Par Pacific Holdings, Inc. (NYSE:PARR) Q4 2022 Earnings Call Transcript

Par Pacific Holdings, Inc. (NYSE:PARR) Q4 2022 Earnings Call Transcript February 25, 2023

Operator: Good morning, and welcome to the Par Pacific Fourth Quarter 2022 Earnings Conference Call. . Please note this event is being recorded. I would now like to turn the conference over to Ashimi Patel, Director of Investor Relations. Please go ahead.

Ashimi Patel: Thank you, Anthony. Welcome to Par Pacific’s Fourth Quarter Earnings Conference Call. Joining me today are William Pate, Chief Executive Officer; Will Monteleone, President; Shawn Flores, SVP and Chief Financial Officer; Richard Creamer, EVP of Refining and Logistics; and Danielle Mattiussi, SVP and Chief Retail Officer. Before we begin, note that our comments today may include forward-looking statements. These 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. Good morning to our conference call participants. 2022 was a breakthrough financial year for our company. Early last year, product cracks rebounded from pandemic lows and remained strong throughout the rest of the year. Adjusted EBITDA was $643 million, and adjusted net income was $475 million or $7.93 per share. Nearly all our adjusted net income was converted into cash from operations for the year. We used our free cash flow to strengthen our balance sheet. We paid down nearly $65 million in funded debt and built our cash on hand by more than $375 million. Consequently, our year-end net debt declined to approximately $25 million. Our team also announced a comprehensive refinancing of our funded debt this month further reducing our cost of capital.

This financing, coupled with our strong liquidity, leaves us well positioned to close the Billings transaction. We’re targeting a June 1 closing. Entering 2023, our markets continue to be tight. Global product cracks remained strong due to increasing demand, principally due to China, which is abandoned its zero COVID lockdown policy. As evidence of growing demand, Chinese refiners have curtailed exports in the first quarter. Additional European sanctions on Russian petroleum products have tightened freight markets and increased the cost of exports, improving overall refining economics. These trends are somewhat offset by declining natural gas prices, which tend to reduce refinery operating costs and product cracks. The Chinese reopening has combined with overall increased global air travel to boost jet fuel demand, a key element of our sales slate.

In Singapore, the jet regrade or the difference between the price of jet fuel and ultra-low sulfur diesel has narrowed considerably and occasionally flipped positive for the first time since 2019. We’re making significant progress on our renewables projects. In this area, our focus remains on smaller-scale projects that afford us maximum flexibility given uncertainty surrounding feedstock sourcing, government credit pricing and overall market dynamics. For example, our Tacoma project will cost less than $2 million but it will cover 50% of our shortfall. We expect this project to be running next quarter. We’re also completing the engineering for the conversion of a unit in Hawaii to produce sustainable aviation fuel. We believe we can complete this 60 million-gallon per year project, including feedstock pretreatment for less than $1.50 per gallon of annual production capacity.

Our upstream affiliate Laramie also completed a refinancing this quarter, redeeming its preferred stock and replacing their existing term loan facility with a new credit facility. We expect an approximate $10 million distribution in March in conjunction with this financing. I want to congratulate Will Monteleone, and Shawn Flores in their new roles as President and CFO, respectively. Like many of our colleagues, they’re passionate and highly focused on our corporate mission and strategy, a key reason for our growth and success. I will now turn the call over to Will to discuss our commercial and operational performance.

Photo by Max Bender on Unsplash

William Monteleone: Thank you, Bill. Before diving into the fourth quarter results, I’d like to thank our team members for their many contributions to our collective success over 2022. Despite the complexities of daily operations, you all managed to run at a remarkable 98% mechanical availability for the year, while the retail team generated a strong financial performance and laid the foundation for future growth. A big thank you to the team for your dedication and hard work. The Refining and Logistics fourth quarter market backdrop remains firm, rewarding refining utilization rates. Total refining throughput was 134,000 barrels per day or 86% utilization. During the quarter, our per barrel production costs were $5.42 in Hawaii, Washington was $3.57 and Wyoming was $7.80 per barrel.

Production costs per barrel were impacted by minor planned maintenance activities in Hawaii and Wyoming, which modestly impacted throughputs and OpEx. For the full year, Hawaii production costs were $4.86 per barrel, Washington was $4 per barrel and Wyoming was $7.32 per barrel. Despite increases in energy costs, the first quarter Washington turnaround and planned small maintenance in Hawaii and Wyoming. In an $80 per barrel Brent and $4 Henry Hub price environment, we would expect Hawaii production costs between $4.25 and $4.50 per barrel, Washington near $3.50 per barrel and Wyoming between $7.50 and $8 per barrel. From an overall reliability and operations standpoint, we have no major planned maintenance activities in 2023. Shifting to commercial matters.

The fourth quarter Singapore 3-1-2 index declined approximately $4 per barrel to $22.84. Landed feedstock costs were approximately $9.15 premium to Brent compared to the initially provided estimate of $8.50 to $9 per barrel. Combining the 3-1-2 and feedstock indexes, the overall margin environment compressed by about $5 per barrel versus the third quarter. Adjusted gross margin declined by a commensurate amount, allowing us to maintain capture rates near 100% of the combined index. In Washington, market conditions declined by approximately $5 per barrel, but remained seasonally strong at $28 per barrel with very strong conditions early in the quarter. Despite this nearly $5 per barrel drop in the index, we were able to increase adjusted gross margins to approximately $22 per barrel.

Improving capture rates were largely driven by wider inland crude discounts relative to ANS and softening backwardation. Wyoming market conditions declined by approximately $8 per barrel compared to the third quarter. However, Wyoming adjusted gross margin only declined by approximately $2 per barrel, largely due to lower FIFO inventory impacts. Looking ahead to the first quarter, we expect Hawaii to run between 78,000 and 82,000 barrels per day, Washington between 40,000 and 42,000 barrels per day and Wyoming between 15,000 and 17,000. In total, this results in a seasonally strong total throughput midpoint of 137,000 barrels per day or 89% utilization. In Hawaii, the Singapore 3-1-2 has averaged $23 per barrel with notable strength in gasoline and jet fuel offsetting gas to oil softening.

On the feedstock side, we expect Q1 average crude to land between 8 and 8.50 versus Brent, a modest improvement from the fourth quarter levels. As a reminder, average landed feedstock costs operate on about a 90- to 120-day lag versus prompt quarter market conditions. In Washington, the PNW 5-2-2-1 index has averaged approximately $30 per barrel quarter today. Wyoming index is averaging $49 per barrel, with notable counter-seasonal strength largely due to regional refinery outages. Moving to the Retail segment. First of all, I’m very excited to announce that Danielle Mattiussi has joined our team to lead the retail business unit. Danielle has a wealth of experience in convenience retail, and I’m excited to work closely with her to take our operations to the next level.

The Retail segment generated a record financial quarter with stabilizing fuel volumes and expanding margins across both fuel and merchandise. Fourth quarter same-store sales fuel and merchandise volumes ramped up nicely growing 1% and 4.5%, respectively, versus 2021 levels. We completed the 3 store acquisition and also had 2 new to industry sites under construction. The Hele and nomnom brands are well positioned in their respective regions for future growth. Key 2023 focus areas are maintaining strong operational reliability, successfully integrating Billings, growing our retail brands and progressing our renewable projects. With respect to Billings, we continue to be impressed with the high quality of the refinery and logistics team. Significant transition efforts are underway for a June 1 transaction closing and we remain confident in our synergy targets.

I will now turn it over to Shawn to review our financial results.

Shawn Flores: Thanks, Will. Fourth quarter adjusted EBITDA and adjusted earnings were $175 million and $133 million or $2.20 per share. Full year adjusted EBITDA and adjusted earnings were $643 million and $475 million or $7.93 per share. The Refining segment reported $146 million of adjusted EBITDA in the fourth quarter compared to $188 million in the third quarter. Fourth quarter adjusted EBITDA includes a net price lag benefit in Hawaii of $10 million, offset by a negative FIFO impact of $4 million in Wyoming and a product crack hedge loss of $4 million in Hawaii. We have continued our crack hedging framework in Hawaii and apparently have approximately 25% of our first quarter sales volumes hedged at levels marginally higher than the current market conditions.

The Logistics segment reported $16 million of adjusted EBITDA in the fourth quarter compared to $22 million in the third quarter. The Logistics results were primarily driven by onetime pipeline maintenance activities in Hawaii, resulting in increased operating costs and marginally lower asset utilization. The Retail segment reported record quarterly adjusted EBITDA of $25 million during the fourth quarter compared to $20 million in the third quarter. As we referenced previously, the strong Retail results were driven primarily by increased margin in fuel and merchandise sales. Shifting to the cash flow statement. Cash provided by operations during the fourth quarter totaled $132 million, excluding net working capital outflows of $48 million.

Working capital outflows were primarily driven by increased RIN settlement activity as we effectively cash settled 60% of our 2022 net RIN obligation during the quarter. Cash outflows from investing activities of $50 million during the fourth quarter include the impact of a $30 million deposit for the upcoming Billings acquisition. Total liquidity at year-end was $577 million, made up of $491 million in cash and $86 million in availability. Next, I’d like to provide an update on our recent capital market activities. Earlier this month, we announced the successful pricing and allocation of a $550 million senior secured term loan. The new facility will simplify our capital structure, reduce our cost of term debt by approximately 100 basis points and better position the company to pursue future growth opportunities.

The facility is expected to close by early March, and the proceeds will be used to take out our existing Term Loan B and senior secured notes. As Bill mentioned, 2022 was a breakthrough year for our company. We generated over $450 million of cash flow from operations, which we used to bolster our balance sheet. Our federal net operating loss carryover reduced our cash tax liability by approximately $100 million and was a key factor in achieving our debt reduction objectives. Last year, we paid down $64 million of term debt, repurchased $8 million in stock, increased our cash position by $379 million, which we will use to fund the upcoming Billings acquisition. As a growth-oriented company, we will continue to identify attractive development opportunities to enhance our integrated supply network across our core markets.

This concludes our prepared remarks. Operator, we’ll turn it back to you for Q&A.

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Q&A Session

Operator: . Our first question will come from Neil Mehta with Goldman Sachs.

Nicolette Slusser: This is Nicolette Slusser on for Neil Mehta. And congrats, Will and Shawn, on the new respective roles. So the first question here would be on Billings. And as we approach the targeted 2Q close date for the transaction, can you just talk about what key factors we should be looking out for ahead of close? And then any thoughts around expected timing within the quarter?

William Monteleone: Nicolette, it’s Will. So again, I think key factors we’ve laid out to date, we’re targeting the June 1 closing. Again, we’re on track for that. And I think focused on the key items that relate to achieving that date again the carve-out audit and ultimately standing up the technology and since it’s necessary. Again, I think in terms of the overall project, again, I think we remain confident in our synergy targets. We spend a lot of time on the ground with the team. And again, our belief that the overall overhead, commercial and operating targets are achievable. And again, I think are focused on — and again, as identified on top of that opportunities for us to deploy low capital items that will generate high returns to increase reliability.

Nicolette Slusser: Thank you for the color. And then the second question here is just on Hawaii, and I think most are trying to get to a better sense of normalized longer-term EBITDA for the business. Can you talk about what factors may be driving a higher capture rate outlook for Hawaii refining that may be more structural going forward?

William Pate: Shawn, do you want to cover the capture. And let me just say, first of all Nicolette, that the refined products market in Singapore continues to be very strong. And generally, it’s trading kind of with the European market on the basis of arbitrage economics. But just to give a little color, the 3-1-2 peaked at $45 a barrel in June of 2022, and it’s been trading in the high teens to the low 20s for most of this year. What we’re seeing overall is just gasoline and jet have improved as diesel comes off highs. The market seems to have built in a premium right now for Chinese demand rebound related to the cessation of their zero COVID lockdown policy. And I think one interesting telltale is the regrade that I mentioned in my prepared remarks, with jet really coming up and trading in parity with diesel.

I think the line of a healthy market. Longer term, I think the other factors to focus on is Chinese actions continue to be very supportive of their longer-term policy message that they will deliver — that they will the cease delivery of clean refined product exports by 2025. Shawn, do you want to go ahead and cover the capture?

Shawn Flores: Yes, Nicolette. As far as capture looking forward, I think we feel like the recent capture rates in Hawaii, looking back to Q3 and Q4 of last year are sustainable. Obviously, we had some price hike benefits in each of those quarters. But as we look ahead, the easing backwardation environment should offset those price hike benefits that we got in recent quarters. And so I expect capture to hold in pretty closely with the prior 2 quarters.

Operator: Our next question will come from Matthew Blair with Tudor, Pickering, Holt.

Matthew Blair: Congrats on the Q4 results. The release mentioned the $10 million distribution coming from Laramie, which it sounds like it stems from the refinancing. But now that the debt is in a better place, could you talk about the prospects for future distributions from Laramie to Par just based on the underlying profitability at Laramie?