CVR Energy, Inc.
Q2 2009 Earnings Call Transcript

Published: 6 Aug 2009

[Operator:]

Greetings and welcome to CVR Energy's Second Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recoded. It is now my pleasure to introduce your host, Stirling Pack, Vice President of Investor Relations for CVR Energy. Thank you. You may begin.

[Stirling Pack:]

Thank you, Joe. And welcome everyone to our call this morning. We know it's a very busy day and we appreciate your being here to share this information with us. With me this morning are Jack Lipinski, our Chief Executive Officer; Stan Riemann, our Chief Operating Officer; and Ed Morgan, our Chief Financial Officer, as well as some other staff members who are here this morning as well. But these will be the primary participants in the call today. Now, before we begin, I need to read our Safe Harbor statement, so I'll do so. Prior to the discussion of our 2009 second quarter result, we are required to make the following Safe Harbor statement. In accordance with Federal Securities Laws, the statements in this earnings call relating to matters that are not historical facts, are forward-looking statements based on management's belief and assumptions using currently available information and expectations as of this date, and are not guarantees of future performance and do involve certain risks and uncertainties including those noted in our filings with the Securities and Exchange Commission. This presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures including a reconciliation to the most directly comparable GAAP financial measures are included in our second quarter 2009 earnings release, which we filed yesterday. Now, it's my pleasure to introduce Jack Lipinski, our Chief Executive Officer. Jack?

[John Lipinski:]

Well, good morning. Thank you for joining for us for our second quarter 2009 earnings conference call. I'll start by reviewing our quarterly operating results by segments and also provide a snapshot on how we see our business shaping up in the third quarter. Ed Morgan, our new CFO, joined us for the first time this morning. And we wish to publicly welcome to CVR. We already recognize and appreciate his contributions for the company. Ed will follow my remarks with a review of our quarterly financial results. Let me begin with Petroleum business. In the current refining environment, the company needs operating flexibility to to take advantage of continually changing markets. At CVR, our focus is on safety and operational excellence. The flexibility of our expanded refinery allows us to take advantage of opportunities as they present themselves. Second quarter petroleum operating results reflected positively on our efforts to maximize profits in a difficult environment. Factors that influenced this quarter includes selection of crudes and product mix, operating rates, cost control, maintaining operating efficiency and meeting our overarching goal of doing this all safely. Crude throughputs for the second quarter averaged 111,600 barrels a day; as compared to 104,600 barrels in the second quarter of '08. Economic favors running lighter, sweeter domestic grades and lower, foreign or heavier grades. As a result, sweet crudes as a percentage of our overall fleet averaged about 71%; compared with 65% in the second quarter of 2008. The sweet-sour and heavy-sour differential, which directly effects our crude discounts remain tight during the second quarter. The impact of these narrow crude oil differentials was offset in part by the ongoing contango in the crude oil market. Also we had a favorable consumed crude differential compared to NYMEX (NYSE

[Edward Morgan:]

Thank you, Jack. It's a pleasure to be here this morning and participate in my first CVR earnings conference call. Before I discuss the quarterly results, I would like to take this time to thank the management team, our Board of Directors and others throughout the organization for helping make my transition so seamless. I'm excited about the opportunity we have in front of us here at CVR. As reported yesterday, CVR Energy's 2009 second quarter net income was 42.7 million, or $0.49 per diluted share; compared to 31 million or $0.36 per diluted share for the second quarter of 2008. As historically reported, there are three primary financial statement impacts that caused fluctuations in our financial performance from quarter-to-quarter. These impacts are unrealized gains or losses from our cash flow swap, inventory impact in first-in, first-out or FIFO accounting for inventory and share-based compensation expenses or reversals, which are non-cash items. The consolidation of these three impacts net of the tax impact is reported separately in our press release as adjusted net income. The adjusted net income for the second quarter of 2009 was 18.7 million or $0.22 per diluted share; compared to an adjusted net loss of 13.5 or $0.16 per basic share for the second quarter of 2008. To compare our adjusted net income to what was reported, please note the following. Our unrealized loss and the cash flow swap net of tax for the second quarter of 2009 is a $12 million loss compared to a $9.6 million loss in the second quarter of '08. Our share-based compensation expense net of tax is 4.6 million for the current quarter versus a reversal of non-cash share-based compensation expense of 9.6 million in Q2 '08. Share-based compensation, which is derived from evaluation method utilizing among other factors, CVR's current common stock price is a primary variable driver of our compensation expense from period-to-period. The impact of FIFO accounting was favorable in the amount of 40.6 million net of taxes for the second quarter versus a favorable 44.5 million net of taxes for the second quarter of last year. In aggregate, these tax affected impacts totaled $24 million, which reconciles reported and adjusted second quarter 2009 net income of 43.7 million and 18.7 million respectively. We're quite pleased with our second quarter operating performance. During this time of economic uncertainty, it's clear that the high level of our assets combined with our operational flexibility, should help us achieve a positive bottom line. Let me provide you with more detail at the segment level. In the Petroleum segment, adjusted operating income was 28.7 million for the second quarter of 2009 compared to 26.1 million for the second quarter of 2008; an increase of 2.6 million. The refining margin adjusted for the impact of FIFO is $8.96 per barrel in the second quarter of 2009 versus $10.45 per barrel for the comparable period in 2008. Several key factors to overall realized refining margins; these include the market contango, which was averaged to $25 per barrel during the second quarter, and the positive impact of our book and gathered crude purchases resulted in a crude differential savings of $4.16 per barrel to the quarterly averaged NYMEX WTI price of $59.79. When compared with our differential for the same quarter of 2008, our overall crude differential has improved by $2.35 per barrel of throughput. Refinery direct operating expenses exclusive of depreciation and amortization were 33 million or $3.25 per barrel of crude throughput for the current quarter; compared to 42.7 million or $4.49 per barrel for the same period in 2008. Compared to the same period last year, this improvement was directly attributable to the following

[John Lipinski:]

Okay. Thank you, Ed. CVR has reported very good -- we have reported very good financial and operating results for this quarter. We speak about our expanded facilities and how we benefit from the capital program that we started in 2005. But the bottom line is, without committed employees, we couldn't achieve these results. And I'd like to express my appreciation to all our employees for their outstanding efforts and working hard everyday to make CVR Energy successful. We intend to exploit opportunities as they arrive. We stay focused on safety and operational excellence. And we thank you all for joining us today. And, now I'll turn this back to Stirling, for any questions. Stirling?

[Stirling Pack:]

Thank you, gentlemen. So, we are prepared then to receive questions following our prepared remarks. So if you please go ahead and queue then I would appreciate it.

[Operator:]

Thank you. (Operator Instructions). Our first question is from Paul Sankey with Deutsche Bank Securities. Please go ahead with your question.

[Paul Sankey:]

Yeah. Hi, guys. Can we talk a little bit about the widening contango and the inventory levels? You yourself say that you're running quite a lot of crude in storage? I was just wondering firstly, is the Mid Corn market beginning to fill up with products. Are we getting to the top of the tanks on the product side? And secondly, I guess we're clearly doing a similar thing at Cushing. How do you see that playing out? If we get to the top of the tanks, would you expect to see an even bigger blow out in contango, or just any observations you have on how these plays out, it would be interesting? Thanks.

[John Lipinski:]

Well, Paul, as far as the contango goes, it has started to move out. When it started to compress a little, we reduced our carry program, actually carry program at the end of the quarter was about 325,000 barrels. And we've significantly increased that this contango has moved up to just basically we buy the crude, we sell it on the market. And all we're doing is start getting in the contango. It helps us reduce our overall crude cost. We're not seeing products go up in the market. I mean, the inventory levels in the Magellan system have been high. But they've been high for the last six months. And what we see happening is our basis is still better than the Gulf, but not so much better that you can -- people would flood our market with product. And being an undersupplied market where we fit, it is the incremental barrels that come in either from the Gulf of Mexico, refining centers or down from the Northern Tier refineries that feed our system. But we do not have a view that our system is filing up on product and as the system fills up on crude, perhaps Cheshire Cat grin is not the right things say but WTI becomes the most undervalued crude the world. Take a look at the brand WTI spread right now. It's enormous. And yet, the crack spreads are increasing at the same time because anybody that has to run a brand related barrel couldn’t run it, the cracks spreads were compressed. So, I don't know if I'm answering your question but

[Paul Sankey:]

No. It's interesting. Thanks. And on the demand side, I mean, you have got this niche market that you're in. I guess the agricultural side might be helping you on this. I don't know that kind of a question. And gasoline cracks are widening as well I guess as well, we just suppose this demand plus low utilization?

[John Lipinski:]

Right. And again, don't forget the incremental barrels coming into our system have to be imported into our shift. And as the economic don't drive it at that rate David they don't come up. There is an inherit cause to do that. So, people look at the spreads. And we really haven't seen. We're starting to see improvements across the board and at least our period-over-period gasoline continues to grow in small amount year-over-year. Just lid on the latest stats shows some improvement. Meaning, it's down as it was, prior to what it was before. And here in the next few weeks, we'll be seeing a week run and harvest. So, we will expect this, let demands pick up during that time.

[Paul Sankey:]

Yeah. I got you. And finally, from the strategic ownership of the company is -- Can you update us on your best understanding of where the private equity holders now stand and all these. Thanks Jack.

[John Lipinski:]

I can't speak for the private equity holders. All I would say is that we have had and have three sitting out there which would have allowed them to sell stock. The fact that they haven't I guess speaks to the fact that they still wants to own us. Actually that question should be directed to them, I’m getting in over my feet here.

[Paul Sankey:]

Yeah but they will answer me although it turned tricky. Okay, I'll leave it, I'll leave it. Thanks.

[John Lipinski:]

Thank you.

[Operator:]

(Operator Instructions) Your next question is from Jeff Dietert with Simmons & Company. Please go ahead with your question.

[Jeff Dietert:]

Good morning

[Stirling Pack:]

Hey Jeff, how are you?

[Jeff Dietert:]

I'm doing fine. Did I hear correctly that 2010 capital spending is expected to be 20 million in total?

[John Lipinski:]

Jeff, that was just for the fertilizer business.

[Jeff Dietert:]

Okay. I'm sorry, what was the total?

[John Lipinski:]

I'll give that to Stan. Stan?

[Stanley Riemann:]

We are in a -- Jeff, its Stan Riemann. We're in a process of -- we obviously have a 2010 capital budget. We were in a process to redo into the budgeting cycle. And my expectations is that the environmental build across all footprint budget will be in the 5 to 7 million range in sustaining capital across the whole footprint would be in the 15 to 17 range. And then on top of that you would have the projects that Jack had talked to you sulphur gasoline my expectations environmental sustaining probably in total across footprint 20-25 million, any profit of Group budgets will be able to absorb that we will get only -- do that we have appropriate cash flow.

[Jeff Dietert:]

Good. Could you talk about how the fining season work through and what the outlook is for 3Q on fertilizer pricing?

[Stanley Riemann:]

Obviously we are across the largest and I thought you saw some pretty good reduction in part issue and some load of reduction in Nitrogen. And being a commodity business, it doesn't take much to move the price up or down on the demand cycle.

[Jeff Dietert:]

Did that turn out are being an advantage for you as you talked about previously?

[John Lipinski:]

No, I think we kind of, oh all well that kind of spending with the same brush, I think when you get into the plant cycle. Overall, I think it bodes well for us forward but we do not have any issues on moving product. We're probably; if you look at a five year average we'll add obviously loan with broker price of 10% above our five year average. And we had seen prices move up nicely in the last 45 to 60 days and we expect them to continue to do that. We obviously always want a higher price, but I think we're at the bottom of our cycle and we've seen prices improve here.

[Jeff Dietert:]

Very good. Thanks for your comments.

[Operator:]

We have no further questions in queue and I'd like to turn the call back over to management for closing remark.

[John Lipinski:]

Okay. Well, listen, thank you all for joining us today. I know it's a very busy day and lots of earnings calls and we appreciate your interest in the company and rest assured we're working hard. And try to maximize profits everyday so you can see it more results, well we strive to be flexible. And we aggressively pursue any opportunities that come up. So thank you. Stirling?

[Stirling Pack:]

Thank you very much, Jack. Thank you Joe. That concludes our presentation, today's end. We shall be available for any additional question for the next couple of days as we proceed. So thank you again everyone for attending. And we'll look forward to speaking with you next quarter.

[Operator:]

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.