HF Sinclair Corporation (NYSE:DINO) Q4 2023 Earnings Call Transcript

HF Sinclair Corporation (NYSE:DINO) Q4 2023 Earnings Call Transcript February 21, 2024

HF Sinclair Corporation beats earnings expectations. Reported EPS is $0.87, expectations were $0.67. DINO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to HF Sinclair Corporation’s Fourth 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 Pompa, EVP of Operations; and Matt Joyce, SVP of Lubricants and Specialties. 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] We ask that you please limit yourself to one question and one follow-up. Additionally, we ask that you pick up your handset to allow optimal sound quality. 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, Gavin. Good morning, everyone, and welcome to HF Sinclair Corporation’s fourth quarter 2023 earnings call. This morning, we issued a press release announcing results for the quarter ending December 31, 2023. If you would like a copy of the earnings press release, you may find it on our website at hfsinclair.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today’s press release. 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 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 release 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 re-reading of the transcript. And with that, I’ll turn the call over to Tim.

Tim Go: Good morning, everyone. When I stepped into the CEO role last year, I laid out three priorities. One, to drive operational excellence, including improved reliability; two, to optimize and integrate our portfolio of new businesses; and three, to generate strong cash flows to advance our cash return strategy. I’m very pleased to report the significant progress our team has executed against these goals during the year. First, in 2023, we delivered record best process safety performance across our refining portfolio and successfully completed heavy maintenance turnarounds at all of our refineries during the year on schedule and on budget, as we took another step towards improving reliability across our portfolio. Second, we closed the transaction to buy in our HEP business in the fourth quarter and furthered our efforts to integrate and optimize our asset base.

In addition, we delivered growth in our Marketing segment volumes and site count and delivered strong Lubricants & Specialties segment earnings despite the weakening of base oil cracks in 2023. Third, during the year, we also returned over $1.3 billion in cash to shareholders through share repurchases and dividends, delivering on our cash return commitment to shareholders. With good momentum across our businesses, we believe we are well positioned to continue creating compelling value for our shareholders in 2024. Now, let’s turn to our segment highlights. In Refining for the full year 2023, we set annual records at our Parco Refinery in both heavy crude runs and total throughput. We also executed planned turnaround work at all of our refineries on schedule and on budget.

Improved turnaround execution allowed us to do all the work on our equipment we intended and is essentially — and is essential to our strategy of driving reliability improvements in 2024 and throughout the turnaround cycle. In Renewables, in the fourth quarter, we achieved our normalized run rate utilization for our renewables facilities and delivered record volumes at our pretreatment unit in Artesia. We also received our new CI pathways, which we believe will benefit our margin capture opportunity going forward. For 2024, we plan to continue to optimize the operation of our renewables assets through improved reliability and improved commercial efforts. The Marketing segment in 2023 delivered growth in gasoline and diesel branded sales volumes as well as branded site count compared to 2022, which includes our Sinclair branded wholesale business for the period after March 14, 2022.

We are pleased with the value that the DINO brand brings to our portfolio and we remain focused on increasing the number of branded sites and sales volumes in 2024. In Lubricants & Specialties, despite lower base oil margins in 2023, we performed well above our midcycle guidance and reported annual EBITDA of $346 million. Our results in 2023 reflect our continued efforts to optimize the feedstock integration and sales mix across our finished products portfolio and we look to build upon this strategy in 2024 to further enhance the value of our Lubricants & Specialties business. In Midstream, we closed on the acquisition of Holly Energy Partners on December 1, 2023 along with the associated exchange of the outstanding HEP bonds for new HF Sinclair bonds.

This acquisition strengthens our business as we simplified our corporate structure and reduced costs as a combined company, further supporting the integration and optimization efforts across our assets. Going forward, our Midstream operation will continue to be reported as a separate standalone segment in our financials. In the fourth quarter, we returned $248 million to shareholders through share repurchases and dividends. For the full year 2023, we returned over $1.3 billion in cash to shareholders, representing an annual cash return of 12% and payout ratio of 74%. This does not include the additional $268 million in cash paid to HEP unitholders in the HEP transaction. Since the closing of the Sinclair acquisition on March 14, 2022, we have returned approximately $3 billion in cash to shareholders, which represents 27% of our market cap as of December 31, 2023.

As of February 9, 2024, we have $591 million remaining on our current share repurchase authorization and we remain fully committed to our long-term cash return strategy and long-term payout ratio, while maintaining a strong balance sheet and investment grade credit rating. We also announced on February 14, 2024 that our Board of Directors declared a regular quarterly dividend of $0.50 per share, an increase of $0.05 over the previous dividend payable on March 5, 2024 to holders of record on February 26, 2024. The 11% dividend increase reflects our Board’s commitment to returning excess cash to shareholders. Looking ahead, we remain focused on further executing our corporate strategy to maximize shareholder value. We believe the strength and diversification of our new asset base coupled with our disciplined approach to capital allocation will position us well for success.

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. Today we reported fourth quarter net loss attributable to HF Sinclair shareholders of $62 million or negative $0.34 per diluted share. These results reflect special items that collectively decreased net income by $227 million. Excluding these items, adjusted net income for the fourth quarter was $165 million or negative $0.87 per diluted share compared to adjusted net income of $598 million or $2.97 per diluted share for the same period in 2022. Adjusted EBITDA for the fourth quarter was $428 million compared to $1 billion in the fourth quarter of ’22. In our Refining segment, fourth quarter adjusted EBITDA was $278 million, which excludes the $221 million lower of cost or market inventory valuation charge.

This compares to $864 million of Refining segment EBITDA for the fourth quarter of ’22. This decrease was primarily driven by lower Refinery gross margins in both the West and Mid-Con regions, which resulted in lower Refining segment earnings in the quarter. Crude oil charge averaged 614,000 barrels per day for the fourth quarter compared to 628,000 barrels per day for the fourth quarter of ’22. In our Renewables segment, we reported adjusted EBITDA of negative $3 million for the fourth quarter compared to negative $7 million for the fourth quarter of ’22. Improved operations in the period were offset by weakening RINs and LCFS credit prices. Total sales volumes were 63 million gallons for the fourth quarter as compared to 54 million gallons for the fourth quarter of ’22.

Our Marketing segment reported EBITDA of $9 million for the fourth quarter compared to $23 million for the fourth quarter of ’22. Total branded volume sales were 350 million gallons, representing $0.06 per gallon margin. Our Lubricants & Specialties segment reported EBITDA of $58 million for the fourth quarter compared to EBITDA of $67 million for the fourth quarter of ’22. This decrease was largely driven by a $30 million FIFO charge from consumption of higher priced feedstock inventory in the fourth quarter of 2023 compared to a $7 million FIFO charge in the fourth quarter of 2022. Our Midstream segment reported EBITDA of $105 million in the fourth quarter compared to $90 million in the same period of last year. This increase was driven by higher revenues from our pipelines, terminals and loading racks.

Net cash provided by operations totaled $231 million, which includes $85 million of turnaround spend in the quarter. HF Sinclair’s capital expenditures totaled $124 million for the fourth quarter. For the full year 2023, our total capital expenditures were $941 million, which includes $556 million in turnarounds. Our full year capital spend came in under budget due to the improved execution of our planned maintenance activities. As of December 31, 2023, HF Sinclair’s total liquidity stood at approximately $3.7 billion, which includes a cash balance of $1.4 billion, our undrawn $1.65 billion unsecured credit facility and $744 million availability on the HEP credit facility. During the year, we reduced our debt by $520 million to the repayment of our 2.625% senior notes at maturity in October and by paying down a portion of our outstanding HEP revolver.

As of December 31, we had $2.8 billion of debt outstanding with a debt to cap ratio of 21%, a net debt to cap ratio of 11%. Let’s go through some guidance items. With respect to capital spending for full year 2024, we expect to spend $235 million in Refining, $5 million in Renewables, $40 million in Lubricants & Specialties, $10 million in Marketing, $30 million in Midstream, $65 million in Corporate and $415 million for Turnarounds & Catalysts. In addition, we expect to spend $75 million in growth capital investments across our business segments. For the first quarter of 2024, we expect to run between 585,000 to 615,000 barrels per day of crude oil in our Refining segment, and we have planned turnaround scheduled at our Puget Sound refinery during the period.

We’re now ready to take some questions from the audience. Operator?

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Q&A Session

Operator: The floor is now open for questions. [Operator Instructions] Thank you. Our first question comes from the line of Neal Mehta of Goldman Sachs & Co. Your line is open.

Neal Mehta: Yeah. Thank you so much, team. One macro question and one micro question. I guess, the macro question would be just your perspective on the Mid-Con setup as we go from here into the summer, obviously very weak January, stronger February with some disruptions from your competitors. But I think we’re getting a lot of investor questions about how you guys see the world as we go into the summer for both diesel and gasoline in the Mid-Con?

Tim Go: Yeah. Good morning, Neal. Let me ask Steve to comment a little bit on the Mid-Con outlook, and then I’ll come back and provide a little more macro on top of that.

Steve Ledbetter: Hey, Neal. This is Steve. Thanks for the question. In the Mid-Con, as you articulated, we did see demand patterns fall off a little earlier in the quarter. We did see inventories rise to kind of the five year range and that stayed into Q1. It’s starting to come back. We’re seeing some support in the structure view there, but we think this is cyclical and we see a supportive margin structure in the Mid-Con, particularly heading into the driving season. We’re starting to see that coming off the — as we progress through the quarter here in February.

Tim Go: Yeah. And I’ll just jump on top of that, Neal. We do believe that Mid-Con seasonality is what we were seeing in the December, January timeframe. We see it every year. In fact, I think we typically talk about it at this call because Mid-Con inventories typically grow during this timeframe. Of course, since the BP Whiting downtime inventories have drawn significantly and Mid-Con cracks have improved significantly. If you look at the more of a step back macro perspective, Neal, we still believe we are in a supply constrained market. We believe that will continue here through at least 2024. I mean, if you look at, again, demand, we think demand overall is 5% to 6% above 2019 levels, whereas supply versus 2019 is significantly constrained, at least 1 million barrels a day, as you know.

And the utilization requirement in order to make up for that additional demand is just higher than what this industry has been able to demonstrate in the past. And so we still think the BP Whiting issue is a good example of that. We still think that the expectations on industry utilization are higher than what the industry is able to produce. And so as a result, we’re going to remain in the supply constrained environment through the rest of 2024. There’s not a lot of incentive to put more capital into refining capacity, just given the current policies of this country. And so we still believe that liquid transportation fuels in general is bullish and refining margins in particular, we’re still very bullish, especially with our portfolio.

Neal Mehta: Yeah. Thanks. Thanks to you both. And then the follow-up is on renewable diesel, Tim, you and I have talked a lot about this business and getting it back to a path to profitability. You know, how do you see the trajectory from here? And how many of the issues continue to be around hydrogen versus something which is more market driven? And just in general, the path towards normalized profitability at RD?

Tim Go: Yeah, Neal. Let me ask Steve again to jump in and then I can comment on top of that.

Steve Ledbetter: Yeah. I think we’re learning and doing better at this business overall. If you look at Q4, financial performance was challenged, but we did demonstrate good progress in facility utilization. We eclipsed north of 70% across the quarter and in December hit a utilization of close to 85% that includes a turnaround or a cat change at Artesia. We had some records at Artesia, Cheyenne, as well as the PTU where we think that’s an advantage for us in terms of taking the low CI feed stocks and putting them into our value chain. We did have a negative earnings impact associated with working through some high-priced inventory, but freed up a considerable amount of cash on the balance sheet. So that’s kind of the Q4 picture.

If I think about looking forward, you know we do see margin softness in ’24. The RD supply is outpacing the mandates and the RFS and the LCFS programs. There’s some additional close to 90,000 barrels a day of nameplate capacity coming on. So all those things create a bit of a structural margin impact. We have seen feedstock prices decline, but at a slower pace than the incentive values that are supporting them. And we don’t see anything structurally that the RVO and the CARB proposed changes will not impact into 2025. So we’re laser focused on facility utilization at an economic clip, OpEx, catalyst utilization and optimization and then putting our feedstock strategy to work, driving low CI feeds, executing and getting our pathways approved, and then finding the most advantaged markets for our fuel.

So we do see some structure softness in the forward run, but we feel like we’re in a good place to take advantage of the market when it’s there for us.

Tim Go: Yeah. And Neal, I’ll just say, I mean, we feel very good about the operating performance of our renewable diesel business in the fourth quarter achieved 71% utilization. The feedstock price lag that Steve mentioned went against us and obviously impacted our overall profitability. But we believe we’ve got a good platform to spring into 2024 with. You look at obviously the LCFS and the RINs prices being significantly lower than what our [Technical Difficulty] basis was when we first launched our business. We do believe that over time, for example, the LCFS is going to recover and it’s going to show some improved project margins again. But things like, you saw that New Mexico just passed their own LCFS. We know that as other programs continue to jump into the LCFS world, that it’s going to continue to tighten those LCFS credits and the RINs credits as well.