WNR earning call transcript May 05, 2011 10AM# Stock
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This is the express transcript from Factset.
Operator: Good morning and welcome to the First Quarter 2011 Western
Refining Earnings Conference Call. After the speakers' opening remarks,
there will be a question-and-answer period. [Operator Instructions] As a
reminder, ladies and gentlemen, this conference call is being recorded and
your participation implies consent to our recording of this call. If you do
not agree with these terms, please disconnect at this time. Thank you.
I would now like to turn the call over to Mr. Jeff Beyersdorfer, Treasurer
and Director of Investor Relations of Western Refining. Mr. Beyersdorfer,
please go ahead, sir.
((Jeffrey S. Beyersdorfer, Senior Vice President, Treasurer and Director of
Investor Relations))
Thank you, Julian and good morning. I would like to thank you for taking
the time to listen in today and for your continued interest in Western
Refining. Again, my name is Jeff Beyersdorfer. I'm the company's Treasurer
and Director of Investor Relations.
Joining me for today's call are Jeff Stevens, our President and CEO; Gary
Dalke, our CFO; Mark Smith, our President, Refining and Marketing, and other
members of our senior management team. If you need a copy of the earnings
release, you may obtain one from the IR section of our website at wnr.com.
Before we proceed, I'd like to make the following Safe Harbor statement.
Today's presentation will contain forward-looking statements, and I
incorporate and refer you to the forward-looking statements section of our
earnings release and recent
earnings release, and recent filings with the SEC. We assume no obligation
to update or revise any forward-looking statements to reflect new or change
events or circumstances.
In addition to reporting financial results in accordance with Generally
Accepted Accounting Principles, or GAAP, we report certain non-GAAP
financial results. Investors are encouraged to review the reconciliation of
these non-GAAP financial measures to the comparable GAAP results, which can
be found in the press release, which is posted on the Investor Relations
section of our website.
I’ll now turn the call over to Jeff.
((Jeff A. Stevens, President and Chief Executive Officer))
Thanks, Jeff. Welcome to everyone on the call. Today, we’ll discuss our
first quarter performance and the steps Western is taking to capitalize on
the strong market conditions we have seen through the beginning of 2011.
After my opening remarks, Gary will review our earnings in more detail and
provide operating guidance for Q2 2011, then we will open up the call for
your question. As stated in our press release we reported net earnings of $
12.2 million or $0.13 per diluted share for the quarter ended March 31st
2011. This compares to a Q1 2010 net loss of $30.7 million or $0.35 per
diluted share. Excluding unrealized loss on economic hedges of
approximately $17 million and a one time on retirement of debt of $4.6
million after-tax earnings in the first quarter would have been $26.1
million or $0.30 per diluted share.
The Gulf Coast 321 benchmark crack spread averaged more than $18 a barrel in
the first quarter as compared to $7.40 in Q1 2010.
in Q1 2010. The continuing widening of WTI to Brent crude oil differentials
was a significant contributor to the refining margin improvement that we
saw during the quarter.
As I mentioned we took several steps during the quarter to capitalize on the
margin environment we are seeing. We quickly responded to the weather
related outage we experienced at Oldcastle in February allowing us to
operate at full capacity during the month of March.
I would also like to point out while this weather event impacted most of the
refiners in the region our Gallup refinery operated at near capacity
throughout the first quarter. Given the strong WTI, WTS spread we increased
our sour crude runs at El Paso and are currently running approximately 10,
000 barrels per day more sour than in 2010.
We added to our gasoline and distillate hedges as of today we have
approximately 20% of our Q3 and Q4 2011 gasoline production hedged at an
average crack of $14 per barrel. And approximately 19% of our Q3 and Q4
2011 distillate production hedged than average crack of $24.71 per barrel.
For 2012, we have hedged about 16% of our total distillate production at an
average crack of $27.59 per barrel. For 2012 gasoline, we have hedged
approximately 7% of our Q1 gasoline production at an average crack of $12.18
per barrel and 3% of our Q4 gasoline production at an average crack at $7.
70. These cracks are all tied to the U.S. Gulf Coast, our target for both
2011 and 2012 is to hedge about 20% to 25% of our total production.
We refinanced our term loan reducing interest expense by
reducing interest expense by $9.5 million annually, extending the maturity
from 2014 to 2017 and eliminating all financial maintenance covenants.
These actions contributed to our improved first quarter results and help to
start off the year well. As an indicator of our strong start, during the
month of March, our refineries ran (ph) at capacity and we effectively
managed our operating expenses. El Paso ran at $3.85 per barrel in
operating cost and Gallup at $6.24 per barrel. As a result the company
generated most of the quarters EBITDA in the month of March alone and this
positive momentum has carried into Q2.
In our other businesses wholesale posted another successful quarter driven
by improving demand for transportation fuels and lubricants in the Southwest
. Fuel volumes in the Southwest were improved by 13% and lub sales were
improved by 12%, compared to Q1, 2010. In retail, poor weather conditions
and rising wholesale fuel cost created a challenging quarter, resulting in
fuel volume in margins that were flat relative to Q1, 2010. However
merchandise sales and margins were modestly improved.
Moving to our East Coast business, we continued to make progress in
upgrading the Yorktown’s capability as a terminal asset. We expect to
complete the colonial pipeline connection in June although we have not
secured terminal customers in line with our original timeframe. We are
working to ensure that the terminalling and storage agreements fit well with
the potential asset monetization. Our goal is to maximize the long-term
value of the Yorktown’s terminal assets.
With respect to debt reduction, western ended the quarter with about 1.05
billion in debt, a reduction of about 16 million during the quarter. Debt
reduction continues to be a primary objective
Continues to be a primary objective of management and over the last couple
of quarters we’ve shared some of the initiatives that we’re pursuing which
will generate cash that can be used to reduce debt.
Also we’ve completed some very important transactions with the refinancing
of our revolver and term loan, resulting in the elimination of all financial
maintenance covenants and the reduction of interest expense by about $13
million annually.
With market conditions we’re experiencing we believe we’ll generate strong
cash flow which will be another source of debt repayment while we continue
to pursue monetization initiatives the refining margin environment has given
us time and flexibility to organize our debt reduction efforts.
Turning the second quarter we continue to see very strong crack spreads with
the Gulf Coast 321 of $25.67 per barrel in April and a forward curve for
the rest of the quarter of approximately $25 per barrel. These includes
relative to the Q1 2011 levels of $18.28 per barrel primarily due to
improved gasoline cracks in the Brent WTI spreads.
In summary we remained encouraged on how 2011 is shaping up our crude safe
and location advantage will allow Western to continue to benefit from this
market environment.
Now Gary will go through our first quarter financials in more detail and
provide operating guidance for the second quarter.
((Gary R. Dalke, Chief Financial Officer))
Thank you Jeff. For the first quarter we reported net income excluding
special items of $15.2 million or $0.17 per diluted share. On a GAAP basis,
the company had net income of the quarter of $12.2 million or $0.13 per
diluted share. These results compared to a Q1 2010 net loss of $30.7
million
$30.7 million or $0.35 per diluted share. A reconciliation of our earnings
– of our net earnings to earnings excluding special items is included in
our press release.
Gross margin at our Southwest refineries was $15.79 per throughput barrel
during the first quarter compared to $8.05 per throughput barrel in Q1 2010.
In the quarter, gross margin at El Paso was $18.70 per barrel and Galup
came in at $19.70 per barrel.
Directing operating expenses at our Southwest refineries were $6.39 per
barrel for the quarter compared to $4.82 per throughput barrel in Q1 2010.
El Paso’s costs were $5.91 per barrel for the quarter compared to $3.77 per
barrel for Q1 2010. The cost at El Paso were significantly impacted by the
downtime in January and February which added one time cost and reduced
operating rates.
In the first quarter, we expensed approximately $7.9 million in El Paso
repair costs associated with the freeze amount in February. As we’ve
mentioned last quarter, our property insurance deductible is $5 million. We
are working with our carriers to finalize our insurance recovery and we
expect to receive these funds in the second and third quarter of this year.
Galup’s operating costs were $6.70 per barrel for the quarter down from $7.
54 per barrel in Q1 2010. This reduction in per barrel cost was primarily
results of improved throughput.
On the East Coast cost related to the temporary suspension of refining
operations at Yorktown were approximately $1.7 million in Q1
million in Q1 2011 and now total approximately $6.2 million since we
announced the suspension in 2010. The remaining suspension cost of
approximately $13 million primarily related to tank cleaning and a pension
termination will be expensed later in 2011.
Total company SG&A costs were $20.4 million for the quarter this compares to
$16.4 million in Q1 2010 which contains a bonus accrual reversal of
approximately $6 million. Excluding this one time reversal SG&A in the
first quarter was improved by $2 million compared to Q1 2010.
Adjusted EBITDA for the quarter was $95.8 million as compared to adjusted
EBITDA of $26.2 million for Q1 2010. Depreciation and amortization expense
for the quarter was $35.4 million, interest expense was $34.5 million a $2.4
million reduction compared to Q1 2010 primarily a result of modestly lower
debt levels.
Our effective tax rate for the first quarter was 35.7%, this rate is more in
line with the statutory rate as compared to our last several quarters
primarily due to the exhaustion of the small refinery (indiscernible) tax
credit.
Cash flow from operations was a negative $21 million in the first quarter as
compared to a negative of $147.6 million in Q1 2010. The primary cause of
the negative cash flow from operations for the quarter was $65 million use
of cash for changes in working capital driven by the increase in accounts
receivable and prepaid prepruchases. This was largely a timing issue which
was created by the unplanned outage at
created by the unplanned outage at El Paso. Total capital expenditures for
the first quarter were $10.8 million. As of March 31, total debt stood at $
1.05 billion, a reduction of approximately $16 million compared to Q4, 2010.
Total liquidity, which we define as cash and availability under our
revolver, was approximately $415 million at the end of Q1. Our daily
average liquidity continues to show improvement. For example, the daily
average liquidity started 2011 has been around $380 million as compared to
our Q4, 2010 average of $280 million. Maintaining strong liquidity remains
a priority and we continue to look for ways to further enhance our liquidity.
As Jeff mentioned earlier, we continue to look for opportunities to place
gasoline adjust for the crack hedges. And as we’ve placed do not call by
for hedge accounting therefore you can expect some volatility in our income
statement going forward. However we feel that hedging a portion of our
production is the best business decision for the company.
Turning to our expectations for the second quarter, our operating guidance
is as follows. We expect crude oil throughput at El Paso to be
approximately 120,000 to 125,000 barrels per day and total throughput to be
approximately 130,000 to 135,000 barrels per day. We expect crude oil
throughput at Gallup to be approximately 20,000 to 22,000 barrels per day
and total throughput to be approximately 22,000 to 24,000 barrels per day.
In the second quarter, we expect operating cost to be approximately $3.65
per barrel at the El Paso refinery and approximately $7.90 per barrel at the
Gallup refinery.
refineries. Throughput and cost guidance for Gallup, includes the impact of
the plant reformer regeneration which we’ll be completing in Mid-May.
We expect total SG&A in the second quarter to be approximately $21 million
interest expense will be about $33 million and appreciation and amortization
will be approximately $36 million for the quarter.
Capital expenditures for the full year 2011 are expected to be approximately
$62 million. I’ll now turn the call back over to Jeff A. Stevens.
((Jeff A. Stevens, President & Chief Executive Officer))
Thanks Gary. Overall we’re pleased with the quarter while the weather
event in February impacted our first quarter results I’m very proud of how
our team responded getting this up running quickly and safely.
Since the third week in February both El Paso and Gallup have been operating
at near capacity and with the outstanding margin environment that we’re
experiencing Western in positioned to have a very strong year.
Julian we’ll now take questions.
Q&A
Thank you. Operator: [Operator Instructions].
Your first question is from the line of Paul Sankey with Deutsche Bank.
(Q): Hi guys.
(A): Good morning Paul.
(Q): So did you put any (indiscernible) around the impact of the outage in
terms of opportunity cost or loss dollars if you want I just trying to get a
better idea for your earnings guidance for obviously compared to this
quarter?
(A): Yeah if you look at February we looked at it and backasted it and when
you look at the last obvious EBITDA I’m not producing barrels and (
indiscernible) along with the property cost. It’s around $45 million to $
50 million that it impacted EBITDA Paul.
(Q): Interesting thanks.
interesting, thanks. And then you said that things were running well right
now as it playing fingers crossed will continue to run well for the rest of
year.
(A): Absolutely.
(Q): And did you talk about your turnaround latest updates on turnaround
schedules for you guys?
(A): One for through this region at Galup, we don’t have any more work
scheduled the balance of this year, we will have a turnaround in the spring
– I’m sorry the fall at Galup and then we won’t have any work scheduled
in 2012 for turnaround in El Paso.
(Q): Great, thanks. And finally from me, just could comment on demand
trends major concern of the market right now. I know, it has got some
interesting perspective on trains some things? Thanks.
(A): Yes, Paul. I mean, obviously we’ve seen a dramatic increase in both
the price of gasoline and diesel. And thus far we are not seeing any demand
distortion at this point. Obviously, we are getting to a point where it
becomes tough on particularly consumers, but on a retail level, we are
seeing in the month of April and early May kind of flat year-over-year
gasoline demand and the distillate demand still remains I would call pretty
strong.
(Q): That’s like 5% up year-over-year, was it – ?
(A): Yes, it’s 3% to 5% is what we are seeing in our market, in our region.
(Q): And then finally was there any, I guess, you were saying the demand is
not going down but I wondered if you had any weather impact from the
weather on demand side?
(A): We obviously did. We had a pretty rough first quarter in February
throughout this region and that’s why I think our retail sales were
basically flat.
(Q): Great. Thank you guys.
(A): Thanks, Paul.
Operator: Your next question is from the line of Chi Chow with Macquarie
Chi Chow with Macquarie Capital.
(Q): Thanks, good morning.
(A): (indiscernible).
(Q): Gary last - on the last call in the fourth quarter, you said that you
would have about $50 million in debt reduction here in the first quarter,
but you missed that by quite a bit. Can you explain where the shortfall
occurred?
(A - Gary R. Dalke): Yeah Chi. Really what happened there was that we have
the opportunity to refinance that term fees and do it at a much more
attractive interest rate than our current term fees and also eliminate
maintenance covenants. So we were required to make that payment, we made –
we did make the early payment of 25, which actually netted out to 16 for
the quarter. We’re really focused on as far as the next piece of debt,
that we’re targeting are those floaters, which are now obviously at a much
higher rate than that new term fees we’ve taken. So, I think we’ve
dispositioned ourselves to start making that and we’ll start doing that
early December because that’s when we really have the first economic
opportunity to start paying those down.
(Q): That was the December, Jeff?
(A): Yeah.
(Q): That we…
(A): December above up 11.
(Q): Okay. I apologize for this, but could you over to your new hedges,
the hedge positions you put on, I didn’t quite get all of those in your
prepared comments.
(A): Okay well what we did is I think on the last call, we were somewhere
in the 9% to 10% range in 2011. We’ve basically taken that up closer to
the 20%, so both gasoline diesel for Q3 and Q4. We currently don’t really
have anything on in Q2, but looking forward we wanted to add to those
positions because obviously these are very attractive cash to us and then
really the big
And then really that the biggest new position that we put on is for 2012.
We put on about 16% of our diesel at about $27.50 per barrel and that’s for
the calendar year of 2012.
And then we’ve started to adding some Q1 and Q4 gasoline cracks obviously
those are typically our lowest point of the year and $12 for the first
quarter of 2012 looked (indiscernible) just under $8 for Q4 and we’ll
probably if those margins are those cracks stay at that level arise we’ll
probably continue to add we we’re looking to go maybe 20% to 25% of our
overall production at these particular levels.
(Q): So you don’t have any hedges on here in the second quarter than this
year?
(A): Yeah we just have a little bit of gas in June. I mean its maybe 4% or
5% and its out about $24 but really what we were looking to do was capture
this margin in quarters that are historically poor margins for us and
obviously the distilled crack in 2012 its just very attractive. I mean the
highest U.S. Gulf Coast distilled (ph) crack we have ever seen was in 2008
and I think it was about $23 a barrel. So to be able to lock in some of that
production at 27.50 we just don’t like we needed to take that off the
table.
(Q): Okay. And I’ve read and write in the release that you realized the $
37 million hedging loss in the first quarter is that correct?
(A - Gary R. Dalke): Yeah this is Gary. Between our realized and
unrealized positions we did realize that was the total loss that we had was
36.5 million. The unrealized fees was 17 million which was related to
future quarters. So what we realized in the first quarter
In the first quarter related to trades on the first quarter was about $19.7
million totaling that 36.5 million.
(Q): All right and that’s fallen through gross margin?
(A): Yes it is.
(Q): It is a split between El Paso and Gallup or is it all El Paso?
(A): It’s actually if you look at total southwest, its reflective there
(Q): Okay, okay. One final question, any more progress on the sale of the
crude oil inventory at El Paso or the remaining palatinum catalyst there?
(A - Jeffrey S. Beyersdorfer): Yeah it’s Jeff Beyersdorfer. We’ve just
about completed all of the platinum catalyst during the quarter, so we’ve
realized in between the fourth quarter of last and the first quarter of this
year about $27 million of between the outright sale and the sale and lease
of catalyst. On the El Paso inventory timing is pretty critical here for us
doing that and as we share we are waiting for an opportunity when contango
comes back, crude contango comes back in order to execute that because that
will help us maximize proceeds. So we continued to look for opportunities
on our window to do that, but as Jeff stated in his comments we do have a
little bit of luxury of time given that we expect pretty significant cash
flow from operations as another bucket if you will to use for debt reduction.
(Q): Okay great thanks Jeff. Appreciate it.
(A - Jeff A. Stevens): Thanks Steve.
Operator: Your next question is from the line of Evan Calio with Morgan
Stanley.
(Q): Good morning guys how are you doing?
(A): Good morning Evan.
(Q): Hey a question just first on the hedging, I know you laid out
first on the hedge, you laid out fair bit of information here that’s going
to digest. But, they’re kind of target levels of 20%, 25%, I mean, could
you just, a little bit more let me run me through the strategy here, or what
return levels are you targeting, and is there an embedded crude
differential in that – in the gas and distillate hedge or are you only
hedging off TI, it seem like there was an – it has got an embedded crude
differential in that, I mean, did I understand that correctly?
(A): Well, this is, the swaps that we are entering into our outside of the
U.S. Gulf Coast and the WTI contract.
(Q): Yes.
(A): And the reason that we choose this strategy is, we have customers that
are tied correctly to the U.S, Gulf Coast market and really the basis risk
of these types of hedges is close to zero as you can get. So that’s why we
have chosen this type of swap in order to do it. I mean, obviously we buy
crude, all of our crude is buy – bought on TI basis or on TS basis. And so
we have contracts that are tied to that along with our customer contract
the swap really is a very clean instrument in making sure we realize these
values.
I think what obviously we have not had this kind of opportunity this far out
to be able to lock-in these types of cracks, I mean, these are really
historically very, very high cracks. And what the strategy is taking about
20% to 25% off the table ensuring that in our situation knowing that we want
to pay back debt. This strategy is that we take some of it off the table
and go ahead and just lock-in that margin at this point but at the same time
leaving a significant amount of opportunity if things get stronger.
So that’s really the strategy behind it.
(Q): May
Behind it.
(Q): May be a question on the debt repayment side. I know you discussed
the floaters and which are callable in December at your first on opportunity
if you wanted to take some of that debt out and I know you recently
refinanced term loan as some debt repayment instruction – restriction sorry
, I mean, if cash flow permits and based upon what do you think as a pretty
constructive environment, should can we expect how much can you pay down
prior to December, are you limited in your retirement until you get into the
window for the floaters or can you walk me through those restrictions I
guess?
(A - Jeffrey S. Beyersdorfer): Kevin it’s Jeff Beyersdorfer. All of the
pieces of debt we have call premium to them, including the term loan we’ve
got a slight call premium on term debt at 102 for this year with repayments
from free cash flow.
Floaters as you pointed out are callable the end of this year on 105. And
the senior secured notes the 11.75 will become callable until the middle of
2013 at 1 of 5 and 5-a. so, there are premiums associated with each of
those debt instruments. But, we continued to look for opportunities to chip
away at debt and we may have some opportunities depending upon the markets
depending upon the high yield markets, depending upon cash flow generation
to prepay some of that debt prior to year end.
But as Jeff mentioned earlier, the primary focuses is first on the floaters
because it’s the highest…
(Q): Sure.
(A): (indiscernible) that in the structure that’s callable first. And
then probably the senior secured and then third the term loan.
(Q): Okay. And may be lastly if I could slip in one more question guys on
one more question, guys on just the discussion on the status of any
potential Yorktown terminal sales and what’s the key impairment there to an
asset sale, I mean, you guys currently operating those terminals as a
merchant terminal today, (indiscernible) third-party off takes and maybe
give you some color there please?
(A): Yeah, currently ever since the (indiscernible) Yorktown facility. We
continue the wholesale business in the region and that takes up about a
third of the terminalling where – currently as we said before getting
connected to the Colonial Pipeline in kind of finishing up pertain cleaning
and some other things to make it more of attractive terminalling asset. As
we said before we were in discussions with parties that were interested in
third-party terminalling agreements.
And at the same time we had parties that approach just about the potential
sale of the terminal assets and we’re in discussions with both and what we
’re trying to do in it’s taking longer than we expected, but we don’t
want to enter into third-party terminal agreements that may affect the value
to these people that have in interest and just in outright purchase.
So, we’re kind of going down a dual half year and making sure that we don’
t give up any value as the terminal. And so they’re both working at the
same time and hopefully – hopefully we can get some resolution to this
sooner than later.
(Q): Thanks guys. Thanks for taking my call.
Operator: Your next question is from the line of Edward Westlake with
Credit Suisse.
(Q): Hey, good morning everyone.
(A): Good morning, Ed.
(Q): Just a quick question really on the ability to sort of improve
underlying profitability at El Paso and Gallup. What I’m talking about is
more local crudes at yield improvements in cost production may be just talk
through if there is anything
Maybe just all through if there is anything with expect that. Thanks.
(A): We’ll obviously we did mentioned that we are with the lining of the (
indiscernible). We are running more sell improved and we’ve ever run
before interacting in June we’re hoping to run closure 28,000 to 30,000
barrels a day, which would be the most that facility is ever run last year.
We probably averaged about 14,000 barrels though as a significant increased
, but probably the bigger opportunities, our things that we’re seeing as
for us new crewed sales.
We are looking at some opportunities within Eagleford new fines and there is
also new fines. So we’re modeling a lot of recruits we’re looking at
yield pattern and how they would effect has not just obviously as you know.
Our cost for barrel its how they crewed performs and its overall yield. So
yeah, absolutely a both refineries we are pretty excited about the
opportunities there and are in a position to fully take advantage.
(Q): Okay. And then just a followup I think on the last call we we’re
talking about 6 to 9 months, in terms getting financials ready and
everything in place to do potential MOP is that still to same time line?
(A): Yes. I would that would still be same time line.
(Q): Thanks very much.
(A): Thank you.
Operator: Your next question is from the line of Joe Citarrella with
Goldman Sachs.
(Q): What you see the sources of cash do that is primarily strong refining
margins in the potentially your account (indiscernible). The possibility
for more I don’t say the pass you entertain bit for the retail business and
I believe get up of take would probably one potential limiting factor. But
any thoughts
potential limiting factor but any thought as to whether that’s still the
case or at this point is that out of the question?
(A): Joe I hate to do this to you but for some reason you were cut off at
the beginning so could you just kind of repeat beginning I think I got the
jest of the question but I want to make sure I answer it correctly.
(Q): No sure in terms of the balance sheet deleveraging and your goal there
at this point do you see the sources of cash to do that as really being
strong margins and the possible euros (ph) on sale or…
Operator: Hi line has disconnected.
(A): Okay.
Operator: [Operator Instructions] your next question is from the line of
Jacques Rousseau with RBC.
(A): Good morning Jacq (ph).
(Q): Good morning gentlemen. How are you?
(A): Good.
(Q): Just wanted to ask about maintenance expense and where that is getting
captured now I know in prior quarters that appeared as a separate line item
and I am just curious if what occurred in El Paso was picked up in a
different manner?
(A): Are you – when you’re referring to maintenance expense are you
talking about our turnaround maintenance?
(Q): Yeah.
(A): [indiscernible] classified turnaround maintenance is a separate line
item, however normal or even unusual maintenance such as [indiscernible]
would go in normal direct operating expenses the only thing we specifically
carve out relates to major maintenance turnaround everything else will flow
through direct operating expense.
(Q): Okay then for the rest of the year where do you see the major
maintenance expense falling out in the different quarters?
(A): We don’t have any plan major maintenance expense for the duration of
this year so the regeneration that we’re doing Gallup for example will be
in direct operating
Operator: Good morning and welcome to the First Quarter 2011 Western
Refining Earnings Conference Call. After the speakers' opening remarks,
there will be a question-and-answer period. [Operator Instructions] As a
reminder, ladies and gentlemen, this conference call is being recorded and
your participation implies consent to our recording of this call. If you do
not agree with these terms, please disconnect at this time. Thank you.
I would now like to turn the call over to Mr. Jeff Beyersdorfer, Treasurer
and Director of Investor Relations of Western Refining. Mr. Beyersdorfer,
please go ahead, sir.
((Jeffrey S. Beyersdorfer, Senior Vice President, Treasurer and Director of
Investor Relations))
Thank you, Julian and good morning. I would like to thank you for taking
the time to listen in today and for your continued interest in Western
Refining. Again, my name is Jeff Beyersdorfer. I'm the company's Treasurer
and Director of Investor Relations.
Joining me for today's call are Jeff Stevens, our President and CEO; Gary
Dalke, our CFO; Mark Smith, our President, Refining and Marketing, and other
members of our senior management team. If you need a copy of the earnings
release, you may obtain one from the IR section of our website at wnr.com.
Before we proceed, I'd like to make the following Safe Harbor statement.
Today's presentation will contain forward-looking statements, and I
incorporate and refer you to the forward-looking statements section of our
earnings release and recent
earnings release, and recent filings with the SEC. We assume no obligation
to update or revise any forward-looking statements to reflect new or change
events or circumstances.
In addition to reporting financial results in accordance with Generally
Accepted Accounting Principles, or GAAP, we report certain non-GAAP
financial results. Investors are encouraged to review the reconciliation of
these non-GAAP financial measures to the comparable GAAP results, which can
be found in the press release, which is posted on the Investor Relations
section of our website.
I’ll now turn the call over to Jeff.
((Jeff A. Stevens, President and Chief Executive Officer))
Thanks, Jeff. Welcome to everyone on the call. Today, we’ll discuss our
first quarter performance and the steps Western is taking to capitalize on
the strong market conditions we have seen through the beginning of 2011.
After my opening remarks, Gary will review our earnings in more detail and
provide operating guidance for Q2 2011, then we will open up the call for
your question. As stated in our press release we reported net earnings of $
12.2 million or $0.13 per diluted share for the quarter ended March 31st
2011. This compares to a Q1 2010 net loss of $30.7 million or $0.35 per
diluted share. Excluding unrealized loss on economic hedges of
approximately $17 million and a one time on retirement of debt of $4.6
million after-tax earnings in the first quarter would have been $26.1
million or $0.30 per diluted share.
The Gulf Coast 321 benchmark crack spread averaged more than $18 a barrel in
the first quarter as compared to $7.40 in Q1 2010.
in Q1 2010. The continuing widening of WTI to Brent crude oil differentials
was a significant contributor to the refining margin improvement that we
saw during the quarter.
As I mentioned we took several steps during the quarter to capitalize on the
margin environment we are seeing. We quickly responded to the weather
related outage we experienced at Oldcastle in February allowing us to
operate at full capacity during the month of March.
I would also like to point out while this weather event impacted most of the
refiners in the region our Gallup refinery operated at near capacity
throughout the first quarter. Given the strong WTI, WTS spread we increased
our sour crude runs at El Paso and are currently running approximately 10,
000 barrels per day more sour than in 2010.
We added to our gasoline and distillate hedges as of today we have
approximately 20% of our Q3 and Q4 2011 gasoline production hedged at an
average crack of $14 per barrel. And approximately 19% of our Q3 and Q4
2011 distillate production hedged than average crack of $24.71 per barrel.
For 2012, we have hedged about 16% of our total distillate production at an
average crack of $27.59 per barrel. For 2012 gasoline, we have hedged
approximately 7% of our Q1 gasoline production at an average crack of $12.18
per barrel and 3% of our Q4 gasoline production at an average crack at $7.
70. These cracks are all tied to the U.S. Gulf Coast, our target for both
2011 and 2012 is to hedge about 20% to 25% of our total production.
We refinanced our term loan reducing interest expense by
reducing interest expense by $9.5 million annually, extending the maturity
from 2014 to 2017 and eliminating all financial maintenance covenants.
These actions contributed to our improved first quarter results and help to
start off the year well. As an indicator of our strong start, during the
month of March, our refineries ran (ph) at capacity and we effectively
managed our operating expenses. El Paso ran at $3.85 per barrel in
operating cost and Gallup at $6.24 per barrel. As a result the company
generated most of the quarters EBITDA in the month of March alone and this
positive momentum has carried into Q2.
In our other businesses wholesale posted another successful quarter driven
by improving demand for transportation fuels and lubricants in the Southwest
. Fuel volumes in the Southwest were improved by 13% and lub sales were
improved by 12%, compared to Q1, 2010. In retail, poor weather conditions
and rising wholesale fuel cost created a challenging quarter, resulting in
fuel volume in margins that were flat relative to Q1, 2010. However
merchandise sales and margins were modestly improved.
Moving to our East Coast business, we continued to make progress in
upgrading the Yorktown’s capability as a terminal asset. We expect to
complete the colonial pipeline connection in June although we have not
secured terminal customers in line with our original timeframe. We are
working to ensure that the terminalling and storage agreements fit well with
the potential asset monetization. Our goal is to maximize the long-term
value of the Yorktown’s terminal assets.
With respect to debt reduction, western ended the quarter with about 1.05
billion in debt, a reduction of about 16 million during the quarter. Debt
reduction continues to be a primary objective
Continues to be a primary objective of management and over the last couple
of quarters we’ve shared some of the initiatives that we’re pursuing which
will generate cash that can be used to reduce debt.
Also we’ve completed some very important transactions with the refinancing
of our revolver and term loan, resulting in the elimination of all financial
maintenance covenants and the reduction of interest expense by about $13
million annually.
With market conditions we’re experiencing we believe we’ll generate strong
cash flow which will be another source of debt repayment while we continue
to pursue monetization initiatives the refining margin environment has given
us time and flexibility to organize our debt reduction efforts.
Turning the second quarter we continue to see very strong crack spreads with
the Gulf Coast 321 of $25.67 per barrel in April and a forward curve for
the rest of the quarter of approximately $25 per barrel. These includes
relative to the Q1 2011 levels of $18.28 per barrel primarily due to
improved gasoline cracks in the Brent WTI spreads.
In summary we remained encouraged on how 2011 is shaping up our crude safe
and location advantage will allow Western to continue to benefit from this
market environment.
Now Gary will go through our first quarter financials in more detail and
provide operating guidance for the second quarter.
((Gary R. Dalke, Chief Financial Officer))
Thank you Jeff. For the first quarter we reported net income excluding
special items of $15.2 million or $0.17 per diluted share. On a GAAP basis,
the company had net income of the quarter of $12.2 million or $0.13 per
diluted share. These results compared to a Q1 2010 net loss of $30.7
million
$30.7 million or $0.35 per diluted share. A reconciliation of our earnings
– of our net earnings to earnings excluding special items is included in
our press release.
Gross margin at our Southwest refineries was $15.79 per throughput barrel
during the first quarter compared to $8.05 per throughput barrel in Q1 2010.
In the quarter, gross margin at El Paso was $18.70 per barrel and Galup
came in at $19.70 per barrel.
Directing operating expenses at our Southwest refineries were $6.39 per
barrel for the quarter compared to $4.82 per throughput barrel in Q1 2010.
El Paso’s costs were $5.91 per barrel for the quarter compared to $3.77 per
barrel for Q1 2010. The cost at El Paso were significantly impacted by the
downtime in January and February which added one time cost and reduced
operating rates.
In the first quarter, we expensed approximately $7.9 million in El Paso
repair costs associated with the freeze amount in February. As we’ve
mentioned last quarter, our property insurance deductible is $5 million. We
are working with our carriers to finalize our insurance recovery and we
expect to receive these funds in the second and third quarter of this year.
Galup’s operating costs were $6.70 per barrel for the quarter down from $7.
54 per barrel in Q1 2010. This reduction in per barrel cost was primarily
results of improved throughput.
On the East Coast cost related to the temporary suspension of refining
operations at Yorktown were approximately $1.7 million in Q1
million in Q1 2011 and now total approximately $6.2 million since we
announced the suspension in 2010. The remaining suspension cost of
approximately $13 million primarily related to tank cleaning and a pension
termination will be expensed later in 2011.
Total company SG&A costs were $20.4 million for the quarter this compares to
$16.4 million in Q1 2010 which contains a bonus accrual reversal of
approximately $6 million. Excluding this one time reversal SG&A in the
first quarter was improved by $2 million compared to Q1 2010.
Adjusted EBITDA for the quarter was $95.8 million as compared to adjusted
EBITDA of $26.2 million for Q1 2010. Depreciation and amortization expense
for the quarter was $35.4 million, interest expense was $34.5 million a $2.4
million reduction compared to Q1 2010 primarily a result of modestly lower
debt levels.
Our effective tax rate for the first quarter was 35.7%, this rate is more in
line with the statutory rate as compared to our last several quarters
primarily due to the exhaustion of the small refinery (indiscernible) tax
credit.
Cash flow from operations was a negative $21 million in the first quarter as
compared to a negative of $147.6 million in Q1 2010. The primary cause of
the negative cash flow from operations for the quarter was $65 million use
of cash for changes in working capital driven by the increase in accounts
receivable and prepaid prepruchases. This was largely a timing issue which
was created by the unplanned outage at
created by the unplanned outage at El Paso. Total capital expenditures for
the first quarter were $10.8 million. As of March 31, total debt stood at $
1.05 billion, a reduction of approximately $16 million compared to Q4, 2010.
Total liquidity, which we define as cash and availability under our
revolver, was approximately $415 million at the end of Q1. Our daily
average liquidity continues to show improvement. For example, the daily
average liquidity started 2011 has been around $380 million as compared to
our Q4, 2010 average of $280 million. Maintaining strong liquidity remains
a priority and we continue to look for ways to further enhance our liquidity.
As Jeff mentioned earlier, we continue to look for opportunities to place
gasoline adjust for the crack hedges. And as we’ve placed do not call by
for hedge accounting therefore you can expect some volatility in our income
statement going forward. However we feel that hedging a portion of our
production is the best business decision for the company.
Turning to our expectations for the second quarter, our operating guidance
is as follows. We expect crude oil throughput at El Paso to be
approximately 120,000 to 125,000 barrels per day and total throughput to be
approximately 130,000 to 135,000 barrels per day. We expect crude oil
throughput at Gallup to be approximately 20,000 to 22,000 barrels per day
and total throughput to be approximately 22,000 to 24,000 barrels per day.
In the second quarter, we expect operating cost to be approximately $3.65
per barrel at the El Paso refinery and approximately $7.90 per barrel at the
Gallup refinery.
refineries. Throughput and cost guidance for Gallup, includes the impact of
the plant reformer regeneration which we’ll be completing in Mid-May.
We expect total SG&A in the second quarter to be approximately $21 million
interest expense will be about $33 million and appreciation and amortization
will be approximately $36 million for the quarter.
Capital expenditures for the full year 2011 are expected to be approximately
$62 million. I’ll now turn the call back over to Jeff A. Stevens.
((Jeff A. Stevens, President & Chief Executive Officer))
Thanks Gary. Overall we’re pleased with the quarter while the weather
event in February impacted our first quarter results I’m very proud of how
our team responded getting this up running quickly and safely.
Since the third week in February both El Paso and Gallup have been operating
at near capacity and with the outstanding margin environment that we’re
experiencing Western in positioned to have a very strong year.
Julian we’ll now take questions.
Q&A
Thank you. Operator: [Operator Instructions].
Your first question is from the line of Paul Sankey with Deutsche Bank.
(Q): Hi guys.
(A): Good morning Paul.
(Q): So did you put any (indiscernible) around the impact of the outage in
terms of opportunity cost or loss dollars if you want I just trying to get a
better idea for your earnings guidance for obviously compared to this
quarter?
(A): Yeah if you look at February we looked at it and backasted it and when
you look at the last obvious EBITDA I’m not producing barrels and (
indiscernible) along with the property cost. It’s around $45 million to $
50 million that it impacted EBITDA Paul.
(Q): Interesting thanks.
interesting, thanks. And then you said that things were running well right
now as it playing fingers crossed will continue to run well for the rest of
year.
(A): Absolutely.
(Q): And did you talk about your turnaround latest updates on turnaround
schedules for you guys?
(A): One for through this region at Galup, we don’t have any more work
scheduled the balance of this year, we will have a turnaround in the spring
– I’m sorry the fall at Galup and then we won’t have any work scheduled
in 2012 for turnaround in El Paso.
(Q): Great, thanks. And finally from me, just could comment on demand
trends major concern of the market right now. I know, it has got some
interesting perspective on trains some things? Thanks.
(A): Yes, Paul. I mean, obviously we’ve seen a dramatic increase in both
the price of gasoline and diesel. And thus far we are not seeing any demand
distortion at this point. Obviously, we are getting to a point where it
becomes tough on particularly consumers, but on a retail level, we are
seeing in the month of April and early May kind of flat year-over-year
gasoline demand and the distillate demand still remains I would call pretty
strong.
(Q): That’s like 5% up year-over-year, was it – ?
(A): Yes, it’s 3% to 5% is what we are seeing in our market, in our region.
(Q): And then finally was there any, I guess, you were saying the demand is
not going down but I wondered if you had any weather impact from the
weather on demand side?
(A): We obviously did. We had a pretty rough first quarter in February
throughout this region and that’s why I think our retail sales were
basically flat.
(Q): Great. Thank you guys.
(A): Thanks, Paul.
Operator: Your next question is from the line of Chi Chow with Macquarie
Chi Chow with Macquarie Capital.
(Q): Thanks, good morning.
(A): (indiscernible).
(Q): Gary last - on the last call in the fourth quarter, you said that you
would have about $50 million in debt reduction here in the first quarter,
but you missed that by quite a bit. Can you explain where the shortfall
occurred?
(A - Gary R. Dalke): Yeah Chi. Really what happened there was that we have
the opportunity to refinance that term fees and do it at a much more
attractive interest rate than our current term fees and also eliminate
maintenance covenants. So we were required to make that payment, we made –
we did make the early payment of 25, which actually netted out to 16 for
the quarter. We’re really focused on as far as the next piece of debt,
that we’re targeting are those floaters, which are now obviously at a much
higher rate than that new term fees we’ve taken. So, I think we’ve
dispositioned ourselves to start making that and we’ll start doing that
early December because that’s when we really have the first economic
opportunity to start paying those down.
(Q): That was the December, Jeff?
(A): Yeah.
(Q): That we…
(A): December above up 11.
(Q): Okay. I apologize for this, but could you over to your new hedges,
the hedge positions you put on, I didn’t quite get all of those in your
prepared comments.
(A): Okay well what we did is I think on the last call, we were somewhere
in the 9% to 10% range in 2011. We’ve basically taken that up closer to
the 20%, so both gasoline diesel for Q3 and Q4. We currently don’t really
have anything on in Q2, but looking forward we wanted to add to those
positions because obviously these are very attractive cash to us and then
really the big
And then really that the biggest new position that we put on is for 2012.
We put on about 16% of our diesel at about $27.50 per barrel and that’s for
the calendar year of 2012.
And then we’ve started to adding some Q1 and Q4 gasoline cracks obviously
those are typically our lowest point of the year and $12 for the first
quarter of 2012 looked (indiscernible) just under $8 for Q4 and we’ll
probably if those margins are those cracks stay at that level arise we’ll
probably continue to add we we’re looking to go maybe 20% to 25% of our
overall production at these particular levels.
(Q): So you don’t have any hedges on here in the second quarter than this
year?
(A): Yeah we just have a little bit of gas in June. I mean its maybe 4% or
5% and its out about $24 but really what we were looking to do was capture
this margin in quarters that are historically poor margins for us and
obviously the distilled crack in 2012 its just very attractive. I mean the
highest U.S. Gulf Coast distilled (ph) crack we have ever seen was in 2008
and I think it was about $23 a barrel. So to be able to lock in some of that
production at 27.50 we just don’t like we needed to take that off the
table.
(Q): Okay. And I’ve read and write in the release that you realized the $
37 million hedging loss in the first quarter is that correct?
(A - Gary R. Dalke): Yeah this is Gary. Between our realized and
unrealized positions we did realize that was the total loss that we had was
36.5 million. The unrealized fees was 17 million which was related to
future quarters. So what we realized in the first quarter
In the first quarter related to trades on the first quarter was about $19.7
million totaling that 36.5 million.
(Q): All right and that’s fallen through gross margin?
(A): Yes it is.
(Q): It is a split between El Paso and Gallup or is it all El Paso?
(A): It’s actually if you look at total southwest, its reflective there
(Q): Okay, okay. One final question, any more progress on the sale of the
crude oil inventory at El Paso or the remaining palatinum catalyst there?
(A - Jeffrey S. Beyersdorfer): Yeah it’s Jeff Beyersdorfer. We’ve just
about completed all of the platinum catalyst during the quarter, so we’ve
realized in between the fourth quarter of last and the first quarter of this
year about $27 million of between the outright sale and the sale and lease
of catalyst. On the El Paso inventory timing is pretty critical here for us
doing that and as we share we are waiting for an opportunity when contango
comes back, crude contango comes back in order to execute that because that
will help us maximize proceeds. So we continued to look for opportunities
on our window to do that, but as Jeff stated in his comments we do have a
little bit of luxury of time given that we expect pretty significant cash
flow from operations as another bucket if you will to use for debt reduction.
(Q): Okay great thanks Jeff. Appreciate it.
(A - Jeff A. Stevens): Thanks Steve.
Operator: Your next question is from the line of Evan Calio with Morgan
Stanley.
(Q): Good morning guys how are you doing?
(A): Good morning Evan.
(Q): Hey a question just first on the hedging, I know you laid out
first on the hedge, you laid out fair bit of information here that’s going
to digest. But, they’re kind of target levels of 20%, 25%, I mean, could
you just, a little bit more let me run me through the strategy here, or what
return levels are you targeting, and is there an embedded crude
differential in that – in the gas and distillate hedge or are you only
hedging off TI, it seem like there was an – it has got an embedded crude
differential in that, I mean, did I understand that correctly?
(A): Well, this is, the swaps that we are entering into our outside of the
U.S. Gulf Coast and the WTI contract.
(Q): Yes.
(A): And the reason that we choose this strategy is, we have customers that
are tied correctly to the U.S, Gulf Coast market and really the basis risk
of these types of hedges is close to zero as you can get. So that’s why we
have chosen this type of swap in order to do it. I mean, obviously we buy
crude, all of our crude is buy – bought on TI basis or on TS basis. And so
we have contracts that are tied to that along with our customer contract
the swap really is a very clean instrument in making sure we realize these
values.
I think what obviously we have not had this kind of opportunity this far out
to be able to lock-in these types of cracks, I mean, these are really
historically very, very high cracks. And what the strategy is taking about
20% to 25% off the table ensuring that in our situation knowing that we want
to pay back debt. This strategy is that we take some of it off the table
and go ahead and just lock-in that margin at this point but at the same time
leaving a significant amount of opportunity if things get stronger.
So that’s really the strategy behind it.
(Q): May
Behind it.
(Q): May be a question on the debt repayment side. I know you discussed
the floaters and which are callable in December at your first on opportunity
if you wanted to take some of that debt out and I know you recently
refinanced term loan as some debt repayment instruction – restriction sorry
, I mean, if cash flow permits and based upon what do you think as a pretty
constructive environment, should can we expect how much can you pay down
prior to December, are you limited in your retirement until you get into the
window for the floaters or can you walk me through those restrictions I
guess?
(A - Jeffrey S. Beyersdorfer): Kevin it’s Jeff Beyersdorfer. All of the
pieces of debt we have call premium to them, including the term loan we’ve
got a slight call premium on term debt at 102 for this year with repayments
from free cash flow.
Floaters as you pointed out are callable the end of this year on 105. And
the senior secured notes the 11.75 will become callable until the middle of
2013 at 1 of 5 and 5-a. so, there are premiums associated with each of
those debt instruments. But, we continued to look for opportunities to chip
away at debt and we may have some opportunities depending upon the markets
depending upon the high yield markets, depending upon cash flow generation
to prepay some of that debt prior to year end.
But as Jeff mentioned earlier, the primary focuses is first on the floaters
because it’s the highest…
(Q): Sure.
(A): (indiscernible) that in the structure that’s callable first. And
then probably the senior secured and then third the term loan.
(Q): Okay. And may be lastly if I could slip in one more question guys on
one more question, guys on just the discussion on the status of any
potential Yorktown terminal sales and what’s the key impairment there to an
asset sale, I mean, you guys currently operating those terminals as a
merchant terminal today, (indiscernible) third-party off takes and maybe
give you some color there please?
(A): Yeah, currently ever since the (indiscernible) Yorktown facility. We
continue the wholesale business in the region and that takes up about a
third of the terminalling where – currently as we said before getting
connected to the Colonial Pipeline in kind of finishing up pertain cleaning
and some other things to make it more of attractive terminalling asset. As
we said before we were in discussions with parties that were interested in
third-party terminalling agreements.
And at the same time we had parties that approach just about the potential
sale of the terminal assets and we’re in discussions with both and what we
’re trying to do in it’s taking longer than we expected, but we don’t
want to enter into third-party terminal agreements that may affect the value
to these people that have in interest and just in outright purchase.
So, we’re kind of going down a dual half year and making sure that we don’
t give up any value as the terminal. And so they’re both working at the
same time and hopefully – hopefully we can get some resolution to this
sooner than later.
(Q): Thanks guys. Thanks for taking my call.
Operator: Your next question is from the line of Edward Westlake with
Credit Suisse.
(Q): Hey, good morning everyone.
(A): Good morning, Ed.
(Q): Just a quick question really on the ability to sort of improve
underlying profitability at El Paso and Gallup. What I’m talking about is
more local crudes at yield improvements in cost production may be just talk
through if there is anything
Maybe just all through if there is anything with expect that. Thanks.
(A): We’ll obviously we did mentioned that we are with the lining of the (
indiscernible). We are running more sell improved and we’ve ever run
before interacting in June we’re hoping to run closure 28,000 to 30,000
barrels a day, which would be the most that facility is ever run last year.
We probably averaged about 14,000 barrels though as a significant increased
, but probably the bigger opportunities, our things that we’re seeing as
for us new crewed sales.
We are looking at some opportunities within Eagleford new fines and there is
also new fines. So we’re modeling a lot of recruits we’re looking at
yield pattern and how they would effect has not just obviously as you know.
Our cost for barrel its how they crewed performs and its overall yield. So
yeah, absolutely a both refineries we are pretty excited about the
opportunities there and are in a position to fully take advantage.
(Q): Okay. And then just a followup I think on the last call we we’re
talking about 6 to 9 months, in terms getting financials ready and
everything in place to do potential MOP is that still to same time line?
(A): Yes. I would that would still be same time line.
(Q): Thanks very much.
(A): Thank you.
Operator: Your next question is from the line of Joe Citarrella with
Goldman Sachs.
(Q): What you see the sources of cash do that is primarily strong refining
margins in the potentially your account (indiscernible). The possibility
for more I don’t say the pass you entertain bit for the retail business and
I believe get up of take would probably one potential limiting factor. But
any thoughts
potential limiting factor but any thought as to whether that’s still the
case or at this point is that out of the question?
(A): Joe I hate to do this to you but for some reason you were cut off at
the beginning so could you just kind of repeat beginning I think I got the
jest of the question but I want to make sure I answer it correctly.
(Q): No sure in terms of the balance sheet deleveraging and your goal there
at this point do you see the sources of cash to do that as really being
strong margins and the possible euros (ph) on sale or…
Operator: Hi line has disconnected.
(A): Okay.
Operator: [Operator Instructions] your next question is from the line of
Jacques Rousseau with RBC.
(A): Good morning Jacq (ph).
(Q): Good morning gentlemen. How are you?
(A): Good.
(Q): Just wanted to ask about maintenance expense and where that is getting
captured now I know in prior quarters that appeared as a separate line item
and I am just curious if what occurred in El Paso was picked up in a
different manner?
(A): Are you – when you’re referring to maintenance expense are you
talking about our turnaround maintenance?
(Q): Yeah.
(A): [indiscernible] classified turnaround maintenance is a separate line
item, however normal or even unusual maintenance such as [indiscernible]
would go in normal direct operating expenses the only thing we specifically
carve out relates to major maintenance turnaround everything else will flow
through direct operating expense.
(Q): Okay then for the rest of the year where do you see the major
maintenance expense falling out in the different quarters?
(A): We don’t have any plan major maintenance expense for the duration of
this year so the regeneration that we’re doing Gallup for example will be
in direct operating