HF Sinclair Corporation (NYSE:DINO) Q3 2023 Earnings Call Transcript

HF Sinclair Corporation (NYSE:DINO) Q3 2023 Earnings Call Transcript November 2, 2023

HF Sinclair Corporation beats earnings expectations. Reported EPS is $4.06, expectations were $3.81.

Operator: Welcome to HF Sinclair Corporation and Holly Energy Partners Third Quarter 2023 Conference Call and Webcast. Hosting the call today is Tim Go, Chief Executive Officer of HF Sinclair. He is joined by Atanas Atanasov, Chief Financial Officer; Steve Ledbetter, EVP of Commercial; Valerie Pompeia, EVP of Operations; and Matt Joyce, SVP of Lubricants and Specialities, along with John Harrison, Chief Financial Officer of Holly Energy Partners. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation [Operator Instructions]. Please note, this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President, Investor Relations. Craig, you may begin.

Craig Biery: Thank you, Christa. Good morning, everyone. And welcome to HF Sinclair Corporation and Holly Energy Partners third quarter 2023 earnings call. This morning, we issued a press release announcing results for the quarter ending September 30, 2023. If you would like a copy of the press releases, you may find them on our Web sites at hfsinclair.com and hollyenergy.com. Before we proceed with remarks, please note the Safe Harbor disclosure statement in today’s press releases. In summary, such statements made regarding management expectations, judgments or predictions are forward-looking statements. These statements are intended to be covered under the Safe Harbor provisions of federal security laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings.

The call also may include discussion of non-GAAP measures. Please see the earnings press releases for reconciliations to GAAP financial measures. Also, please note any time sensitive information provided on today’s call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I’ll turn the call over to Tim Go.

Tim Go: Good morning, I am pleased to report strong third quarter results, driven by solid execution of safe and reliable operations across our Refining, Lubricants, HEP and Marketing segments. We continue to progress our strategic initiatives of integrating and optimizing our portfolio, along with delivering strong cash return to shareholders. Today, we reported third quarter 2023 net income attributable to HF Sinclair shareholders of $791 million or $4.23 per diluted share. These results reflect special items that collectively increased net income by $31 million. Excluding these items, adjusted net income for the third quarter was $760 million or $4.06 per diluted share, compared to adjusted net income of $983 million or $4.58 per diluted share for the same period in 2022.

Adjusted EBITDA for the third quarter was $1.2 billion, a 20% decrease compared to the third quarter of 2022. In our Refining segment, third quarter 2023 adjusted EBITDA contributed $1 billion compared to $1.4 billion in the same period last year. This decrease was primarily driven by lower refining margins in both the West and Mid-Con regions and lower refined product sales volumes due to higher maintenance activity. Operating expenses were $496 million in third quarter of 2023 versus the $475 million recorded in the same period last year as lower natural gas costs were offset by higher maintenance costs. Crude oil charge averaged 602,000 barrels per day in the third quarter of 2023 compared to 646,000 barrels per day in the third quarter of 2022.

The decrease was primarily due to higher maintenance activity during the period. I am pleased to report that the turnaround in the third quarter at our Casper refinery was completed on time and on budget and at Tulsa, we are in the process of ramping up normal operations after the successful turnaround at that refinery. With all of our major turnarounds behind us for the year, we remain focused on executing our strategy to improve reliability and operating costs across our refining portfolio. In our Renewables segment, we reported adjusted EBITDA of positive $5 million, for the third quarter of 2023 compared to negative $14 million for the third quarter of 2022. Total sales volumes were 55,000,000 gallons for the third quarter of 2023 as compared to 52,000,000 gallons for the third quarter of 2022.

We continue to make progress towards our target of achieving normalized run rates by the end of 2023 through improved reliability and feedstock optimization. Our Marketing segment reported EBITDA of $21 million for the third quarter of 2023 compared to $10 million in third quarter of 2022, and total branded fuel sales volumes set another quarterly record 398,000,000 gallons. Gross margin per gallon was $0.07 in the third quarter, supported by strong demand in our regions. During the quarter, we added 15 new branded sites and we expect to continue to grow our branded sites by 5% or more per year. Our Lubricants & Specialties Products segment reported EBITDA of $118 million for the third quarter of 2023 compared to EBITDA of $15 million for the third quarter of 2022.

This increase was largely driven by a $30 million FIFO benefit from consumption of lower priced feedstock inventory for the third quarter of 2023 compared to a $44 million charge in the third quarter of 2022. Despite weakening base oil prices during the period, continued efforts to improve sales mix optimization across our finished products portfolio, resulted in strong earnings contribution from our lubricants business. HEP reported EBITDA of $94 million in the second quarter of 2023 compared to $66 million in the same period of last year. This increase was mainly driven by tariff increases that went into effect on July 1, 2023. On August 15, 2023, we entered into definitive merger agreement with HEP and we expect the proposed transaction to close in the fourth quarter of this year, subject to the satisfaction of closing conditions.

During the third quarter, we announced and paid a regular quarterly dividend of $0.45 per share to stockholders totaling $84 million and spent $586 million on share repurchases. Year-to-date, as of September 30th, our total cash returned, including dividends and share repurchases is over $1.09 billion and we have reduced our share count by 8%. In closing, our third quarter results highlight the diversification of our portfolio and quality of our assets. Our strong cash return during the period demonstrates our continued commitment to our long term cash return strategy and long term payout ration, while maintaining an investment grade rating. Looking forward, we remain focused on executing our strategy of safe and reliable operations as we continue to integrate and optimize our assets across our portfolio.

With that let me turn the call over to Atanas.

Atanas Atanasov: Thank you, Tim, and good morning, everyone. Let’s begin by reviewing HF Sinclair’s financial highlights. Net cash flows provided by operations for the third quarter of 2023 totaled $1.4 billion, which included $124 million of turnaround spend in the quarter. HF Sinclair’s standalone capital expenditures totaled $75 million for the third quarter 2023. As of September 30, 2023, HF Sinclair’s standalone liquidity stood at approximately $3.85 billion comprised of a cash balance of $2.2 billion along with our undrawn $1.65 billion unsecured credit facility. As of September 30, 2023, we have $1.7 billion of outstanding with a debt-to-cap ratio of 15%. In October 2023, we have repaid at maturity the $308 million aggregate principal amount of our 2.625% senior notes.

HEP distributions received by HF Sinclair during the third quarter of ’23 totaled $21 million. HF Sinclair owns 59.6 million HEP limited partner units, which represents 47% of HEP’s outstanding LP units at a market value of approximately $1.25 billion as of last night’s close. Now let’s go through some guidance items. With respect to capital spending, last quarter, we lowered our full year 2023 guidance range to $900 million to [$1.60] billion on a consolidated basis. With the majority of our plant maintenance activity behind us, we expect to end up at the lower end of our capital spend range for 2023. For the fourth quarter of 2023, we expect to run between 590,000 to 620,000 barrels per day of crude oil in our Refining segment, which reflects plant maintenance at our Tulsa refinery during the period.

Let me now turn the call over to John for an update on the HEP, John.

John Harrison: Thanks, Atanas. HEP’s third quarter 2023 net income attributable to Holly Energy Partners was $63 million compared to $42 million in the third quarter of 2022. Each period reflected non-recurring expenses that decreased net income by $4 million and $20 million respectively. Excluding these items, the year-over-year increase was primarily attributable to higher revenues associated with tariff increases that went into effect on July 1, 2023, which were partially offset by higher interest expense and higher G&A expenses during the third quarter of 2023. HEP’s third quarter 2023 adjusted EBITDA was $119 million compared to $110 million in the same period last year. The reconciliation table reflecting these adjustments can be found in HEP’s press release.

For the third quarter, HEP generated distributable cash flow of $78 million and we announced a distribution of $0.35 per LP unit, which is payable on November 10, 2023 to unit holders of record as of October 30, 2023. Capital expenditures during the third quarter were approximately $9 million, a rise of $6 million in maintenance, $2 million of reimbursable and $1 million of expansion CapEx. During the third quarter, we repaid $27 million of debt and ended the quarter with available liquidity of approximately $630 million. We’re now ready to turn the call over to the operator for any questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from Manav Gupta from UBS.

Manav Gupta: My question is more broader. In the past, you have mentioned that you have seven refineries, but there’s a hidden refinery within your system and you can run 50,000 to 60,000 barrels higher, and we have seen one of your competitors do it where they shut two assets and the throughput is higher. And please help us understand some of the progress that you’re making in that direction so you can uncover this hidden refinery within your refining system.

Tim Go: As you stated reliability and integration and commercial optimization are our main priorities right now, and that is to try to unlock that hidden refinery as you mentioned. Let me ask Valerie to talk a little bit about some of the reliability efforts that we have going on.

Valerie Pompeia: What we’re doing is assessing the reliability of all of our assets, looking at capacity and then stepping back and looking at equipment. We have completed a full assessment of all of our sites and then within that starting to work execution plans by site. Those will unlock availability within each of our individual assets, which is a process that’s been around in industry for a really long time. We’re coupling that with some innovation and some tools that will help us improve our availability.

Tim Go: Manav, the other thing that I’ll mention in addition to what Val just talked about was on previous calls, we’ve talked about the importance of executing our turnarounds well. And with this year’s heavy turnaround load, I know there was a lot of concern about whether we could execute our turnarounds well. Val and her team have really done a fantastic job this year, executing those turnarounds on schedule on budget. And not only does that help in the actual execution of the turnaround but it helps us get to all of the planned work that we wanted to get done during the turnarounds to help us get that reliability improvement for the full cycle that’s coming post the turnaround. And so that’s kind of another benefit that we are getting from good, clean execution of the turnarounds as we hope that will allow us to again demonstrate better reliability through this cycle.

Manav Gupta: My quick follow-up here is on the lubes, even adjusting for that inventory, it was a much stronger quarter. Your vision was to make this business more on the specialty side. Help us to understand how those plans are progressing and also help us to understand some of the reasons you had such a strong quarter in 3Q in the lubes business?

Tim Go: Let me ask Matt to comment on the strength of our lubes business.

Matt Joyce: And I think where the team has done a really nice job is getting after operational excellence and focus on regional growth. We have been working on mixing the mix of our business and really looking to see where and how we can focus on higher value products and better understand the markets we serve where we have stickier solutions that are enabling our customers to be successful and therefore allowing us to be a bit more successful. And hats off to our petro Canada team in the US in particular, they have done a nice job of expanding their footprint and and getting into the US markets, which was part of our strategy. And that’s got gained a lot of nice traction and we are seeing some real positive signs of growth there from a regional perspective.

Tim Go: Manav, I would just say, Matt and his team have done a really nice job of continuing to integrate the base oil business with the finished lubes and specialties business. We have talked about this on past earnings calls. But you just continue to see the inter-company sales of base oils to those finished lubes especially as businesses continue to increase, which is giving us more resiliency, more cushion for these falling base oil cracks that you are seeing in our reported HFS index. As those base oil cracks come down, the more integrated we are gives us more insulation and allows us to continue to generate the strong margins that you are seeing. So that’s a structural improvement that Matt and his team are doing.