HF Sinclair Corporation (NYSE:DINO) Q4 2022 Earnings Call Transcript

HF Sinclair Corporation (NYSE:DINO) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Welcome to HF Sinclair Corporation and Holly Energy Partners Fourth Quarter 2022 Conference Call and Webcast. Hosting the call today is Mike Jennings, Chief Executive Officer of HF Sinclair and Holly Energy Partners. He is joined by Tim Go, President and Chief Operating Officer of HF Sinclair; Atanas Atanasov, Chief Financial Officer of HF Sinclair; and John Harrison, Chief Financial Officer of Holly Energy Partners. . Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Biery, Vice President of Investor Relations. Craig, you may begin.

Craig Biery: Thank you, Rob. Good morning, everyone, and welcome to HF Sinclair Corporation and Holly Energy Partners fourth quarter 2022 earnings call. This morning, we issued a press release announcing results for the quarter ending December 31, 2022. If you would like a copy of the press release, you may find them on our website 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, it says 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 securities 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 Mike Jennings.

Mike Jennings: Thanks, Craig. Good morning, everyone. Today, we reported fourth quarter net income attributable to HF Sinclair shareholders of $587 million or $2.92 per diluted share. These results reflect special items that collectively decreased net income by $11 million. Excluding the items, adjusted net income for the fourth quarter was $598 million or $2.97 per diluted share compared to adjusted net loss of $18 million or a negative $0.11 per diluted share for the same period in 2021. Adjusted EBITDA for the fourth quarter was $1.0 billion, an increase of approximately $878 million compared to the fourth of 2021. In our Refining segment, fourth quarter EBITDA was $864 million compared to $25 million in the same period last year.

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This increase was primarily driven by higher refining margins in both the West and Mid-Con regions and a 39% increase in sales of refined products year-over-year due to the acquisition of the Puget Sound Refinery and the acquired Sinclair businesses. Despite the winter storm impacts we experienced in December, crude oil charge averaged 628,000 barrels per day for the fourth quarter compared to 421,000 barrels per day in the fourth quarter of ’21. For full year 2022, we achieved records for annual crude charge of 607,000 barrels per day and Refining segment EBITDA of $4.2 billion. Despite the tight supply environment in 2022, our continued focus on operational excellence allowed us to safely increase throughput to meet customer demand for our transportation fuels.

In our Renewables segment, we reported adjusted EBITDA of negative $7 million for the fourth quarter and total sales volumes of 54 million gallons, driven by unplanned downtime. We continue to increase throughput at our renewables facilities and expect to achieve normalized run rates in the second half of 2023. We remain constructive on the D4 RIN market and on our ability to source advantaged feedstocks for our renewable diesel plants. Our Marketing segment reported EBITDA of $23 million for the fourth quarter, and total branded fuel sales volumes were 336 million gallons, representing a $0.07 per gallon margin. We continue to make progress expanding the DINO brand as our number of branded sites grew by 24 during the fourth quarter and by 81 since the acquisition of the branded business from Sinclair in March of ’22.

Lubricants and Specialty Products reported EBITDA of $67 million for the fourth quarter compared to EBITDA of $75 million for the fourth quarter of 2021. This decrease was largely driven by FIFO impact from consumption of higher-priced feedstock inventory in the fourth quarter of 2022. For full year ’22, lubricants performed well above our mid-cycle guidance, reporting annual EBITDA of $382 million due to strong demand for base oils and finished products. HEP reported adjusted EBITDA of $116 million in the fourth quarter compared to $80 million in the same period of last year. This increase was primarily driven by contributions from the Sinclair transportation assets, which were acquired in March of 2022, coupled with record volumes across our integrated system.

We returned $475 million in cash to shareholders through share repurchases and dividends during the fourth quarter. And since the closing of the Sinclair acquisition on March 14, 2022, we have returned over $1.6 billion, which is well ahead of our initial target of returning $1 billion to our shareholders by the end of the first quarter of ’23. This represents a 2022 full year cash return of 16%. As of December 31, 2022, we have $662 million remaining on our share repurchase authorization and remain fully committed to our cash return strategy and payout ratio, while maintaining a strong balance sheet and an investment-grade credit rating. We also announced today that our Board of Directors declared a regular quarterly dividend increase to $0.45 per share payable on March 17, 2023, to our holders of record on March 7, 2023.

This 12.5% increase reflects our constructive outlook on cash generation from our recently acquired assets and our Board’s commitment to returning excess cash to shareholders. Looking ahead, our focus remains on operating safely and reliably, while executing on our integration strategy to fully optimize our new and more diverse asset base. We believe we’ve created a strong foundation as a downward integrated business with increased scale to drive growth and capital returns to shareholders. So with that, let me turn the call to Atanas.

Atanas Atanasov: Thank you, Mike, and good morning, everyone. Let’s begin by reviewing HF Sinclair’s financial highlights. Net cash provided by operations totaled $915 million, which included $47 million of turnaround spend in the quarter. HF Sinclair’s stand-alone capital expenditures totaled $99 million for the fourth quarter. As of December 31, 2022, HF Sinclair’s total liquidity stood at approximately $3.3 billion, comprised of a stand-alone cash balance of $1.7 billion, along with our undrawn $1.65 billion unsecured credit facility. As of December 31, we had $1.7 billion of stand-alone debt outstanding, with a debt-to-cap ratio of 16% and net debt-to-cap ratio of 1%. HEP distributions received by HF Sinclair during the fourth quarter totaled $21 million.

HF Sinclair owns 59.6 million HEP Limited Partner units, which following the acquisition of Sinclair Transportation, represents 47% of HEP’s outstanding LP units at a market value of approximately $1.1 billion at last night’s close. Let’s go through some guidance items. With respect to capital spending for full year 2023, we expect to spend between $250 million to $280 million in Refining, $25 million to $35 million in Renewables, $35 million to $50 million in Lubricants and Specialty Products, $20 million to $30 million in Marketing, $50 million to $80 million in Corporate, and $530 million to $630 million for Turnarounds and Catalysts. At HEP, we expect to spend between $25 million to $35 million in maintenance and $5 million to $10 million in expansion and joint venture investments.

For the first quarter of 2023, we expect to run between 500,000 and 530,000 barrels per day of crude oil in our Refining segment, and we have planned turnaround scheduled at our Puget Sound Wood Cross and El Dorado refineries in the period. Let me now turn the call over to John for an update on HEP.

John Harrison: Thanks, Atanas. I’m pleased to report HEP’s strong fourth quarter and full year earnings driven by record volumes across our integrated system. HEP’s fourth quarter 2022 net income attributable to Holly Energy Partners was $68.5 million compared to $45.6 million in the fourth quarter of 2021. The year-over-year increase was primarily attributable to earnings related to the Sinclair transportation assets, partially offset by higher interest expense and operating costs. HEP’s fourth quarter 2022 adjusted EBITDA was $115.7 million compared to $79.7 million in the same period last year. A reconciliation table reflecting these adjustments can be found in HEP’s press release. HEP generated distributable cash flow of $85.8 million, and we announced a fourth quarter distribution of $0.35 per LP unit, resulting in a distribution coverage ratio of 1.9x.

Capital expenditures and joint venture investments during the quarter were approximately $18 million, including $11 million of expansion and joint venture investments, $5 million in maintenance CapEx, and $2 million for reimbursable CapEx. For 2023, we expect total CapEx of $30 million to $45 million. During 2022, we made good progress on reducing our leverage ratio and ended the year with a pro forma debt to trailing 12-month adjusted EBITDA ratio of 3.6x. We expect to reach our target leverage ratio of 3.5x in mid-2023, at which time we will evaluate incremental cash return to unitholders consistent with our previously announced capital allocation strategy. We are now ready to turn the call over to the operator for any questions.

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Q&A Session

Operator: And your first question today comes from the line of Theresa Chen from Barclays.

Theresa Chen: Congratulations to Mike, again, for round 2 of retirement. So now that you’ve achieved $100 million of run rate synergies following the Sinclair acquisition and have assets under your umbrella for some time. How do you view the further stages of the integration effort? What phase are you at in terms of rolling out their — Sinclair marketing brand to the legacy HFC refining markets and downstream channels and other aspects of integration and synergies that we should be anticipating?

Tim Go: Theresa, this is Tim Go. Let me take a stab at that first here. We’re very pleased that we were able to achieve the $100 million of synergies so quickly, just right out of the gate. We definitely see more opportunities for us to continue to take advantage of the larger refining portfolio, but more importantly, the integration with our marketing assets. That was, as you recall, one of the core objectives of our Sinclair HollyFrontier merger was to be able to get that branded wholesale integration in our merchant refining markets that we currently didn’t have any real exposure to in the past. We’ve done really well. Mike said in his prepared comments, we had 24 additional stores in the fourth quarter. 81 branded outlets for the year.

We’re really 3 quarters of the year since we’ve owned Sinclair, and we think that’s just the beginning. We think there are a lot more opportunities. We’re seeing a lot of interests in the Southwest. We’re seeing a lot of interests in the P&W to basically bring out the branded stores in those areas, which will couple with our — again, our refining output to help us fully integrate that value chain. We also see a lot of opportunities just within our operating assets to procurement, combining processes to improve our reliability, there’s a lot more opportunity out there. We’re not ready at this point to give you a number, but I can tell you that we are we are seeing a lot of opportunity, and we’re going after it.

Theresa Chen: Congratulations on the new role. Turning to refining. Can you give us a sense of what happened on the West Coast this quarter’s further details on the capture results? And do you see this improving over the long term or medium term, taking into account, of course, the near-term downtime that you have in the first half?

Tim Go: Yes, Theresa, this is Tim. Let me take that again. Basically, the fourth quarter impacts were about 20,000 barrels a day less heavy crude than we typically run, primarily in the West, and about 4% lower diesel yield across the portfolio, but again, primarily in the West. And that was due to both planned and unplanned maintenance as well as some higher natural gas prices that occurred that also impacted the West. So on the planned basis, we had coker maintenance planned at our Parco refinery. We had coker maintenance planned at our PSR refinery. We had distillate hydrotreater maintenance planned at our Puget Sound refinery, and then we had distillate hydrotreater maintenance planned at our El Dorado refineries. All of those contributed to the lower heavy crude runs as well as the lower distillate yields.

In addition, we had some hydrogen outages, both planned and unplanned at our Navajo refinery and at our Parco refinery. So really, that’s what drove the lower West Coast productivity. In addition, though, if you’re looking at OpEx and if you’re looking at even some of the gross margin capture associated with natural gas, we saw some very high natural gas prices on the West Coast. The basis for the P&W as well as for our Salt Lake City refinery had gotten up to about $40 to $50 in MMBtu above the Henry Hub baseline price in that December and really carrying over into the January time frame. So those 3 factors, less heavy crude, less distillate yield and higher natural gas prices really explain the weaker West results that we had.