CVR Energy, Inc.
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Greetings, and welcome to the CVR Energy Third Quarter 2014 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions). As a reminder this conference is being recorded. It’s now my pleasure to introduce your host, Jay Finks, Investor Relations for CVR Energy. Thank you sir, you may begin.

[Jay Finks:]

Thank you, Kevin. Good afternoon. We very much appreciate you joining us this afternoon for CVR Energy Third Quarter 2014 earnings call. With me are Jack Lipinski, our Chief Executive Officer and Susan Ball, our Chief Financial Officer. Prior to discussing our 2014 third quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under Federal Securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, the words outlook, believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise except to the extent required by law. This call also includes various non-GAAP financial measures, the disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2014 third quarter earnings release that we filed with the SEC this morning prior to the opening of the market. With that said, I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

[Jack Lipinski:]

Thanks, Jay and thank everyone here on the call for joining us. Hopefully you had the opportunity to listen CVR Partners and CVR Refining third quarter earnings calls earlier today. Today we reported CVR Energy’s third quarter consolidated adjusted net income of $37 million or $0.43 per diluted share as compared to $5.2 million or $0.06 per diluted share in the third quarter of 2013. Susan will provide you more details on the financials reported this morning. We continue to return cash to our shareholders through special and recurring dividends. On July 17 we declared a $2 special dividend paid on August 04 and we also announced a quarterly cash dividend of $0.75 per share which will be paid on November 17 to stockholders of record on November 10. This all bring our 2014 cumulative cash dividends paid or declared to $4.25 per share. Now let me talk a little bit about each of our business segments. For petroleum this morning, CVR Refining released their third quarter results. The 2014 third quarter adjusted EBITDA was $129.9 million as compared to $33.9 million a year ago. CVR Refining also declared a third quarter distribution of $0.54 per common unit. CVR Energy owns approximately 66% of the common units of CVR Refining and therefore receives a proportional amount of distributions from CVR Refining. CVR Refining’s total throughput for the quarter was approximately 176,400 barrels a day. Coffeyville processed approximately 96,500 barrels a day of crude and Wynnewood processed approximately 79,900 barrels a day of crude. Turning to fertilizer, this morning CVR Partners announced a 2014 third quarter adjusted EBITDA of $21.1 million as compared to $28.2 million in the third quarter of 2013. CVR Partners declared a 2014 third quarter cash distribution of $0.27 per common unit. As CVR Energy owns approximately 53% of the common units of CVR Partners will receive a proportional amount of that distributions. I’ll now turn the call over to Susan who’ll talk about the financials in more detail.

[Susan Ball:]

Thank you Jack and good afternoon everyone. Net income attributable to CVR Energy’s stockholders was $7.9 million in the third quarter of 2014 as compared to $44 million in the third quarter of last year. Non-controlling interest was $13.4 million for the third quarter 2014 as compared to $34.2 million in the same period a year ago. As Jack mentioned, adjusted net income for the 2014 third quarter was $37 million as compared to $5.2 million in the third quarter of 2013. We believe adjusted net income is a meaningful metric for analyzing our performance as it does eliminate the impact of non-cash and other unusual items inherent in our business and provides the more transparent view as to market expectations. The more significant adjustments to net income during the 2014 third quarter to drive adjusted net income or adjustments related to the increase or decrease in our inventory values that are realized under the first in, first out or the FIFO inventory accounting method and certain net impacts associated with our derivatives. We adjusted for the quarter’s realized unfavorable FIFO inventory impact of 52 million and our net derivative gain of $25.7 million which was further adjusted by the current period settlements on derivative gains of $38.2 million. The adjustments for the third quarter 2013 were a favorable FIFO impact of 54.3 million and our net derivative gain of 72.5 million which was further adjusted by the current period gain settlement of $33.9 million. These growth adjustments to net income are reduced for the portion that is attributable to the non-controlling interest and then are further reduced for the net tax impact associated with them. Our income tax rate approximate at 16.5% for the 2014 third quarter as compared to approximately 27% in the prior year period. As noted on our previous calls, our overall effective tax rate is lower than the expected statutory rate primarily due to the reduction of income associated tax, subject to tax associated with the non-controlling interest in CVR Refining and CVR Partner’s earnings as well as the benefits related to the domestic production activities deduction and state income tax credits. We currently estimate the full year effective tax rate will approximate 24% to 25%. I will now turn to the specific performance of our two business segments impacting our overall quarterly results. CVR Refining’s adjusted EBITDA for the 2014 third quarter was $129.9 million as compared to $33.9 million in the same period 2013. In the third quarter, 2014, CVR Refining's realized refining margin adjusted for FIFO was $13.16 per barrel as compared to $8.21 in the same quarter of 2013. Throughput rates for the third quarter 2014 were approximately 176,400 barrels per day as compared to approximately 161,000 barrels per day in the same quarter last year. As of September 30, CVR refining had open commodity derivate positions of 9.8 million barrels at an average fixed price of $28.45 per barrel. The open commodity derivative positions were comprised of approximately 89% for distillate crack swaps and 11% for gasoline crack swaps. As the open positions 5.1 million barrels will be settled in the fourth quarter of 2014 and/or at an average fixed price of $27.25, the remaining 4.7 million barrels will settle during 2015 and 2016. As discussed earlier, CVR Refining announced the 2014 third quarter distribution up $0.54 per common unit with $27.1 million to be paid to the public unit holders and $52.6 million that will be paid to CVR Energy. CVR Partner’s third quarter adjusted EBITDA was $21.1# million as compared to $28.2 million in the same period last year. The decrease was primarily associated with lower sales volumes in and lower realized prices for UAN in the third quarter of 2014 as compared to the prior year’s third quarter. The partnership announced a cash distribution of $0.27 per common unit for the third quarter of 2014 and the $19.7 million to be paid, $9.2 will be paid to the public unit holders and CVR Energy will receive $10.5 million. CVR Energy ended the quarter with cash and cash equivalents of approximately $793.1 million on a consolidated basis including $68 million held the CVR partners and $359.2 million at CVR refining. As such CVR Energy held cash of $365.9 million as of September 30, 2014. Total consolidated debt including current portions as of September 30 was approximately $675.3 million. CVR Energy has no debt exclusive of the debt that resides at CVR Refining and CVR Partners. CVR Energy has a strong consolidated balance sheet with both business segments continuing to be positioned well for growth opportunities. With that Jack I will turn the call back to you.

[Jack Lipinski:]

Okay, thank you Susan. As discussed earlier on the CVR Refining call, CVR Refining’s board gave management approval to proceed with the installation of a new hydrogen plant natural gas pipeline to be constructed at the Coffeyville Refinery. The capital cost to this project is approximately $122.5 million and the project is estimated to be operational in the second quarter of 2016. The addition of a hydrogen plant will allow the refinery to increase its liquid volume recovery provide hydrogen for two environmental requirements one is for MCET which is benzene saturation, by moving benzene to gasoline and the other advance (inaudible) rules which will move additional sulphur from gasoline. So by installing this plant and the associated equipment with it, we expect it to generate hydrogen and not have to generate hydrogen from one of the existing units in the refinery. This plant will also be able to supply approximately 5 million [cubic per day] of hydrogen to CVR Partners where they will use the hydrogen to fill out their synthesis loops, so it’s a win for both companies. The IRR of this project exceeds 30% so it’s pretty good return on capital. To finance this project on October 29th, CVR Energy entered into an amendment of the inter-company credit facility with CVR Refining, by increasing the facility to $250 million from $150# million. This basically functions as a growth CapEx revolver and as not intended to be firm and facilities but as growth occurs at the subsidiary and the income is generated the (inaudible) do something to reply as revolver if needed but as long as CVR Energy does not require the cash that gives us a lot of functionality. I would like to thank each of you for joining our call today and operator I would like to open up for questions.

[Operator:]

(Operator Instructions) Our first question today is coming from Ed Wisely from Credit Suisse. Please proceed with your question.

[Ed Wisely:]

Thanks for all the color this morning on the CVRR call but one intriguing comment was around the winning with refinery and obviously the scoop and seeing additional barrels there, I just, may be if you could run through how you would fit some of the those barrels as that play takes off in the spring which will be quite exciting into your refineries what sort of prices you think you might achieve relative to say ATI.

[Jack Lipinski:]

We don't disclose individual discounts but every barrel that we do gather is delivered after all costs below WTI and depending on which barrels they are, they could be anywhere from $1 to $3, in general we think we are capturing right now somewhere between $1 and $2 barrel for each barrel gathered, and what makes it very interesting for Wynnewood is you know we are rapidly increasing our ability to offload crude at Wynnewood, this play literally I mean I almost wish (inaudible) plant by miles further west, so we would be drilling our own wells, but we just get outside of the play but this is literally in our backyard and if you look back to December of 2011, we virtually had no gathering in Wynnewood and today we do up 18,000 barrels a day and it’s growing rapidly and so overtime some of these plays will be supplied by pipelines, gathering more. But as the play continues we do everything by truck. We have well over 150 trucks today. I believe we are approaching 180 even with contract trucks and that is the largest growth area of our business right now. And some of the – because backwardation this year pretty much took a lot blending out of Cushing. It didn’t – crude so therefore some of the blending disappeared. Right now we see the market not necessarily flat, it is still slightly backwardated, but that also took some of the pressure off the pricing for gathered crude because the blenders then found themselves having to pay the backwardation. So it is basically improved our capture, but not necessarily by huge amounts but directionally it is the right way to go, but we are improving our capture and improving our volume on that business.

[Ed Wisely:]

What about the I guess the ability then to push forward a little bit with logistics type of vehicle perhaps backed by some of the assets obviously have refineries, but then some of the logistics assets that you could build, to basically help that oil get to Cushing and to your storage and infrastructure around that.

[Jack Lipinski:]

Yes, that is exactly our plan and we had hoped to have been further along but like I mentioned when we had lot of pressure for blending in Cushing the capture on gathered barrels was reduced, but recently would not only increase in volume, but increase in capture we are doing much better. And there are other things that we will be able to drop in. For example, it’s not huge but there is a new natural gas pipeline we are putting in, in conjunction with this hydrogen plant. Those kind of assets, we have wholly owned assets, pipeline assets and our gathering business right now. We have a lot of storage in throughout Wynnewood Coffeyville and/or gathering business as well as in Cushing so that is part of our plan and I just don’t have an exact timeframe right now. I would rather underpromise and over deliver.

[Ed Wisely:]

Okay, thanks very much.

[Operator:]

(Operator Instructions) We’ve reached the end of our question and answer session. I would like to turn the floor back over to management for any further or closing comments.

[Jay Finks:]

Thanks, Kevin. I’d like to thank everyone for listening to our conference call today. As a reminder, our conference call along with CVR Refining and CVR Partners will be available for replay over the next 14 days. Please visit our website cvrenergy.com or contact investor relation for additional information, thank you.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. And have a great day.