Par Pacific Holdings, Inc. Q4 FY2022 Earnings Call

Thank you, Anthony. Welcome to Par Pacific's Fourth Quarter Earnings Conference Call. Joining me today are William Pate, Chief Executive Officer; Will Monteleone, President; Shawn Flores, SVP and Chief Financial Officer; Richard Creamer, EVP of Refining and Logistics; and Danielle Mattiussi, SVP and Chief Retail Officer. Before we begin, note that our comments today may include forward-looking statements. These 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 Chief Executive Officer, William Pate.

Thank you, Ashimi. Good morning to our conference call participants. 2022 was a breakthrough financial year for our company. Early last year, product cracks rebounded from pandemic lows and remained strong throughout the rest of the year. Adjusted EBITDA was $643 million, and adjusted net income was $475 million or $7.93 per share. Nearly all our adjusted net income was converted into cash from operations for the year. We used our free cash flow to strengthen our balance sheet. We paid down nearly $65 million in funded debt and built our cash on hand by more than $375 million. Consequently, our year-end net debt declined to approximately $25 million. Our team also announced a comprehensive refinancing of our funded debt this month further reducing our cost of capital. This financing, coupled with our strong liquidity, leaves us well positioned to close the Billings transaction. We're targeting a June 1 closing. Entering 2023, our markets continue to be tight. Global product cracks remained strong due to increasing demand, principally due to China, which has abandoned its zero COVID lockdown policy. As evidence of growing demand, Chinese refiners have curtailed exports in the first quarter. Additional European sanctions on Russian petroleum products have tightened freight markets and increased the cost of exports, improving overall refining economics. These trends are somewhat offset by declining natural gas prices, which tend to reduce refinery operating costs and product cracks. The Chinese reopening has combined with overall increased global air travel to boost jet fuel demand, a key element of our sales slate. In Singapore, the jet regrade, or the difference between the price of jet fuel and ultra-low sulfur diesel, has narrowed considerably and occasionally flipped positive for the first time since 2019. We're making significant progress on our renewable projects. In this area, our focus remains on smaller-scale projects that afford us maximum flexibility given the uncertainty surrounding feedstock sourcing, government credit pricing, and overall market dynamics. For example, our Tacoma project will cost less than $2 million, but it will cover 50% of our shortfall. We expect this project to be running next quarter. We're also completing the engineering for the conversion of a unit in Hawaii to produce sustainable aviation fuel. We believe we can complete this 60 million-gallon-per-year project, including feedstock pretreatment for less than $1.50 per gallon of annual production capacity. Our upstream affiliate Laramie also completed a refinancing this quarter, redeeming its preferred stock and replacing their existing term loan facility with a new credit facility. We expect an approximate $10 million distribution in March in conjunction with this financing. I want to congratulate Will Monteleone and Shawn Flores in their new roles as President and CFO, respectively. Like many of our colleagues, they're passionate and highly focused on our corporate mission and strategy, a key reason for our growth and success. I will now turn the call over to Will to discuss our commercial and operational performance.

Thank you, Bill. Before diving into the fourth quarter results, I'd like to thank our team members for their many contributions to our collective success over 2022. Despite the complexities of daily operations, you all managed to run at a remarkable 98% mechanical availability for the year, while the retail team generated a strong financial performance and laid the foundation for future growth. A big thank you to the team for your dedication and hard work. The Refining and Logistics fourth quarter market backdrop remains firm, rewarding refining utilization rates. Total refining throughput was 134,000 barrels per day or 86% utilization. During the quarter, our per barrel production costs were $5.42 in Hawaii, $3.57 in Washington, and $7.80 in Wyoming. Production costs per barrel were impacted by minor planned maintenance activities in Hawaii and Wyoming, which modestly impacted throughputs and operating expenses. For the full year, Hawaii production costs were $4.86 per barrel, Washington was $4 per barrel, and Wyoming was $7.32 per barrel. Despite increases in energy costs, the first quarter Washington turnaround, and planned small maintenance in Hawaii and Wyoming, in an $80 per barrel Brent and $4 Henry Hub price environment, we would expect Hawaii production costs between $4.25 and $4.50 per barrel, Washington near $3.50 per barrel, and Wyoming between $7.50 and $8 per barrel. From an overall reliability and operations standpoint, we have no major planned maintenance activities in 2023. Shifting to commercial matters, the fourth quarter Singapore 3-1-2 index declined approximately $4 per barrel to $22.84. Landed feedstock costs were approximately $9.15 premium to Brent compared to the initially provided estimate of $8.50 to $9 per barrel. Combining the 3-1-2 and feedstock indexes, the overall margin environment compressed by about $5 per barrel versus the third quarter. Adjusted gross margin declined by a commensurate amount, allowing us to maintain capture rates near 100% of the combined index. In Washington, market conditions declined by approximately $5 per barrel but remained seasonally strong at $28 per barrel with very strong conditions early in the quarter. Despite this nearly $5 per barrel drop in the index, we were able to increase adjusted gross margins to approximately $22 per barrel. Improving capture rates were largely driven by wider inland crude discounts relative to ANS and softening backwardation. Wyoming market conditions declined by approximately $8 per barrel compared to the third quarter. However, Wyoming adjusted gross margin only declined by approximately $2 per barrel, largely due to lower FIFO inventory impacts. Looking ahead to the first quarter, we expect Hawaii to run between 78,000 and 82,000 barrels per day, Washington between 40,000 and 42,000 barrels per day, and Wyoming between 15,000 and 17,000. In total, this results in a seasonally strong total throughput midpoint of 137,000 barrels per day or 89% utilization. In Hawaii, the Singapore 3-1-2 has averaged $23 per barrel with notable strength in gasoline and jet fuel offsetting gas to oil softening. On the feedstock side, we expect Q1 average crude to land between $8 and $8.50 versus Brent, a modest improvement from the fourth quarter levels. As a reminder, average landed feedstock costs operate on about a 90- to 120-day lag versus prompt quarter market conditions. In Washington, the PNW 5-2-2-1 index has averaged approximately $30 per barrel quarter to date. Wyoming index is averaging $49 per barrel, with notable counter-seasonal strength largely due to regional refinery outages. Moving to the Retail segment. First of all, I'm very excited to announce that Danielle Mattiussi has joined our team to lead the retail business unit. Danielle has a wealth of experience in convenience retail, and I'm excited to work closely with her to take our operations to the next level. The Retail segment generated a record financial quarter with stabilizing fuel volumes and expanding margins across both fuel and merchandise. Fourth quarter same-store sales fuel and merchandise volumes ramped up nicely growing 1% and 4.5%, respectively, versus 2021 levels. We completed the 3-store acquisition and also had 2 new to industry sites under construction. The Hele and nomnom brands are well positioned in their respective regions for future growth. Key 2023 focus areas are maintaining strong operational reliability, successfully integrating Billings, growing our retail brands, and progressing our renewable projects. With respect to Billings, we continue to be impressed with the high quality of the refinery and logistics team. Significant transition efforts are underway for a June 1 transaction closing, and we remain confident in our synergy targets.

Thanks, Will. Fourth quarter adjusted EBITDA and adjusted earnings were $175 million and $133 million or $2.20 per share. Full year adjusted EBITDA and adjusted earnings were $643 million and $475 million or $7.93 per share. The Refining segment reported $146 million of adjusted EBITDA in the fourth quarter compared to $188 million in the third quarter. Fourth quarter adjusted EBITDA includes a net price lag benefit in Hawaii of $10 million, offset by a negative FIFO impact of $4 million in Wyoming and a product crack hedge loss of $4 million in Hawaii. We have continued our crack hedging framework in Hawaii and currently have approximately 25% of our first quarter sales volumes hedged at levels marginally higher than the current market conditions. The Logistics segment reported $16 million of adjusted EBITDA in the fourth quarter compared to $22 million in the third quarter. The Logistics results were primarily driven by one-time pipeline maintenance activities in Hawaii, resulting in increased operating costs and marginally lower asset utilization. The Retail segment reported record quarterly adjusted EBITDA of $25 million during the fourth quarter compared to $20 million in the third quarter. As we referenced previously, the strong Retail results were driven primarily by increased margin in fuel and merchandise sales. Shifting to the cash flow statement, cash provided by operations during the fourth quarter totaled $132 million, excluding net working capital outflows of $48 million. Working capital outflows were primarily driven by increased RIN settlement activity as we effectively cash settled 60% of our 2022 net RIN obligation during the quarter. Cash outflows from investing activities of $50 million during the fourth quarter include the impact of a $30 million deposit for the upcoming Billings acquisition. Total liquidity at year-end was $577 million, made up of $491 million in cash and $86 million in availability. Next, I'd like to provide an update on our recent capital market activities. Earlier this month, we announced the successful pricing and allocation of a $550 million senior secured term loan. The new facility will simplify our capital structure, reduce our cost of term debt by approximately 100 basis points, and better position the company to pursue future growth opportunities. The facility is expected to close by early March, and the proceeds will be used to take out our existing Term Loan B and senior secured notes. As Bill mentioned, 2022 was a breakthrough year for our company. We generated over $450 million of cash flow from operations, which we used to bolster our balance sheet. Our federal net operating loss carryover reduced our cash tax liability by approximately $100 million and was a key factor in achieving our debt reduction objectives. Last year, we paid down $64 million of term debt, repurchased $8 million in stock, and increased our cash position by $379 million, which we will use to fund the upcoming Billings acquisition. As a growth-oriented company, we will continue to identify attractive development opportunities to enhance our integrated supply network across our core markets. This concludes our prepared remarks. Operator, we'll turn it back to you for Q&A.

This is Nicolette Slusser on for Neil Mehta. And congrats, Will and Shawn, on the new respective roles. So the first question here would be on Billings. And as we approach the targeted 2Q close date for the transaction, can you just talk about what key factors we should be looking out for ahead of close? And then any thoughts around expected timing within the quarter?

Nicolette, it's Will. So again, I think key factors we've laid out to date, we're targeting the June 1 closing. Again, we're on track for that. And I think focused on the key items that relate to achieving that date again the carve-out audit and ultimately standing up the technology and systems necessary. Again, I think in terms of the overall project, we remain confident in our synergy targets. We spend a lot of time on the ground with the team. Our belief is that the overall overhead, commercial, and operating targets are achievable. We're focused on, as identified, opportunities for us to deploy low capital items that will generate high returns to increase reliability.

Thank you for the color. And then the second question here is just on Hawaii, and I think most are trying to get to a better sense of normalized longer-term EBITDA for the business. Can you talk about what factors may be driving a higher capture rate outlook for Hawaii refining that may be more structural going forward?

Shawn, do you want to cover the capture rate? And let me just say, first of all, Nicolette, that the refined products market in Singapore continues to be very strong. Generally, it's trading kind of with the European market based on arbitrage economics. To give a little color, the 3-1-2 peaked at $45 a barrel in June of 2022, and it's been trading in the high teens to the low 20s for most of this year. What we're seeing overall is just gasoline and jet improved as diesel comes off highs. The market seems to have built in a premium right now for the Chinese demand rebound related to the cessation of their zero COVID lockdown policy. One interesting telltale is the regrade that I mentioned in my prepared remarks, with jet really coming up and trading in parity with diesel. I think this indicates a healthy market. Longer term, the other factors to focus on are that Chinese actions continue to be very supportive of their longer-term policy message that they will cease delivery of clean refined product exports by 2025. Shawn, do you want to go ahead and cover the capture?

Yes, Nicolette. As far as capture looking forward, I think we feel like the recent capture rates in Hawaii, looking back to Q3 and Q4 of last year are sustainable. Obviously, we had some price hike benefits in each of those quarters. But as we look ahead, the easing backwardation environment should offset those price hike benefits from recent quarters. Therefore, I expect capture to hold in closely with the prior two quarters.

Congrats on the Q4 results. The release mentioned the $10 million distribution coming from Laramie, which it sounds like it stems from the refinancing. But now that the debt is in a better place, could you talk about the prospects for future distributions from Laramie to Par, just based on the underlying profitability at Laramie?

Sure. And yes, you're correct, Matthew. The distribution is related to the refinancing. We essentially completed a $160 million funded facility, and that took out $135 million in liabilities and permitted a $25 million distribution. So we're getting our pro rata share. Going forward, the facility will permit distributions based on a minimum asset coverage ratio, which is based on the NPV of the reserve base and the level of debt. The company continues to perform well and actually benefited from the strong market conditions on the West Coast over the winter, facilitating this distribution. I wouldn't expect distributions to be more common than annually. But based on an early February strip and current hedge levels, we would expect to receive distributions in most years going forward, just subject to our drilling investment levels.

Any sense based on current strip on what a 2023 distribution might look like to Par?

Not at this point. It's really going to depend on how much we commit to drilling and that will depend on the strip. In a somewhat counterintuitive fashion, the lower the price, the more likely there will be a distribution. The higher price, the more likely we'll put money to work to grow our reserve base, which will probably lead to greater distributions post-2023.

Okay. And then my follow-up is on the Washington CFS or clean fuel standard program. I believe that is scheduled to start on January 1, 2023. I was hoping you could talk about, on the refining side, do you anticipate that buying these credits would impact your refining capture rate at Washington going forward? And then on the renewables side, do you see this as a boost to this coprocessing project that you're working on?

Sure. So Matthew, I think what we've observed is that the clean fuels or aspects of Washington operate similarly to California, where it impacts rack pricing versus the wholesale under-octane price that you see that OPIS publishes. I wouldn't expect major impacts to capture; it will likely affect working capital and some other items as we consider the overall multi-year settlement time frames that will play out in this. I think we're well positioned to ultimately recoup the cost of that given our strong logistics network. In terms of the coprocessing project, the state is still very early in rolling out some of the specifics around the regulations and the way the coprocessing will function, so TBD on whether coprocessing will qualify for ultimately reducing the carbon intensity of the fuel. But logic suggests it should over time.

So my first question is on maintenance and CapEx. I know you have no major maintenance this year. How should we expect the maintenance cycle to look once Billings is complete? With the fourth refinery, can you stagger them so you maybe have one major turnaround per year? And then relatedly, how should we think about the longer-term CapEx and maintenance in this business annually after Billings is complete? I think you said $95 million for Billings. But just an update on how we should think about the entire system, including Billings.

I wouldn't highlight any changes to our overall maintenance and turnaround cycle for our existing assets. Typically, we've been investing around $40 million annually in maintenance and regulatory capital expenditures. Additionally, we've had around $20 million a year for amortized turnarounds, totaling approximately $60 million in annual spending. This can fluctuate year to year, and in 2023, we aren't planning significant turnaround expenditures due to timing. I don't anticipate any specific alterations to our plans regarding the existing asset base. For Billings, we expect a maintenance and regulatory requirement of about $15 million annually alongside the $20 million for amortized turnarounds. Overall, we are looking at just under $100 million in normalized maintenance and turnaround needs. As for the timing related to Billings, we still cannot disclose the specific turnaround schedule. There are no major items expected in the second half of 2023, and the $20 million a year is a reliable figure for amortized turnarounds. Our cash flow can vary, with some years being larger than others, but over a five-year period, this should be a solid number for your financial models.

That's helpful. And then on the retail side, you've shown some nice improvement throughout 2022. You spoke about it a bit in the opener, but maybe you can just talk a little more on the dynamics there around tourism and any other drivers of that strength? And how you think 2023 could shape up?

Sure. On the retail side, I think the Hawaii market is a little bit different than the mainland markets. In particular, our store footprint is heavily weighted towards Hawaii. We have not seen the full recovery of, in particular, Japanese tourism to Hawaii. It's inching its way back, probably moving towards 40% to 50% of pre-pandemic levels. There are positive macro trends on the overall shift in mix and tourism in Hawaii. We feel good about our overall store portfolio there. The Hele brand has been very well received in the market. We continue to look for ways to grow in that market with one new-to-industry location under construction that should be online this year. Regarding the Pacific Northwest, it is probably more similar to the mainland markets. The nomnom brand is relatively new in that market, and we've received positive feedback. We look forward to working closely with Danielle to grow that business further. Overall, we have a good foundation and some opportunities to continue to improve.

I wanted to ask on capital allocation just given debt target levels, and you're carrying cash on the balance sheet well in excess of what's needed to close the Billings acquisition. So how do you think about capital allocation and priorities of deploying cash moving forward, taking dividend, buyback, and growth? Comments on all three would be helpful.

Jason, this is Shawn. As we referenced, we're a growth-oriented company, and our near-term capital allocation policies will reflect that strategy. What we've said is we want to get through Billings, integrate it. Will mentioned some capital projects that are on the table to increase reliability, which we think will be really attractive. After Billings is integrated, we'll focus on identifying other attractive opportunities to enhance our network. If we can't identify capital projects over time, then we'll evaluate returning capital to shareholders. Bill, anything you'd add?

No.

Got it. And in terms of the inorganic growth aspect, are there areas that are more attractive, either regionally or by asset type?

Jason, this is Bill. I've said this before, and I'll say it again, we're really focused on closing and integrating Billings. Beyond that, we continue to look at the same areas and avenues of growth, investing in renewables, which we're doing right now and expect to continue; adding to our retail footprint, which we're doing with new-to-industry builds as well as the recent acquisition, which is going quite well. We will continue to look at communities we can serve through additional refinery acquisitions.

Understood. And just one more on—there was an inflow on cash from financing, I think, of almost $15 million. Can you disclose what that was related to?

Yes, Jason. I think it was a number of small items. One I'd call out is we finance our pre-funding on our insurance premiums. It's roughly $15 million to $20 million. It's located in two places; you'll see it as an inflow in the financing section and an outflow in cash from ops. The other small item was just general funding and our working capital in Hawaii under the draw facility, but it's not a big deal.

There appear to be no further questions. 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, Anthony. I want to thank everybody for joining us this morning. This is an exciting time for Par Pacific. With a favorable market outlook, we look forward to closing and integrating the Billings acquisition and the continued growth of our company. Have a good day.

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