Par Pacific Holdings, Inc. Q1 FY2021 Earnings Call

Good day, and welcome to the Par Pacific First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ashimi Patel. Please go ahead.

Thank you, Matt. Welcome to Par Pacific’s first 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 for 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. Our first quarter results reflect the continuing demand suppression brought about by the global pandemic. However, we noted several positive developments in the United States during the first quarter: an increase in vaccination rates, improving mobility trends, growing employment, and increasing business openings. These factors indicate that our industry is at a key inflection point. First quarter adjusted EBITDA was a loss of $43 million and adjusted net loss was $1.55 per share. These results included a $47 million non-cash prior period mark-to-market expense. In March, we were pleased to see substantial improvement in our refineries' profitability. This was a welcome change and market conditions continue to improve early in the second quarter. Air travel to Hawaii increased significantly with the advent of spring break. This growth boosted our Logistics segment utilization and profitability as neighbor island demand approached normal. Passenger arrivals to the state are now approximately 65% of pre-pandemic levels, primarily driven by increases in domestic travel from the U.S. Mainland. International arrivals continue to lag domestic trends due to lower vaccination rates in key nations like Japan. Despite the slow international tourist recovery in Hawaii, we can operate our refinery in the range of 85,000 barrels per day and easily place all our refined products in local markets. On the mainland, product cracks have improved seasonally as inventories have returned to normal levels and refined product demand recovers. Cracks have improved over the prior year, even when adjusted for the record RINs prices. The Texas freeze has not affected a number of refining units and as a result, inventories are now at normal and even low levels in some areas. Wyoming has particularly benefited from the improving environment. We expect our retail segment to rebound from the weaker Q1 performance as crude oil prices stabilize and traffic volumes increase. Our Northwest retail unit began rebranding to our proprietary NomNom convenience store brand this winter and we expect this initiative will boost segment profit in the coming quarters. In Washington State, several pieces of legislation have been passed to help reduce greenhouse gas emissions. If these bills are signed by Governor Inslee, they will enact cap-and-trade limitations on greenhouse gas emissions and low carbon fuel standard regulations similar to the California framework. We expect these regulations will have a significant impact on the industry; although establishing the regulatory framework will take time. We’re confident that our operations are well-positioned for these new regulations, given our low scope one greenhouse gas emissions, our newly completed renewables logistics system, and our unique product yield. During the first quarter, we closed two significant transactions to continue to increase our liquidity. We completed a $116 million sale-leaseback of certain real estate properties and an $87 million equity issuance. Our liquidity and net debt position are in the best shape since the closing of our Tacoma refinery acquisition in January 2019. Our current liquidity of $287 million is substantially greater than liquidity levels at the end of 2019 when we faced three major turnarounds and unbeknownst to us a historic refining downturn. Our net debt position is also down to $462 million, more than $45 million below our net debt level at year-end 2019. Overall, we anticipate improving profitability as the economy recovers. Forward cracks in Singapore are in steep contango anticipating increasing demand. Going forward, we expect much of the global demand growth to be distillate. Refined product demand softness is now largely concentrated in jet fuel. The largest domestic jet fuel markets like the United States and China are rapidly recovering to pre-pandemic levels. Remaining demand recovery will largely revolve around international travel as countries open their borders to other markets. While there is a limited global recovery underway, there are occasional setbacks like the current surge in India. Volatility is high as the market attempts to identify recovery trends. Nonetheless, after the market has fully recovered, we expect a balanced market with high utilization as a result of the refinery closures during the pandemic. At this time, I’ll turn it over to Joseph to discuss our operations in more detail.

Thank you, Bill. In the first quarter, our system demonstrated safe and reliable operations, along with the smooth execution of our planned turnaround in Washington. No additional major maintenance is planned for the rest of the year for our entire system. Demand recovery has supported margin improvement in all three markets, which has accelerated with a typical seasonal trend, mostly for our Wyoming and Washington refineries. Our Wyoming 3-2-1 Index in the first quarter was $20.97 per barrel. And our refinery throughput averaged approximately 15,000 barrels per day. Our realized adjusted gross margin in the quarter was $2.35 per barrel, including an approximately $8.50 per barrel of prior period month-to-month expense. Our production costs were slightly elevated at $8.10 per barrel due to timing, but as mentioned in the past, we are expecting to average close to $6.50 per barrel on an annual basis. So far in the second quarter, our Wyoming 3-2-1 Index has averaged over $28 per barrel and we are well-positioned to supply the strong demand, as we transition to the gasoline season in the Rocky Mountains. Our second quarter throughput target is in the 17,000 to 18,000 barrels per day range. In Washington, we executed our planned 20-day oil-to-oil turnaround on time and on budget. Our first quarter Pacific Northwest 5-2-2-1 Index was $11.46 per barrel on ANS basis. And our refinery throughput, including the turnaround impact, averaged approximately 32,000 barrels per day. Our realized adjusted gross margin was a negative $1.33 per barrel, including an estimated negative $1.30 per barrel of turnaround impact and then approximately $3.38 per barrel related to prior period mark-to-market expense. Our production costs were $4.36 per barrel in the quarter. So far in the second quarter outlook, the 5-2-2-1 Index has averaged close to $15 per barrel and our plant throughput is approximately 39,000 barrels per day. NOI, our Singapore 3-1-2 Index in the first quarter was $3.80 per barrel on brent basis and our realized crude differential averaged a $1.02 per barrel premium to brent. Our throughput averaged approximately 81,000 barrels per day and our realized adjusted gross margin was a negative $0.46 per barrel including an approximately $3.57 per barrel related to prior period mark-to-market expense. Our production costs were $3.97 per barrel including approximately $0.40 per barrel of non-recurring maintenance and transition costs from our west. The fresh wave of COVID in Asia has slowed down demand recovery and our Singapore 3-1-2 Index has averaged approximately $3.65 per barrel so far in the second quarter. However, two reasons, an activity surge to NOI mainly from the U.S. Mainland is triggering higher demand for our products. Our estimated crude differential is a $1.92 per barrel premium to brent. And our second quarter throughput target is in the 82,000 to 85,000 barrels per day range. The refinery team is focused on the bottlenecking opportunities to support crude flexibility, as we increased utilization and get closer to our 94,000 barrels per day nameplate capacity. In summary, we are excited to put turnaround activities behind us and maximize our asset utilization as we transition back to positive profitability territory. With that, I’ll turn the call over to Will to review our consolidated results.

Thank you, Joseph. First quarter adjusted EBITDA and adjusted earnings were a loss of $43 million and $84 million or $1.55 per fully diluted share. Focusing on accounting items first, our financial results include a $47 million prior period mark-to-market expense related to the 2019 and 2020 renewable fuel standard compliance years. In addition, Wyoming refining results benefited from a $7 million first in first out benefit in a rising price environment. Impacting our GAAP results was a $64 million gain related to the sale of certain Hawaii retail real estate as well as approximately $1.5 million in debt extinguishment costs related to redeeming property level financing. Shifting to segment results, the retail segment adjusted EBITDA contribution was $8 million compared to $16 million in the fourth quarter of 2020. The reduction was largely driven by margin compression in a rising price environment, while volumes remained below pre-pandemic levels. The month of March showed a material improvement over the early part of the quarter with margin stabilizing and volumes beginning to grow compared to recent months. Same-store sales fuel volumes were down roughly 13%, while merchandise sales were up approximately 3%, compared to the first quarter of 2020. The Logistics segment's adjusted EBITDA contribution was $16 million, up $7 million from the fourth quarter of 2020. The improvement was driven by a full quarter of Hawaii neighbor island demand growth as well as increased Wyoming sales post turnaround. Washington throughput was marginally impacted by the turnaround activities during the quarter. Hawaii neighbor island activity levels increased throughout the quarter, culminating in March. Looking forward, a full quarter of March level demand would bode well for the second quarter Hawaii contributions. The Refining segment recorded a segment adjusted EBITDA loss of $55 million. The prior period non-cash mark-to-market expense of $47 million was split $26 million in Hawaii, $10 million in Washington, and $11 million in Wyoming. Excluding the prior period mark-to-market expense, Refining segment adjusted EBITDA would be a loss of $9 million. Notwithstanding a rapidly increasing price environment that squeezed Hawaii refining gross margins on fuel oil, we continue to see improvements in our adjusted gross margins relative to our Benchmark Indexes. Washington results were negatively impacted by compressed margins on asphalt in a rising flat price environment as well as lower sales due to turnaround activities. Wyoming saw improvement throughout the quarter with volumes and margins expanding steadily. Laramie generated adjusted EBITDAX of $54 million and net income of $40 million for the first quarter of 2021. The largest driver of this improved financial performance was gas price realizations of $6.83 related to favorable market positioning during winter storm Yuri. First quarter cash consumed from operations was $31 million, excluding the impact of RINs and deferred turnaround expenditures, networking capital was a use of approximately $8 million. Capital expenditures were $8 million and accrued deferred turnaround expenditures were $6 million, totaling approximately $14 million. Accrued cash interest equaled $16 million. Our quarter-end liquidity totaled $287 million, made up of $215 million in cash and $72 million in availability. This reflects the completion of the $116 million sale leaseback, repayment of the $53 million in property level obligations, and the issuance of $87 million in common stock. In addition, we have recently extended the J. Aron agreement by one month and expect to enter into a multi-year extension shortly. With our liquidity on hand, we are well-positioned to cash settle the upcoming convertible note if required, as well as consider other alternatives to reduce our funding costs. First quarter total operating expense plus Logistics segment cost of goods sold increased approximately $4 million compared to the Q2 through Q4 2020 average. The increase was largely driven by increased R&M expense, utility costs due to higher flat prices, insurance, and approximately one month of lease expense associated with the sale-leaseback transactions, partially offset by reduced logistics commitments and other cost savings initiatives. This concludes our prepared remarks. Operator, I’ll turn it back to you for Q&A.

We’ll now begin the question-and-answer session. Our first question will come from Phil Gresh with J.P. Morgan. Please go ahead.

Yes. Hi, good morning. My first question would be just how you commented a bit in the prepared remarks about how you see things trending here in the second quarter. Some of your peers have been willing to talk about April EBITDA performance; I wasn’t sure if you’d be willing to lean out there and share any information there and in particular, how things are going in Hawaii. It looked like if you back out the mark-to-market effects it was a pretty strong capture rate in the first quarter. So, any color there.

Sure. Thanks, Phil. This is Bill. We’re definitely seeing a pretty significant change in profitability, especially if you compare January and February to March and beyond. By the end of March, we were really pushing the refineries and operational reliability then becomes the key factor to achieving nameplate capacity. It’s more a matter of market trends, and you can see that in all our markets with our market indices cracks that have been improving. We believe we can improve our capture over time in Hawaii, which is largely related to some of the contractual improvements; but there are other factors as well. And obviously, by increasing throughput at every refinery, we also think we can get our operating costs down to a more manageable level. So I think we’re at a point in the cycle where the profitability for our refining business will improve materially, and you started to see the improvement from logistics in Q1, which was really on the backs of increased throughput in sales in March. We expect to see additional improvements in logistics going forward. Overall, things look pretty good. Retail obviously had a rougher quarter, but keep in mind that was on the back of an almost record quarter in Q4. We’re also starting to see some impact from the sale-leaseback because we closed that at the end of February. So that will be a factor going forward, and we started transitioning our Northwest retail stores to our own brand and that has some disruption. But I think we’re really well positioned in all of our units as we move forward, as long as the market cooperates, and we’re starting to see that cooperation.

Okay, great. My second question would be a bit of a macro one. I appreciate all the updated colors that you’ve provided the slides around sensitivities, et cetera. If I look at the Singapore crack spread relative to the two U.S. crack spreads, they’ve all gotten back closer to the five-year average levels, but were closer to it, whereas Singapore has lagged. And I think you’ve touched on some of the factors there. But do you think that Singapore cracks can get back to normalized levels just with a demand recovery or do you see supply factors in Asia needing to come to bear to help balance the market?

Certainly, there’s been a significant increase in supply over the last year and a half, but keep in mind, there’s also been a lot of rationalization. Even in the last 24 hours, Shell accelerated the reduction in their Singapore refinery. It’s a 500,000 barrel per day refinery; they were supposed to ratchet it back to 300,000 barrels at the end of 2023. They announced in the last 48 hours that they’re going to do that at the end of July. So, we are seeing supply change in the market. When you look at the Singapore cracks, keep in mind, it does not include the impact of RINs. A lot of the impact we’re seeing in the local mainland U.S. market is driven by higher RINs prices and higher agricultural prices, which drive ethanol and biofuels. You don’t have that impact in the Singapore market. I think there’s just more of an international factor there, given international travel and the relationship of nations and how lockdowns have occurred in those countries. I think that market will return to some kind of historical means, but we’re in for a lot more volatility everywhere, whether it’s the U.S. or Asia, just given all the changes that are affecting the industry.

And let me add, a common theme in all our markets is that gasoline crack spreads are strong as consumers are back on the road, but really the wild-card is jet fuel recovery. We lost $3 million to $4 million barrels per day of demand in 2020, and we’re having a harder time recovering there, especially with international flights; this is a global challenge. It holds diesel crack spreads down even with a very healthy demand profile. It's out for the diesel crack spreads to go up as long as the refineries need to continue and put jet fuel into diesel.

To Joseph’s point, we typically track a pretty good barometer of the incentive, which is basically the spread between jet fuel and Singapore diesel. We've seen that narrowing over the last two weeks and I think that’s a positive indicator for the relative value of those two products. Ultimately, I think that’s a good barometer to watch with respect to when jet starts getting produced intentionally.

That makes sense. Thanks a lot.

Our next question will come from Neil Mehta with Goldman Sachs. Please go ahead.

Hi, this is Carly on for Neil. Thanks for taking the questions this morning. Wanted to start off on retail. The quarter was a little lighter than normal there and you touched on it a bit in the prepared remarks, but can you just walk through the moving pieces that impacted results in Q1 and then talk a little about how those dynamics have evolved into Q2 here across both your markets?

Sure, Carly, this is Will. Yes, I think first on the volume side, you can see in the first quarter our volumes even lagged. We were in the fourth quarter. Part of that is fewer days in the first quarter, but I think we also had just a little bit of a lull that occurred in our markets. March was materially different than January and February from a volumetric standpoint. We are also in the process in the Northwest of transitioning our brand early in the quarter and there’s some disruption that occurs with that. The rapid increase in crude prices also compressed margins because typically street prices are sticky and supply costs move faster. In a rapidly rising price environment like we saw in Q1, we tend to see margin compression; so those are the biggest factors that impacted the compression on the retail side. As Bill referenced, the stabilization of crude flat prices as well as the ongoing recovery in our markets is positive for a rebound in the retail segment.

And Carly, this is Bill. I’d just add one other thing, especially with respect to gasoline in Hawaii. It’s really consumed largely by the local population. The employment trends are probably a bigger driver of gasoline consumption. Particularly for our network because we tend to be Hawaii-focused. So even as we see passenger arrivals ramping up in the neighbor islands, that’s not going to have the same impact on gasoline volume that we’ll see on jet. We’re really watching a return to employment due to the international arrivals and a return to the tourist population if you will in Honolulu.

That’s helpful. Thank you. My follow-up is around RINs; I appreciate you breaking out the mark-to-market impact there. We heard the Supreme Court oral arguments in the last couple of weeks. I’d love to get your read on the key takeaways from that process thus far and ultimately, how you see Par's exposure to RINs obligations for the 2019 to 2021 compliance years.

Yes, this is Bill. I’ll start and then let Will cover any of the granularity. The Small Refineries Council did a great job of explaining why the law permits small refiners that demonstrate hardship to seek an exemption at any time. This has been the EPA's established policy since the inception of the RFS back in 2007 under three different administrations—two Republican and one Democratic. Only in the last few months, in the wake of the Tenth Circuit opinion, had the EPA changed that stance. We expect the Supreme Court to reverse the Tenth Circuit, and when that happens, the EPA will grant us our waivers for 2019 and 2020. Will can cover how we account for that, but I think that’s why we referenced the mark-to-market in a different way. The factors affecting pricing are somewhat related to this issue. Unfortunately, RINs have become more of a political instrument than a consistent policy, and the only thing worse than government regulation is government regulation that has become a political football.

Carly, with respect to the accounting for the RINs, as we referenced the $47 million mark-to-market, our net liability at the end of the first quarter was roughly $126 million based on the $1.38 average RIN price. One thing you should keep in mind is that the Renewable Fuel Standard allows you to defer settlement for up to two consecutive compliance years. This would allow us to defer our 2021 compliance settlement until the 2023 time frame. Based on our operations and commercial activities, we estimate our year-end 2021 RINs value at approximately $100 million holding prices constant as of March 31. With this asset available to support our prior period settlement obligations, we think our net cash requirement, should the court rule against us, would be substantially less than $125 million. As Bill said, with the oral arguments recently occurring, we expect the Supreme Court to reverse the lower court’s decision and for the EPA to grant us the waivers for the 2019 and 2020 years.

I appreciate the color, thanks.

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

Hi, good morning, everyone. Joseph, I was a little surprised by the crude guidance in Hawaii; it looks like it’s getting more expensive for you by about $0.90 per barrel in Q2 compared to Q1. Are there any particular crudes that are moving against you here? Could you also talk about how tanker costs are trending for you?

Good morning, Matt. It’s not a question of quality or different types of crudes we’re running this quarter versus the prior quarter. Just remember the two to three months lag that we have on our crude pricing, and the crude we will be running in the second quarter has already incorporated the price recovery around the world.

Hi, Matt. This is Will. As Joseph referenced, the crude consumed during the first quarter was largely procured during the late third or fourth quarter of 2020, reflecting a more challenging market environment. I think we’re seeing the shape of the curve shift from contango to backwardation, and those are the major factors driving the modest increase on the crude side. On the freight side, I think it’s been relatively stable, so I don’t think we have any significant concerns there.

Sounds good, thanks. Laramie put up excellent EBITDA numbers: $54 million compared to about $12 million last year. But I guess through your accounting, that doesn’t affect Par's EPS. Could you just talk about the economic benefits to Par from Laramie? What is Laramie going to do with that extra cash generated? Does that go to debt reduction or I guess increased growth? Overall on Laramie would be great.

Matthew, you are correct, it doesn’t impact our financial results. Laramie’s management plans to take that incremental cash generated and use it to pay down debt. Laramie is in a position where its capital structure is improving, but this is still a very challenging backdrop for a natural gas producer despite its impressive quarter. We’re continuing to work with Laramie management and other stakeholders there to ensure we maximize the potential value of our equity stake over time.

Our next question will come from Manav Gupta with Credit Suisse. Please go ahead.

Hi. I just had a couple of quick accounting questions. I think your mark-to-market number on RINs, you indicated is $47 million. When we look through your adjusted EBITDA calculations, the number over there is RIN, loss in excess of net obligation at about $29 million. Can you just help me reconcile those two numbers—47 versus 29?

Sure, Manav. This is Will. To understand the non-GAAP adjustment, you first need to understand our GAAP accounting. Our GAAP accounting reflects our RIN liabilities carried at market. In a rising price environment, our liability increases while our assets are carried at cost. The $47 million is related to our open RIN position for the 2019 and 2020 years. The non-GAAP adjustment reflects increasing the value of our RIN assets to market price. This discrepancy is why the two numbers differ.

Okay, that’s very clear. And just what is the open position in terms of number of gallons? Not the dollar amount, what’s the actual gallon open position at this point in time?

We’re not going to share the volumes, but the dollars are approximately $125 million.

And you said that’s $131 million. Okay, thank you for taking my question.

Our next question will come from Jason Gabelman with Cowen. Please go ahead.

Yes, Hi. Thanks for taking my question. I first wanted to ask about the equity raise you did. Can you just talk about the logic behind it? It seems like liquidity is in a pretty good position right now. So why did you decide to issue more shares, and can you elaborate on where you’re going to potentially use those proceeds?

Sure, Jason, thanks for the question. The principal reasoning behind the equity raise was really to give us the tools we need to lower our cost of senior debt funding. If you look at our weighted average cost of debt capital today, it's around 8.5%, which is substantially higher than most of our peers. The capital raise allows us to potentially reduce our cost of debt capital. Additionally, it gives us flexibility to address the convertible note maturing in June.

Are you able to pay down certain debt without much pressure on cost?

Yes, we do have pre-payable debt and debt that can be called per the indentures or credit agreements.

Can you let us know which ones those are?

We’re not going to get into the specifics of which instruments we would use to pay down, but debt reduction and lowering our funding costs is one of our principal financial objectives this year.

Got it. And then my second question, just on the Hawaii margin. It does seem like the margin strengthened, excluding the written mark-to-market impacts. Are you seeing any benefit from these new commercial contracts you mentioned would be kicking in the first quarter? Can you give us any indication of what the magnitude of that benefit was and if that’s sticky and will continue into the future?

So, Jason, this is Will. The best way to measure that is to look at our Singapore 3-1-2 Index subtract the crude differential we provide. Looking at our adjusted gross margin relative to those indices, you'll see a trend that started in Q4, where our capture relative to those indices is improving, reflecting the contractual improvements we’ve been discussing over the last several quarters.

Great, thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to William Pate for any closing remarks.

Thank you, operator. We ended the first quarter with our refineries running at their highest level since the beginning of 2020. Product cracks are moving upward as the world returns to normal. We look forward to increasing profitability on the back of these trends as we enter the summer driving season. Have a good day.

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