the ongoing RINs impact for 2021, or at least for the first quarter, I guess, we don't know where RINs are exactly going here?

Yes. I think, Phil for the ongoing recurring expense at current prices for 2021, we'd expect in our annual rent expense to be in the $50 million to $55 million per year range. So I think that's our overall outlook on the recurring expense.

Thank you. From a balance sheet perspective, you mentioned that at the right price, any asset could be for sale. How do you envision the desired state of the balance sheet? Are there any additional measures you might consider to expedite progress, especially as you project into a more normalized situation beyond 2021?

Yes. I think our historical perspective on this has been that we like our net debt-to-cap to be in the 30% to 35% range. I still think that's our objective. We've obviously had to delay that objective given the impact of the pandemic. But I still think that remains our objective. And again, with our mix of businesses, I think if we achieve that as our long-term target, that gets us in a position where we can begin to contemplate reallocating capital either efficiently towards M&A transactions or back towards shareholder returns.

Phil, this is Bill. I want to add to that. We clearly have high-cost debt, and following the pandemic and the turnarounds, we’re carrying more debt than we’d prefer. However, as I mentioned, we have no significant turnarounds planned for the future, and we anticipate generating considerable free cash flow, which we will allocate towards reducing our debt to a more manageable level. It's important to highlight that we have substantial diversification, with significant cash flow from our retail segment, which helps sustain our current debt level, though we would certainly prefer it to be lower. Additionally, regarding our free cash flow, we are not a federal taxpayer, meaning we won't incur significant cash taxes as we achieve profitability. Therefore, we can use all of that toward debt repayment.

Okay. Thanks for taking my question.

Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Hey. Good morning, everyone. Will, could you provide a quick update on Laramie? Where does the drilling program stand? Were they in a position to capture the high natural gas prices that occurred earlier this quarter? And where do you stand on potentially looking to divest that interest?

Sure, Matt. With respect to their development program, Laramie is not operating any rigs at the moment. So again, continuing to produce its base proved developed producing assets. With respect to the recent spike in gas prices, Laramie was able to operate through the cold snap and did have some significant exposure to the daily market. As a result, the company did realize significant profitability over the last couple of weeks related to the spike in gas prices. So I think it's a helpful benefit to the company. But I think it remains challenging to finance and grow a natural gas company in the current environment. But the Laramie management team continues to explore their options regarding its assets and capital structure today.

Sounds good. And then thinking about refinery OpEx for the first quarter here, will there be any headwinds from higher natural gas prices hitting either I guess Wyoming or Washington? And then what about the higher crude price impact in Hawaii?

Hey, Matt. This is Joseph. Because of our contractual structure of the gas price, we are not anticipating any significant spike in gas price for all our refineries. It's going to be very, very minimal. And with regards to the crude, crude is up, but the products are going up as well. And overall crack spreads are improving. The crude is in a good place.

Matt, I'll add to that. In Hawaii, again, we're internally consuming the barrel to generate heat, given we don't have access to natural gas there. So the rising flat price does impact the overall yield cost. That said, I think we've got a number of other offsetting factors that we believe position us well to keep our aggregate cash outlays flat to down for the full year.

Sounds good. And then final question. So the mark-to-market on the RIN liability costs you about $2 a barrel or I think $23 million or so on your gross margin in Q4. Where does that liability stand currently, or I guess at the beginning of the quarter either in just like a dollar liability or I guess like an open RIN position as you start Q1?

Matt, I don't think we're going to get into our specific RIN position, but I think it's fair to assume that with the continuing increase in price that we've observed in January, February timeframe that there's additional mark-to-market expense that we'd expect.

Our next question comes from Manav Gupta with Crédit Suisse. Please go ahead.

Hi, guys. How much of Bakken crude are you running in your system? And how much can you run, if you're actually operating close to 100%? I'm trying to understand if DAPL does go down and the Bakken spreads do widen, then how much could Par benefit from it?

Yes, this is Joseph. We consume approximately 15 million barrels of Bakken in our system between Tacoma and Wyoming refinery. And this includes PROB, Bakken lookalike. So from a pricing upside standpoint, this will be the impact. From a physical standpoint, we are not relying in any way on the DAPL operations. We have all the flexibility in the world to keep our crude supply optimized, even without DAPL.

I mean, the question was, if DAPL goes down how could you benefit? So, I completely understand. The second quick question is, you kind of indicated that looking at current margins and stuff, you expect to be positive on the cash side in refining. I'm just trying to understand, your refining is pretty closely tied to your logistics. And if you can raise the refining rates, I'm assuming then there's a tailwind for the logistics business also. So could you give us an outlook for the logistics business in 2021, based on the fact that you actually are seeing an improvement in demand and you could actually raise your refining utilization?

Sure, Manav. This is Will. Your point about throughput and sales driving logistics activity is especially important for our mainland operations in Wyoming and Washington. We expect that as throughput and sales improve, we will see a return to previous levels of EBITDA contribution from those assets. Aside from the expected downturn in Washington's first quarter, where we're anticipating reduced throughput, we expect a return to regular contributions from those business units. Regarding Hawaii, the main factor is the demand for refined products, particularly on the neighboring islands, which is showing improvement. We observed progress in the fourth quarter and are continuing to see improvements in the first quarter. The logistics situation in Hawaii is not strictly dependent on reaching total throughput of 115,000 or 120,000 barrels a day. We can achieve a level of logistics profitability consistent with prior years without reaching that throughput target. I hope this gives you a clearer understanding of how we can return to prior year levels of logistics EBITDA contribution, specifically thinking of 2019 figures, despite lower throughput in Hawaii.

Makes a lot of sense. Thank you so much for taking my questions.

Our next question comes from Patrick Sheffield with Beach Point Capital. Please go ahead.

Hey, guys. Thanks for taking my questions. Most have been answered, I have a couple housekeeping ones. On the sale-leaseback transaction, you guys referenced paying down some associated debt. I assume that's the retail property term loan. Was there anything else that you paid down with some of the proceeds?

That's correct, Patrick. It's the retail loans. And again, I think we'd expect to pay down the balance. There's a series of smaller property loans. And I think pro forma for closing each of the transactions we’d expect to pay down those retail loans. And then, that will be the net cash proceeds of roughly $62 million.

And Pat, we closed down 90% of those sales in the last 48 hours and we are doing more.

What is the additional lease expense, and how will it affect our retail EBITDA?

Sure. So we filed our 8-K with the details of the lease in it, but roughly the $7 million annual lease expense. So I think when you look at the segment retail results going forward, the annual result will be about $7 million lower. However, if you looked at it on a corporate level, in aggregate, our interest and amortization related to the retail loans was about $3.5 million. So net, it's really an increase of about a $3.5 million outflow for us on a consolidated basis.

Pretty good deal.

We thought it was an attractive transaction. And so, that's why we elected to go ahead with it.

Great. Thanks, guys. That’s all I had.

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. We look forward to the next few months as vaccinations climb, case rates decline, and mobility trends improve. I believe there's a lot of pent-up demand for personal travel and our company is well positioned to benefit from increased travel and an economic recovery. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.