Par Pacific Holdings, Inc. (NYSE:PARR) Q3 2023 Earnings Call Transcript

Par Pacific Holdings, Inc. (NYSE:PARR) Q3 2023 Earnings Call Transcript November 7, 2023

Par Pacific Holdings, Inc. beats earnings expectations. Reported EPS is $3.15, expectations were $3.06.

Operator: Good morning, and welcome to the Par Pacific Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. And now I would like to turn the conference over to Ashimi Patel, Director of Investor Relations. Please go ahead.

Ashimi Patel: Thank you, Marliese. Welcome to Par Pacific’s third quarter earnings conference call. Joining me today are William Pate, Chief Executive Officer; Will Monteleone, President; Shawn Flores, SVP and Chief Financial Officer; and Richard Creamer, EVP of Refining and Logistics. Before we begin, note that our comments today may include forward-looking statements. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties, and actual results may differ materially from these forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements, and we disclaim any obligation to update or revise them. I refer you to our investor presentation on our website and to our filings with the SEC for non-GAAP reconciliations and additional information. I’ll now turn the call over to our Chief Executive Officer, William Pate.

William Pate: Thank you, Ashimi. We’re pleased to share outstanding third quarter results with you this morning. Key highlights include record earnings and improved capital structure and achievement of our principal Billings integration objectives. We recorded record quarterly adjusted EBITDA of $256 million. The accretive impact of Billings was illustrated by our third quarter adjusted net income of $3.15 per share, 10% above the comparable result in 2022. This was our first full quarter of ownership of the Billings Refining and Logistics System, which contributed quarterly adjusted EBITDA of more than $85 million. As previously noted, our principal acquisition objective is to increase annual throughput through consistent, reliable operations.

In this regard, we exceeded our acquisition target of 50,000 barrels per day with quarterly throughput above 55,000 barrels per day. We are also well ahead of our acquisition synergies target due to commercial activities and corporate overhead reductions. Our other refining and logistics units recorded strong profits due to solid operational execution and favorable market conditions. Despite the pressures of rising wholesale prices on street margins, our retail system continued to post excellent same-store sales growth and strong profitability. Across the board, our team continues to exhibit near flawless operational and commercial execution. With the strong earnings, we also improved our capital structure. During the quarter, we were able to build liquidity, reduce debt and refinance one of our intermediation facilities while also repurchasing $27 million of our common stock.

We have also retired all prior year rent obligations. At this point, we have a strong balance sheet with limited financial obligations other than investing in our base assets and pursuing our strategic growth initiatives. On the growth front, we are focused on low-cost, high-return renewables projects. In Tacoma, we successfully tested our co-feeding operation, and we’re also moving forward with the engineering of our green hydrogen and SAF units. In Hawaii, we remain on schedule with our renewable fuels project. Overall, we continue to invest and expand in this critical sector aligning with our long-term sustainability goals. As we enter the winter, distillate cracks continue to be strong across our markets and gasoline cracks have declined with the conclusion of the summer driving season.

While our Rockies markets remain well above Gulf Coast cracks, Billings in Wyoming have strong seasonality profiles due to the winter decline in Upper Rockies demand. However, the strong distillate orientation of our Hawaii operations will continue to reduce our sensitivity to winter seasonality, and it leaves us well positioned for the winter quarters. I’ll now turn the call over to Will to provide a detailed analysis of our commercial and operational performance.

William Monteleone: Thank you, Bill. The Refining and Logistics business units delivered strong asset reliability during peak season, driving a record quarterly financial contribution. Total throughput was 198,000 barrels per day, which included a full quarter contribution billings of 55,000 barrels per day. In Hawaii, third quarter throughput was 82,000 barrels per day and production costs were $4.50 per barrel. The quarterly Singapore Index averaged $23.39 per barrel, and our landed crude differential was $5.50 per barrel, consistent with our guidance. We expect our fourth quarter Hawaii crude differential to average between $6 and $6.50 per barrel. Third quarter capture to the combined index was approximately 75%, reflecting unfavorable price lag, crack spread hedging and previously mentioned pro forma maintenance.

In Washington, third quarter throughput was 41,000 barrels per day and production costs were $3.77 per barrel. The P&W Index averaged $35 per barrel during the quarter. Capture improved to 35%, reflecting a reversion to the typical capture range despite rising prices impacting asphalt netbacks. The Wyoming team set a quarterly throughput record of 19,500 barrels per day, driving production costs to $6.46 per barrel. The quarterly U.S. Gulf Coast index was $29.65 per barrel and Wyoming capture was approximately 125%. Adjusted gross margin result includes a favorable FIFO impact of $13 million and strong seasonal Rockies market conditions versus the Gulf Coast. Montana throughput was 55,000 barrels per day and production costs totaled $10.83 per barrel, which was elevated by approximately $1.25 per barrel due to coker maintenance.

Capture to our Gulf Coast index was 89%, slightly below what we would expect in the seasonally strong third quarter due to reduced asphalt and secondary product netbacks in a rising price environment. Four months into our ownership of the billing system, we’re as excited as we were on day 1. We’re pleased with the operations and commercial execution, resourcefulness, creativity and dedication of the operations and commercial teams have been excellent. Total synergies are exceeding initial expectations and we remain focused on improving plant reliability. As you can see from the team’s strong operational results, the plant is more than capable of running above 50,000 barrels per day. Our objective is running consistently above 60,000 barrels per day.

Looking forward, we are laying the groundwork for delivering consistent reliability. When we made the Billings acquisition, we guided to amortize turnaround expenditures of approximately $20 million per year. Given a 5- to 6-year turnaround cycle, this implies approximately $120 million over the course of a cycle. During 2024 and 2025, we expect to turn around all major units broken down roughly between the 2 years. During the 2024 turnaround, we will also be making $25 million of capital investments to improve reliability. Based on modest improvements in reliability, these investments should result in a 1- to payback in mid-cycle margin conditions. The Retail segment generated a strong financial quarter with growing fuel volumes and expanding merchandise revenues.

Third quarter same-store sales fuel volumes and merchandise revenue grew 9% and 7%, respectively, versus 2022 levels. We also recently opened our first new-to-industry site in this Spokane market and initial results are promising. In addition, we have one new site coming online during the fourth quarter in Hawaii. For the fourth quarter, we expect Hawaii to run between 83,000 and 88,000 barrels per day, Montana between 47,000 and 50,000 barrels per day and Washington between 38,000 and 40,000 barrels per day and Wyoming between 16,000 and 18,000 barrels per day. As we look across our capital project portfolio, we see many high-return projects that will allow us to consistently deliver annual throughput of 200,000 barrels per day or more. In addition, we are progressing our renewables initiatives.

The Hawaii project remains at the forefront and we expect the renewable fuels unit to come online in 2025. The majority of long-lead equipment items have been ordered, and returns continue to look robust on the project given the attractive low capital conversion costs of less than $1.50 per gallon of capacity. I’ll now turn it over to Shawn to review our financial results.

Shawn Flores: Thank you, Will. Third quarter adjusted EBITDA and adjusted earnings were $256 million and $194 million or $3.15 per share. The Refining segment reported record quarterly adjusted EBITDA of $234 million in the third quarter compared to $129 million in the second quarter. Our third quarter Refining results including unfavorable price lag impact of $22 million and our product crack hedge loss of $26 million in Hawaii, partially offset by a $13 million FIFO benefit in Wyoming. We have continued our crack hedging framework in Hawaii with approximately 25% of our fourth quarter sales hedged at $22 per barrel premium to Brent. Our Logistics segment reported adjusted EBITDA of $29 million in the third quarter compared to $26 million in the second quarter.

The sequential improvement was driven by increased throughput across our system and a full quarter contribution from the Montana business. The Retail segment reported adjusted EBITDA of $17 million in the third quarter compared to $18 million in the second quarter. Despite rising wholesale prices, our stores generated strong profitability on growing fuel volumes and merchandise revenue. Cash provided by operations in the third quarter totaled $269 million, net changes in working capital resulted in a cash inflow of $70 million, most of which we expect to reversed during the fourth quarter. Cash outflows from investing activities totaled $6 million including capital expenditures of $23 million and an inflow of $13 million related to the final working capital settlement for Par Montana.

Strong free cash flow during the quarter drove record ending liquidity of $778 million. With gross term debt at the midpoint of our stated target of $500 million to $600 million, we are focused on streamlining and reducing our cost of working capital. During the quarter, we closed a $120 million letter of credit facility that will support our Hawaii refinery. We expect the LC facility to reduce our crude funding costs by approximately $3 million per year or $0.10 per barrel. In early October, we terminated the intermediation agreement at our Washington refinery and increased our ABL capacity from $600 million to $900 million. The Washington working capital folded into the ABL, we expect to reduce annual funding costs by approximately $6 million or $0.40 per barrel.

Our expanded ABL facility now supports all 3 mainland refineries and our retail business. Through the end of October, we have repurchased $37 million or 1.1 million shares at an average price of $33.44. As we head into the new year, our balance sheet is well positioned to achieve our strategic growth objectives while opportunistically repurchasing our common stock at attractive prices. This concludes our prepared remarks. Operator, we’ll turn it back to you for Q&A.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Ryan Todd from Piper Sandler. Ryan, please go ahead.

Ryan Todd: Maybe starting out, I mean margin capture was solid and the numbers are good in the third quarter. Can you talk about some of the moving pieces as we think about — as we look at the fourth quarter WCS differentials have widened out quite a bit. You’ve got a reformer back up and running. Secondary product trends, particularly in asphalt. So how should we think about directional trends in margin capture as we look into the fourth quarter?

Shawn Flores: Yes. This is Shawn. I’ll hit each region separately. I think starting in Hawaii, we would reiterate our guidance of 100% capture over the medium to long term. As you noted, we booked a pretty sizable headwind on price lag in crack hedging in the third quarter. And then we also had the reformer activity. I think when you back all of that out of the Q3 capture it would imply about 120% gross margin capture in the third quarter. So we still feel very good about our 100% guidance in Hawaii, given the moving pieces there. For Tacoma, we’ve guided towards a mid-40% capture. Obviously, the WCS widening out will be a boost in the quarter. And I would also point to the sort of headwinds that we’re continuing to see on the secondary product market, namely asphalt.

In Wyoming and Montana, I think Bill and Will both mentioned the seasonality of both of those businesses it’s not unusual to see capture in the 60% to 70% range in Q1 and Q4. Although I will say, the Upper Rockies market really Spokane, Billings, Missoula, have fared quite well quarter-to-date. So I suspect the Montana capture will hold in a bit better than Wyoming.

Ryan Todd: Okay. That was really helpful. And then maybe on free cash flow, I mean generation was strong in the quarter supporting both debt reduction and share buyback. As we look forward, can you talk about how you think about priorities for the use of cash going forward? Is there more debt reduction that we should anticipate? And then how do you look at balancing shareholder returns and growth capital going forward?

William Pate: Ryan, this is Bill. Certainly, as I mentioned in my prepared comments, we have a balance sheet at this point where we’ve got a lot of flexibility. We really have minimal obligations with respect to financial needs. So the question really is, how do we want to invest in growth. And when we think about share repurchases, we really look at that as another opportunity to invest, and it’s an opportunity to invest in our own company. And so I think what you’ll see is if the market is weaker, you’re probably going to see us investing — repurchasing more equity over time. And as the market strengthens, you’ll probably see less of that. And then we will continue to pursue our strategic growth initiatives. And that’s everything from some of the retail locations that Will mentioned that are proving to be quite successful to investing in our refineries, to improve reliability.

We continue to be in markets that are short product. And so improvements in reliability translate directly into profitability for us at this point. And obviously, we’ll be looking at strategic opportunities to the extent that they are apparent and available within our existing markets.

Operator: And our next question comes from Matthew Blair from TPH. Matthew, you may proceed.

Matthew Blair: Congrats on the strong operations in Montana. Could you talk about what you’re doing today to run at 55,000 barrels per day versus the original target of 50,000 and then moving up to the 60,000 mark. Could you give any sort of examples of projects they’ll be implementing or things will be changing in order to raise production further?